HIERARCHIAL INVENTORY DECISIONS.
CALIFORNIA UNIV LOS ANGELES
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Economic theory has so far had little to say about inventory keeping as an economic activity. The purpose of this paper is to point out the need for a theory of this economic activity. A retailer is considered who each Friday has to order goods for resale next week without actually knowing how much he will be able to sell during that week. Usually this retailer will stand to lose if he is caught with an unsold inventory at the end of the week, or if he is unable to satisfy the demand from his customers. In this unpleasant situation our retailer will probably try to keep an inventory which is optimal in the sense that it in some way will minimize the sum of losses from both sources. If the unknown future sales obey a known probability law, it is natural to define an inventory as optimal if it minimizes the expected losses, or on an equivalent and less pessimistic vein, if it maximizes the expected profits of the retailer. The mathematical structure of models for analyzing such problems can be given many concrete interpretations, i. e., applied to a wide range of different practical problems. A better understanding of these problems may be useful in many economic situations. It may, for instance, help develop a more realistic theory for the economics of the distributive trades.