Journal
EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 245, Issue 2, Pages 623-628Publisher
ELSEVIER
DOI: 10.1016/j.ejor.2015.03.014
Keywords
Entropy; Measuring demand uncertainty; Stochastic inventory models; Demand variability
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We analyze the effect of demand uncertainty, as measured by entropy, on expected costs in a stochastic inventory model. Existing models studying demand variability's impact use either stochastic ordering techniques or use variance as a measure of uncertainty. Due to both axiomatic appeal and recent use of entropy in the operations management literature, this paper develops entropy's use as a demand uncertainty measure. Our key contribution is an insightful proof quantifying how costs are non-increasing when entropy is reduced. (C) 2015 Elsevier B.V. All rights reserved.
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