The Impact of a Target on Newsvendor Decisions

Lucy Gongtao Chen (), Daniel Zhuoyu Long () and Georgia Perakis ()
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Lucy Gongtao Chen: NUS Business School, National University of Singapore, Singapore 119245
Daniel Zhuoyu Long: Department of Systems Engineering and Engineering Management, Chinese University of Hong Kong, Shatin, Hong Kong
Georgia Perakis: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Manufacturing & Service Operations Management, 2015, vol. 17, issue 1, 78-86

Abstract: Goal achieving is a commonly observed phenomenon in practice, and it plays an important role in decision making. In this paper, we investigate the impact of a target on newsvendor decisions. We take into account the risk and model the effect of a target by maximizing the satisficing measure of a newsvendor’s profit with respect to that target. We study two satisficing measures: (i) conditional value at risk (CVaR) satisficing measure that evaluates the highest confidence level of CVaR achieving the target; (ii) entropic satisficing measure that assesses the smallest risk tolerance level under which the certainty equivalent for exponential utility function achieves the target. For both satisficing measures, we find that the optimal ordering quantity increases with the target level. We determine an optimal order quantity for a target-based newsvendor and characterize its properties with respect to, for example, product’s profit margin.

Keywords: newsvendor; risk measure; target profit (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:17:y:2015:i:1:p:78-86

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