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A dynamic newsvendor problem with goodwill-dependent demands and minimum commitment

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  • Han, Xiaoya
  • Yu, Yugang
  • Hu, Guiping

Abstract

A retailer provides products to satisfy consumers whose goodwill towards the retailer is positively correlated to the past fulfillment levels of the retailer. Consumer goodwill changes with fulfillment levels and influences the demand. The retailer makes a commitment on order quantity to suppliers who offer price discounts. This paper focuses on the decision-making problem faced by the retailer to determine the minimum commitment at the beginning of the planning horizon and ordering policies in the long run. The objective is the retailer's profit maximization. We model the problem as a stochastic dynamic programming model and solve the model with a robust optimization approach considering consumers’ goodwill. We find that all goodwill paths monotonically converge to a constant steady-state goodwill characterized by implicit equations. Moreover, if the retailer ignores long-term implications of its ordering policy, it may lose profits. In addition, the steady-state goodwill may decrease even with increased committed minimum quantity.

Suggested Citation

  • Han, Xiaoya & Yu, Yugang & Hu, Guiping, 2019. "A dynamic newsvendor problem with goodwill-dependent demands and minimum commitment," Omega, Elsevier, vol. 89(C), pages 242-256.
    • Handle: RePEc:eee:jomega:v:89:y:2019:i:c:p:242-256
    DOI: 10.1016/j.omega.2018.10.012
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    5. Poormoaied, Saeed & Atan, Zümbül, 2020. "A multi-attribute utility theory approach to ordering policy for perishable items," International Journal of Production Economics, Elsevier, vol. 225(C).

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