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Sensitivity Analysis of the Newsboy Model

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  • Khanra, Avijit
  • Soman, Chetan A.
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    Abstract

    Sensitivity analysis is an integral part of inventory optimization models due to uncertainty associated with estimates of model parameters. Though the newsboy problem is one of the most researched inventory problems, very little is known about its robustness. We study sensitivity of expected demand-supply mismatch cost to sub-optimal ordering decisions in the newsboy model. Conditions for symmetry (skewness) of cost deviation have been identi ed and magnitude of cost deviation is demonstrated for normal demand distribution. We found the newsboy model to be sensitive to sub-optimal ordering decisions, much more sensitive than the economic order quantity model.

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    Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP2013-09-03.

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    Handle: RePEc:iim:iimawp:12128

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    1. Maurice E. Schweitzer & GĂ©rard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, INFORMS, vol. 46(3), pages 404-420, March.
    2. Borgonovo, E. & Peccati, L., 2007. "Global sensitivity analysis in inventory management," International Journal of Production Economics, Elsevier, Elsevier, vol. 108(1-2), pages 302-313, July.
    3. Kevork, Ilias S., 2010. "Estimating the optimal order quantity and the maximum expected profit for single-period inventory decisions," Omega, Elsevier, Elsevier, vol. 38(3-4), pages 218-227, June.
    4. Khouja, Moutaz, 1999. "The single-period (news-vendor) problem: literature review and suggestions for future research," Omega, Elsevier, Elsevier, vol. 27(5), pages 537-553, October.
    5. Qin, Yan & Wang, Ruoxuan & Vakharia, Asoo J. & Chen, Yuwen & Seref, Michelle M.H., 2011. "The newsvendor problem: Review and directions for future research," European Journal of Operational Research, Elsevier, Elsevier, vol. 213(2), pages 361-374, September.
    6. Chen, Liang-Hsuan & Chen, Ying-Che, 2010. "A multiple-item budget-constraint newsboy problem with a reservation policy," Omega, Elsevier, Elsevier, vol. 38(6), pages 431-439, December.
    7. Louis Eeckhoudt & Christian Gollier & Harris Schlesinger, 1995. "The Risk-Averse (and Prudent) Newsboy," Management Science, INFORMS, INFORMS, vol. 41(5), pages 786-794, May.
    8. Ridder, A.A.N. & Laan, E. van der & Salomon, M., 1997. "How Larger Demand Variability may Lead to Lower Costs in the Newsvendor Problem," Discussion Paper, Tilburg University, Center for Economic Research 1997-31, Tilburg University, Center for Economic Research.
    9. Yu-Sheng Zheng, 1992. "On Properties of Stochastic Inventory Systems," Management Science, INFORMS, INFORMS, vol. 38(1), pages 87-103, January.
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