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Improved profit functions for newsvendor models with normally distributed demand

Author

Listed:
  • Jianli Hu
  • Charles L. Munson

Abstract

Existing textbook and research paper formulas for newsvendor models with normally distributed demand represent reasonable approximations of expected profit only when the coefficient of variation (CV) of demand is relatively low. Instead, we seek expected profit functions that better represent the expected value of what firms will actually earn if managers are making ordering decisions assuming a normal distribution (the most common assumption in many textbooks and papers). We derive robust expected profit formulas that account for high CV, and computational experiments suggest that our formulas provide a close match to actual realised average profit, irrespective of the CV level.

Suggested Citation

  • Jianli Hu & Charles L. Munson, 2011. "Improved profit functions for newsvendor models with normally distributed demand," International Journal of Procurement Management, Inderscience Enterprises Ltd, vol. 4(1), pages 20-36.
    • Handle: RePEc:ids:ijpman:v:4:y:2011:i:1:p:20-36
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    Cited by:

    1. Halkos, George & Kevork, Ilias, 2012. "The classical newsvendor model under normal demand with large coefficients of variation," MPRA Paper 40414, University Library of Munich, Germany.

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