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The Data-Driven Newsvendor Problem: New Bounds and Insights

Author

Listed:
  • Retsef Levi

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Georgia Perakis

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Joline Uichanco

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

Consider the newsvendor model, but under the assumption that the underlying demand distribution is not known as part of the input. Instead, the only information available is a random, independent sample drawn from the demand distribution. This paper analyzes the sample average approximation (SAA) approach for the data-driven newsvendor problem. We obtain a new analytical bound on the probability that the relative regret of the SAA solution exceeds a threshold. This bound is significantly tighter than existing bounds, and it matches the empirical accuracy of the SAA solution observed in extensive computational experiments. This bound reveals that the demand distribution’s weighted mean spread affects the accuracy of the SAA heuristic.

Suggested Citation

  • Retsef Levi & Georgia Perakis & Joline Uichanco, 2015. "The Data-Driven Newsvendor Problem: New Bounds and Insights," Operations Research, INFORMS, vol. 63(6), pages 1294-1306, December.
    • Handle: RePEc:inm:oropre:v:63:y:2015:i:6:p:1294-1306
    DOI: 10.1287/opre.2015.1422
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    References listed on IDEAS

    as
    1. Omar Besbes & Alp Muharremoglu, 2013. "On Implications of Demand Censoring in the Newsvendor Problem," Management Science, INFORMS, vol. 59(6), pages 1407-1424, June.
    2. Gregory A. Godfrey & Warren B. Powell, 2001. "An Adaptive, Distribution-Free Algorithm for the Newsvendor Problem with Censored Demands, with Applications to Inventory and Distribution," Management Science, INFORMS, vol. 47(8), pages 1101-1112, August.
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    Full references (including those not matched with items on IDEAS)

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