Modelling the newsvendor problem with a random fraction of defective items in the lot
by Mohammad J. Alkhedher; Abdulrahman Alenezi; Mehmet Savsar
International Journal of Procurement Management (IJPM), Vol. 10, No. 4, 2017

Abstract: An important assumption in deriving a formula for the optimal lot size newsvendor problem is that 100% of items in an ordered lot are assumed conforming to specifications. In real-life situations, however, this assumption may not hold for many production processes because of process deterioration and other factors. This paper develops a model for the newsvendor problem under the assumption that each ordered lot contains a random fraction of defective items which follows a beta distribution. The concavity of the expected total profit is established and the global optimal solution is determined by an algorithm based on Karush-Kuhn-Tucker conditions. Also, the effects of model's key parameters on the optimal solution are investigated using several case examples.

Online publication date: Mon, 10-Jul-2017

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