Title: Improved profit functions for newsvendor models with normally distributed demand

Authors: Jianli Hu, Charles L. Munson

Addresses: The George L. Argyros School of Business & Economics, Chapman University, One University Drive, Orange, CA 92866, USA. ' Department of Management and Operations, Washington State University, P.O. Box 644736, Pullman, WA 99164-4736, USA

Abstract: Existing textbook and research paper formulas for newsvendor models with normally distributed demand represent reasonable approximations of expected profit only when the coefficient of variation (CV) of demand is relatively low. Instead, we seek expected profit functions that better represent the expected value of what firms will actually earn if managers are making ordering decisions assuming a normal distribution (the most common assumption in many textbooks and papers). We derive robust expected profit formulas that account for high CV, and computational experiments suggest that our formulas provide a close match to actual realised average profit, irrespective of the CV level.

Keywords: inventories; applied probability; newsvendor models; normal distribution; improved profit functions; demand; coefficient of variation; expected profit functions; ordering decisions; actual realised profits; average profits; procurement management.

DOI: 10.1504/IJPM.2011.037383

International Journal of Procurement Management, 2011 Vol.4 No.1, pp.20 - 36

Published online: 31 Jan 2015 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article