Two-stage inventory management with financing under demand updates

Considered is a retailer (she) facing non-stationary stochastic demand. Demand can be fully observed and backlogged, consequently the retailer can update the initial demand information using a Bayesian approach. To alleviate the demand risk, the retailer may use a secondary opportunity to replenish through an option contract. In addition, the retailer also has access to an immediate loan if she faces capital constraints and to a risk-free investment if she has surplus funds. The paper presents a recourse approach to solve the two-stage optimization problem and derive the optimal inventory/financing policies. The results show that the option procurement policy has a two-threshold base-stock structure depending on the first procurement, demand update and also the retailer’s financial state. The initial procurement can be computed subsequently. A sufficiently large initial demand will induce the retailer to seize the secondary procurement opportunity. Finally, a series of numerical examples demonstrate the resulting policy under various inventory/financial situations. This research incorporates the financial and operational decisions into demand updates, and brings new managerial results and insights.