TITLE:
On Real-Time Accounting of Inventory Costs in the Newsvendor Model and Its Effect on the Service Level
AUTHORS:
Tal Avinadav
KEYWORDS:
Newsvendor, Service Levels, Accounting
JOURNAL NAME:
Journal of Service Science and Management,
Vol.7 No.2,
April
23,
2014
ABSTRACT:
The
newsvendor model is the cornerstone of most periodic inventory models; however,
it distorts the correct timing of inventory costs and thus misses the optimal
solution of the inventory system. This work presents a modification of the
classical newsvendor model that considers the holding cost according to the
stock-levels within the selling period rather than according to the stock-level
at the end of it. The selling period (for example, a season) is divided into
equal-time epochs (for example, one-day epochs), where demands are not
necessarily identical across epochs or independently distributed. A
mathematical model is formulated to find the optimal order quantity which
maximizes the expected profit. We show: 1) that the profit function is concave;
2) that the structure of the optimality equation is similar to that of the
classical newsvendor model; 3) how to attain the real tradeoff between the
expected profit and the service level. Finally, we propose three heuristics to
approximate the optimal order quantity and two bounds on its value, which are
easy to implement in practice, and evaluate their performances using extensive
numerical examples in a factorial experimental design.