Title: Properties of optimal order-up-to levels for the newsvendor problem with random capacity

Authors: Frank W. Ciarallo; Suman Niranjan

Addresses: Department of Biomedical, Industrial and Human Factors Engineering, 207 Russ Engineering Center, Wright State University, 3640 Colonel Glenn Highway, Dayton, OH 45435, USA ' College of Business Administration, Savannah State University, 209 Howard Jordan Building, 3219 College Street, Savannah, Georgia 31404, USA

Abstract: It is known that for the newsvendor problem with uncertain capacity as well as uncertain demand, order-up-to policies are optimal. This paper explores the structure of these order-up-to policies in more detail for the multiple period and infinite horizon problems for some special cases. Through numerical examples and analytic proofs the relationships between parameters of the demand and supply distributions and optimal order-up-to levels are explored. The specific cases include normally and exponentially distributed demand in each period. An 'all-or-nothing' type capacity distribution is assumed in these cases. A linear relationship is shown to exist between the mean demand and the optimal order-up-to level in these cases.

Keywords: newsvendor policy; order-up-to levels; finite horizons; infinite horizons; optimisation; newsvendor problem; random capacity; uncertainty; exponentially distributed demand; normally distributed demand.

DOI: 10.1504/IJAOM.2014.066830

International Journal of Advanced Operations Management, 2014 Vol.6 No.4, pp.353 - 376

Received: 11 Jun 2013
Accepted: 08 Jan 2014

Published online: 14 Jan 2015 *

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