Inventory Valuations—An Analytic Technique

Recursive inventory decision processes, when formulated as dynamic programs, lead to functional equations. The unknown functions in these equations have arguments which range over the set of possible inventory conditions in the process, and values which represent the minimum possible expected present value of the costs of operating the process through the indefinite future. We call these functions “inventory valuations.”

The realism of such formulations and the difficulties of solving for the implicitly defined functions lead to an alternative proposal: that approximate inventory valuations be induced more directly from the context of the recursive inventory process. Methods of developing such valuations are illustrated in sample analyses.