A Two-Stage Newsvendor Problem with a Service Constraint

37 Pages Posted: 6 Jul 2008

See all articles by Alain Bensoussan

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management; Hong Kong Polytechnic University - Faculty of Business; Ajou University

Qi Feng

Purdue University - Krannert School of Management

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: December 22, 2004

Abstract

We extend the classical newsvendor problem by introducing a service constraint and a demand forecast update. The newsvendor orders an initial amount and has the possibility to adjust the initial order after she observes a demand updating signal. She also commits to a target service level before any forecast update is available. The resulting problem does not permit a dynamic programming formulation. We use the method of Lagrange multipliers to solve the problem, and we derive an analytical expression for the optimal ordering decisions. Various properties of the optimal policy are discussed, and numerical results are presented to provide further insights into the newsvendor's behavior.

Keywords: Inventory, newsvendor problem, service constraint, forecast update, two-stage ordering

JEL Classification: M11, C61

Suggested Citation

Bensoussan, Alain and Feng, Qi and Sethi, Suresh, A Two-Stage Newsvendor Problem with a Service Constraint (December 22, 2004). Available at SSRN: https://ssrn.com/abstract=1155208 or http://dx.doi.org/10.2139/ssrn.1155208

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Rd
SM 30
Richardson, TX 75080-3021
United States
9728836117 (Phone)

HOME PAGE: http://www.utdallas.edu/~axb046100/

Hong Kong Polytechnic University - Faculty of Business

Dept SEEM
Systems Engr * Engr Mgmt
Hong Kong, Hong Kong
China

Ajou University ( email )

Ajou
France

Qi Feng

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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