How Larger Demand Variability May Lead to Lower Costs in the Newsvendor Problem

Ad Ridder · Erwin van der Laan

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Supply Chain and Inventory Management Management and Optimization Techniques Sustainable Supply Chain Management

Abstract

In this paper we consider the Newsvendor Problem. Intuition may lead to the hypothesis that in this stochastic inventory problem a higher demand variability results in larger variances and in higher costs. In a recent paper, Song (1994a) has proved that the intuition is correct for many demand distributions that are commonly used in practice, such as for the normal distribution function. However, this paper shows that there exist demand distributions for which the intuition is misleading, i.e., for which larger variances occur in combination with lower costs. To characterize these demand distributions we use stochastic dominance relations.

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1979Decision Systems for Inventory Management and Production Planning 1986Comparison Methods for Queues and Other Stochastic Models.1984Comparison Methods for Queues and Other Stochastic Models 1986Decision systems for inventory management and production planning 1994The Effect of Leadtime Uncertainty in a Simple Stochastic Inventory Model 1995Stochastic Dominance on Unidimensional Grids

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2016Order variability in perishable product supply chains 2013The data-driven newsvendor with censored demand observations 2008Risk preferences and robust inventory decisions 2004The influence of demand variability on the performance of a make-to-stock queue 2018Asymmetry and Ambiguity in Newsvendor Models 2006Stochastic Comparisons in Airline Revenue Management 2014The Data-Driven Newsvendor with Censored Demand Observations 2005On the effect of demand randomness on a price/quantity setting firm

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