A Counterintuitive Example in Inventory Management

Abstract

The paper \cite{helm:17} studies an inventory management problem under a long-term average cost criterion using weak convergence methods applied to average expected occupation and average expected ordering measures. Under the natural condition of inf-compactness of the holding cost rate function, the average expected occupation measures are seen to be tight and hence have weak limits. However inf-compactness is not a natural assumption to impose on the ordering cost function. For example, the cost function composed of a fixed cost plus proportional (to the size of the order) cost is not inf-compact. Intuitively, it would seem that imposing a requirement that the long-term average cost be finite ought to imply tightness of the average expected ordering measures; a lack of tightness should mean that the inventory process spends large amounts of time in regions that have arbitrarily large holding costs resulting in an infinite long-term average cost. This paper demonstrates that this intuition is incorrect by identifying a model and an ordering policy for which the resulting inventory process has a finite long-term average cost, tightness of the average expected occupation measures but which lacks tightness of the average expected ordering measures.