Newsvendor games: convex optimization of centralized inventory operations

Samuel Burer () and Moshe Dror

TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, 2012, vol. 20, issue 3, 707-728

Abstract: A finite set of outlets with randomly fluctuating demands bands together to reduce costs by buying, storing and distributing their inventory jointly. This is termed inventory centralization and is a type of risk pooling. The expected centralization cost can be lowered even further, without disrupting the demand behavior at individual outlets, by inducing the outlets to correlate their individual demands. Given that the outlets’ demands are normally distributed, the lowering of the centralized cost corresponds to a semidefinite optimization problem. This paper establishes a closed-form optimal solution of the semidefinite program and a fair allocation of the centralized cost at optimality. Copyright Sociedad de Estadística e Investigación Operativa 2012

Keywords: Inventory centralization; Risk pooling; Cooperative game theory; Convex optimization; 90B05; 91A12; 90C22; 90C25 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11750-010-0160-x

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