Sample path derivatives for (s, S) inventory systems with price determination

Abstract

We consider the problem of simultaneous price determination and inventory management. Demand depends explicitly on the product price p, and the inventory control system operates under a periodic review (s, S) ordering policy. To minimize long-run average loss, we derive sample path derivatives that can be used in a gradient-based algorithm for determining the optimal values of the three parameters (s,S,p) in a simulation-based optimization procedure. Numerical results for several optimization examples are presented, and consistency proofs for the estimators are provided. © 2005 Springer Science+Business Media, Inc.