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Newsvendor games: convex optimization of centralized inventory operations

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  • Samuel Burer

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  • Moshe Dror
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    Abstract

    A finite set of outlets with randomly fluctuating demands bands together to reduce costs by buying, storing and distributing their inventory jointly. This is termed inventory centralization and is a type of risk pooling. The expected centralization cost can be lowered even further, without disrupting the demand behavior at individual outlets, by inducing the outlets to correlate their individual demands. Given that the outlets’ demands are normally distributed, the lowering of the centralized cost corresponds to a semidefinite optimization problem. This paper establishes a closed-form optimal solution of the semidefinite program and a fair allocation of the centralized cost at optimality. Copyright Sociedad de Estadística e Investigación Operativa 2012

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    File URL: http://hdl.handle.net/10.1007/s11750-010-0160-x
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    Bibliographic Info

    Article provided by Springer in its journal TOP.

    Volume (Year): 20 (2012)
    Issue (Month): 3 (October)
    Pages: 707-728

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    Handle: RePEc:spr:topjnl:v:20:y:2012:i:3:p:707-728

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    Related research

    Keywords: Inventory centralization; Risk pooling; Cooperative game theory; Convex optimization; 90B05; 91A12; 90C22; 90C25;

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    1. Gary D. Eppen, 1979. "Note--Effects of Centralization on Expected Costs in a Multi-Location Newsboy Problem," Management Science, INFORMS, vol. 25(5), pages 498-501, May.
    2. Hartman, Bruce C. & Dror, Moshe & Shaked, Moshe, 2000. "Cores of Inventory Centralization Games," Games and Economic Behavior, Elsevier, vol. 31(1), pages 26-49, April.
    3. Saif Benjaafar & William L. Cooper & Joon-Seok Kim, 2005. "On the Benefits of Pooling in Production-Inventory Systems," Management Science, INFORMS, vol. 51(4), pages 548-565, April.
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