The newsvendor model revisited: the impacts of high unit holding costs on the accuracy of the classic model

Shaolong Tang, Stella Cho, Wenjie Wang, Hong Yan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

1 Citation (Scopus)

Abstract

The newsvendor problem has been applied in various business settings. It is often assumed that the decision variable, i.e., order-up-to level, has no impacts on the holding costs for average inventory cycled in a given period, which is the difference between beginning and ending inventory levels on hand in that period. The average holding cost for this portion of inventory is conveniently and approximately calculated as half the product of the unit holding cost and the expectation of the demand in one period if it is assumed that the inventory is approximately evenly consumed. It is a good approximation when the unit holding cost is significantly lower than the unit backorder cost as this optimal solution to inventory level is able to guarantee a low probability of understocking. However, if this condition does not hold, the approximation may deviate from the actual cost and cannot measure the expected holding cost for this portion of inventory. This paper examines the impact of the cycle stock holding cost on the newsvendor model and the conditions under which this portion of cost is not negligible.
Original languageEnglish
Article number12
JournalFrontiers of Business Research in China
Volume12
Issue number1
DOIs
Publication statusPublished - 1 Dec 2018

Keywords

  • Inventory control
  • Newsvendor model
  • Stochastic model

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Public Administration

Cite this