Dynamic optimal decision making for manufacturers with limited attention based on sparse dynamic programming

In a fully competitive industry, the market demand is changing rapidly. Thus, it is important for manufacturers to manage their inventory effectively as well as to determine the best order quantity and optimal production strategy. In this paper, our concern is how shall a manufacturer with limited attention determine his optimal order quantity and optimal production strategy in an environment when many factors are volatile, such as the price of raw materials (respectively, finished goods) and attrition rate of inventory of raw materials (respectively, finished product). Under this environment, it is observed, according to various empirical studies, that decision makers tend to focus their attention on factors with major changes. Taking all these into account, our problem is formulated as a discrete-time stochastic dynamic programming. We propose a general approach based on the sparse dynamic programming method to solve this multidimensional dynamic programming problem. From the numerical examples solved using the proposed method, it is interesting to observe that decision makers with limited attention do not adjust their final decision when the volatility is small.