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End-of-Period vs. Continuous Accounting of Inventory Related Costs

Date: 01-09-2007
Start Time: 1:00pm
End Time: 2:00pm
Speaker: Nils Rudi, INSEAD
Location: Uris 333

Abstract:

This paper investigates the effect of using an end-of-period accounting scheme for inventory related costs when costs actually accrue in continuous time. Using a simple model, we show that (i) the end-of-period scheme results in higher than optimal order-up to levels and inventory cost if the cost and demand parameters are unchanged, and (ii) it is possible to replicate both the optimal base stock level and its cost by selecting the values of the cost or demand parameters judiciously. The cost adjustments often require extreme values and no systematic cost parameter adjustment scheme is robust. However, we find a systematic adjustment to the demand parameters which serves as a good approximation and is robust. We therefore conclude that end-of- period cost accounting without parameter adjustments is in general inappropriate when costs are incurred continuously, but there are adjustments that can make it work well. 

Bio:

Nils Rudi's research is in operations management with overlap to information systems, marketing and finance. He has been focusing on supply chain management and how one can use different strategies (e.g., variety postponement, real options, flexibility, financial hedging and incentive structures) to better handle demand uncertainty. Journals where his research has appeared include Interfaces, Journal of Management Information Systems, Management Science, Manufacturing & Service Operations Management, Operations Research and Supply Chain Management Review.

After high school, Nils worked for three years as a computer programmer of ERP (Enterprise Resource Planning) systems at Movex. He then formed Minard, specializing in decision support systems for forecasting and inventory management. Minard did an IPO and went public on the Oslo Stock Exchange (Norway) in 1996. Other work experiences range from consulting for firms in a wide variety of industries to negotiating professional football contracts.

Nils studied part time for a B.S. degree in computer science at Molde College (Norway), and holds a Ph.D. in operations management from the University of Pennsylvania.