Feature-Based Inventory Control with Censored Demand

Problem definition: We study stochastic periodic-review inventory systems with lost sales, where the decision maker has no access to the true demand distribution a priori and can only observe historical sales data (referred to as censored demand) and feature information about the demand. In an inventory system, excess demand is unobservable because of inventory constraints, and sales data alone cannot fully recover the true demand. Meanwhile, feature information about the demand is abundant to assist inventory decisions. We incorporate features for inventory systems with censored demand. Methodology/results: We propose two feature-based inventory algorithms called the feature-based adaptive inventory algorithm and the dynamic shrinkage algorithm. Both algorithms are based on the stochastic gradient descent method. We measure the performance of the proposed algorithms through the average expected regret in finite periods: that is, the difference between the cost of our algorithms and that of a clairvoyant optimal policy with access to information, which is acting optimally. We show that the average expected cost incurred under both algorithms converges to the clairvoyant optimal cost at the rate of [Formula: see text] for the perishable inventory case and [Formula: see text] for the nonperishable inventory case. The feature-based adaptive inventory algorithm results in high volatility in the stochastic gradients, which hampers the initial performance of regret. The dynamic shrinkage algorithm uses a shrinkage parameter to adjust the gradients, which significantly improves the initial performance. Managerial implications: This paper considers feature information. The idea of dynamic shrinkage for the stochastic gradient descent method builds on a fundamental insight known as the bias-variance trade-off. Our research shows the importance of incorporating the bias-variance in a dynamic environment for inventory systems with feature information. Funding: W. T. Huh acknowledges support from the NSERC Discovery Grants [Grant RGPIN 2020-04213] and the Canada Research Chair Program. The work of Y. Rong was supported by the National Natural Science Foundation of China [Grants 72025201, 72331006, and 72221001]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0135 .