Presenting author: Vishal Gaur
Co-authors:
Sridhar Seshadri,
Marti Subrahmanyam
Abstract
Retail demand for discretionary purchase items, such as apparel, consumer
electronics, and home furnishings, can be correlated with the movement of
economic indicators. This correlation presents an opportunity to a firm to use
information about market expectations embedded in the prices of financial
instruments to improve demand forecasting, inventory decision-making as well as
risk management. We investigate these potential uses of financial market
information using a single-period inventory model for a short-lifecycle product.
In our model, the forecast of demand depends on the subjective assessment of
decision-makers in the firm as well as the price of a financial asset, e.g., a
market index. The decisions of the firm are the amount of inventory to procure
and the lead-time, i.e., how early to make the inventory commitment. We show how
these decisions depend on the firm's risk premium and the correlation of its
demand with financial market information. We also show the impact of hedging on
the firm's inventory decision and cash flows. Our results lead to new insights
on hedging, pricing inventories, and the value of postponement.
Related Papers:
Gaur, V., S. Seshadri. 2005. Hedging Inventory Risk through Market Instruments. M&SOM, Spring, 7(2) 103-120.
Gaur, V., S. Seshadri, M. Subrahmanyam. 2006. Optimal Timing of Inventory Decisions as a Postponement Option. Draft Working Paper, NYU Stern School of Business.