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Acquisition Management Under Fluctuating Raw Material Prices
Author(s) -
Yang Jian,
Xia Yusen
Publication year - 2009
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2009.01010.x
Subject(s) - raw material , poisson distribution , monotonic function , markov process , order (exchange) , computer science , discrete time and continuous time , state space , mean reversion , markov chain , mathematical optimization , econometrics , mathematical economics , economics , mathematics , statistics , finance , mathematical analysis , chemistry , organic chemistry , machine learning
We study a continuous‐review acquisition problem, in which the raw material price follows a discrete‐state Markov process and demand is compound Poisson. We show that one optimal policy is of the order‐up‐to type. Under our mean reversion and time continuity conditions, we further show that the order‐up‐to levels are decreasing at the current price level. At the same time, our computational study verifies that both conditions are indispensable for the monotonicity result. The study also hints at the connection between discrete‐ and continuous‐state price processes.