IEOR 4601 Homework 3 Due Wednesday February 201

Ieor 4601 Homework 3 Due Wednesday February 201

Find optimal protection levels for the following data and compute the optimal expected revenues V1(c), V2(c), V3(c) and V4(c) for c ∈ {50, 55, 60, 65, 70, 75, 80} assuming Poisson demands. Modify the problem so that p1 = $125 and compute optimal protection levels and the value function V4(c) for c ∈ {50, 55, 60, 65, 70, 75, 80}. Compute the upper bound V_H(c), the value V(c,μ), the lower bound V_L(c), and the spread V_H(c) − V_L(c) for the given data. Use discrete time dynamic programming to compute V(T,c) and V_j(T,c), j=1,2,3,4, for c ∈ {50, 55, 60, 65, 70, 75, 80} under two arrival rate models: a) Uniform arrival rates, with λ_tj = Λ_j = E[D_j] for 0 ≤ t ≤ T = 1, with time rescaled so T = a; and b) Low-to-high arrival rates, dividing the horizon into four sub-intervals with rates scaled appropriately. Analyze differences in the value functions under these models.

Paper For Above instruction

The problem of determining optimal protection levels within inventory and supply chain management requires an intricate understanding of demand distribution, revenue maximization, and dynamic programming techniques. Specifically, the problem states that demand follows a Poisson distribution, a common choice for modeling count-based, random demand scenarios in operational research. The aim here is twofold: first, to determine the optimal protection levels and associated expected revenues under various demand parameters, and second, to explore bounds, modifications, and temporal models to extend this analysis under different assumptions and demand scenarios.

The initial task involves calculating optimal protection levels, denoted by parameters c, which represent the inventory buffer or safety stock, and the expected revenues V_i(c), for different demand levels. These calculations hinge critically on understanding Poisson demand E[D_j] and the associated prices p_j. The demand scenarios include parameters where p_j varies, such as in the modification where p₁ increases to $125, influencing the protection level—higher prices typically prompt greater inventory protection to maximize revenue.

To solve these problems, revenue management often employs the classic newsvendor model, where the optimal order quantity balances the marginal cost and marginal benefit derived from stocking additional units. Mathematically, the critical ratio, which guides protection levels, is given by p_j / (p_j + c_cost), evaluating the likelihood of demand relative to costs. For Poisson demand, the probabilistic demand distribution further informs these calculations, where cumulative Poisson probabilities determine the likelihood constraints associated with overstocking and understocking.

The bounds on the value function, including upper bounds V_H(c) and lower bounds V_L(c), provide a range within which the true expected revenue resides, aiding decision-makers in understanding the possible variance of outcomes. These bounds are computed utilizing methods like the expected value approximation for lower bounds and the value of the hypothetical perfect foresight for upper bounds. The spread, V_H(c) − V_L(c), quantifies the uncertainty in revenue estimates, guiding risk-aware strategies.

Dynamic programming's role is vital in modeling sequential decision-making over time—specifically, how the expected revenue evolves when considering the temporal dynamics of demand and inventory holding. In this context, the functions V(T,c) and V_j(T,c) incorporate the multi-period horizon T, adjusting for the demand arrival process modeled via arrival rates λ_tj. The models contrast uniform rates, where demand arrives at a steady average, and low-to-high rates, where demand intensity increases over the period, necessitating different scaling and rescaling approaches to maintain computational stability.

The significance of these models lies in their capacity to capture real-world temporal demand fluctuations, allowing firms to optimize protection levels dynamically and allocate resources efficiently. For example, the uniform model assumes steady demand, simplifying calculations but potentially overlooking peak periods' importance. Conversely, the low-to-high model captures demand surges, emphasizing the need for adaptable policies that respond to changing market conditions, thus maximizing profitability.

In conclusion, the analyzed scenarios combine foundational inventory management principles, advanced probabilistic modeling, and recursive dynamic programming strategies. These tools collectively enable decision-makers to determine optimal protection strategies, evaluate revenue bounds, and adapt to demand uncertainties and temporal patterns—all critical for operational efficiency and competitive advantage in supply chain management.

References

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