Sourcing with Demand Updates

Abstract

We address a two-stage Newsvendor model in which the mean demand -- but not the actual demand -- at first random itself, gets revealed in midstream, in time to place a second order, albeit that the unit cost price of this second order is higher than that of the original one. The two-stage process is most relevant to many retail organizations, where the retailer has access to two supply options: one with a relatively long lead time where orders need to be placed with much uncertainty about even the mean demand for the season, and a second more expensive option with a much smaller lead time that can be exercised after a signal is revealed, which provides the decision maker with an update of the mean demand. We show that the optimal first-round order can be found by solving a simple ordinary differential equation, while the second-round order is analytically available. We characterize the asymptotic behavior of the initial order, derive analytical upper and lower bounds for this initial procurement, and extend our results to the case where procurement capacities prevail. A numerical study shows the benefits of postponed procurements. We also show necessary and sufficient conditions under which a simple heuristic, suggested by the asymptotic analysis, outperforms the optimal single-stage Newsvendor solution.

Keywords: Newsvendor, two-stage procurements, demand updates