Lower Bound for Cost Deviation in the Newsboy Model

Avijit Khanra and Tathagata Bandyopadhyay

No WP2013-11-01, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Quality of decisions in inventory management problems depends on accuracy of parameter estimates used for decision making. In many situations, error in decision making is unavoidable. In such cases, understanding sensitivity of objective function to sub-optimal decisions is necessary for better implementation of the model. We study sensitivity of expected demand-supply mismatch cost to sub-optimal ordering decisions in the newsboy model. We demonstrate through establishing a lower bound for cost deviation that the newsboy model is sensitive to error in ordering decisions. We generalize our conclusions to the discrete case too.

Date: 2013-11-06
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