Improved profit functions for newsvendor models with normally distributed demand

Jianli Hu and Charles L. Munson

International Journal of Procurement Management, 2011, vol. 4, issue 1, 20-36

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.

Keywords: inventories; applied probability; newsvendor models; normal distribution; improved profit functions; demand; coefficient of variation; expected profit functions; ordering decisions; actual realised profits; average profits; procurement management. (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.inderscience.com/link.php?id=37383 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ids:ijpman:v:4:y:2011:i:1:p:20-36

Access Statistics for this article

More articles in International Journal of Procurement Management from Inderscience Enterprises Ltd
Bibliographic data for series maintained by Sarah Parker ().