Newsvendor Application

Topic: newsvendor model

The newsvendor or newsboy or single-period model refers to a mathematical model in operations management and applied economics used for determining optimal inventory levels. It is predominantly characterized by prices that are fixed and uncertain demand for a perishable product. This model is also called the Newsvendor Problem or Newsboy Problem by analogy with the situation faced by a newspaper vendor who has the decision of ascertaining how many copies of the day's paper to stock in the situation of uncertain demand and knowing that copies that remain unsold will be worthless when the day comes to an end.

Abstract

The newsvendor model has a history that is rich and expansive in operations research and management science. In its formulation, the newsvendor model had the following optimization problem characteristics: a company facing random demand for a product that becomes old at the end of a single period must make a decision on how many units of the product to keep as stock in order to maximize the profit expected for the period. The popular solution to this problem provides a supply quantity that equates the expected cost of overstocking to the expected (opportunity) cost of under stocking. This classic model, with its appealing effective solution, serves as the steeping stone for such vast and relevant literature as stochastic inventory theory, supply chain coordination and the operations or marketing interface.

background

This mathematical problem appears to date from 1888 where Edgeworth employed the central limit theorem to determine the optimal cash reserves to satisfy random withdrawals from depositors. The newsvendor problem has numerous applications for decision making in manufacturing and service industries as well as decision making by individuals. It occurs whenever the amount needed of a given resource is random, a decision must be made regarding the amount of the resource to have available prior to finding out how much...