American Institute of Mathematical Sciences

April  2012, 8(2): 379-389. doi: 10.3934/jimo.2012.8.379

A real option approach to optimal inventory management of retail products

 1 College of Management, Georgia Institute of Technology, 800 West Peachtree Street NW Atlanta, Georgia 30308-0520 2 Advanced Modeling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong, China 3 Department of Applied Finance and Actuarial Studies and the Centre for Financial Risk, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109, Australia 4 Department of Applied Mathematics, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

Received  March 2011 Revised  October 2011 Published  April 2012

This paper introduces a novel approach to discuss an optimal inventory level of a retail product using a real option framework. We consider stochastic models for the evolution of the demand and unit price of the product over time. The profit structure of the retailer is represented by the payoff of the real option. An actuarial approach is then used to price the option. The retailer determines an optimal inventory level of the product with a view to maximizing the net expected profit. Numerical examples will be given to illustrate the practical implementation of the proposed approach and to investigate the impacts of changes in parameters on the optimal inventory level of the product.
Citation: Ximin Huang, Na Song, Wai-Ki Ching, Tak-Kuen Siu, Ka-Fai Cedric Yiu. A real option approach to optimal inventory management of retail products. Journal of Industrial & Management Optimization, 2012, 8 (2) : 379-389. doi: 10.3934/jimo.2012.8.379
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