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Multi-location newsvendor problem with random yield: Centralization versus decentralization

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  • Xiao, Li
  • Wang, Ce

Abstract

We study a multi-location newsvendor problem with an additive or multiplicative random yield assumption. We derive the expected cost and variance of cost under both centralized and decentralized systems. Given the additive random yield, we show that centralization is better than decentralization if demand is deterministic, or demand is uncertain and service level is 0.5. This result is driven by the risk pooling effect, where risk refers to supply risk. Given the multiplicative random yield, we show that decentralization is better than centralization if demand is deterministic. This result is driven by the risk diversification effect, where risk refers to supply risk. Through numerical experiments, we find that in general there is no risk pooling effect nor risk diversification effect if demand is uncertain. Specifically, under additive random yield the cost variance of centralized system can be either higher or lower than the decentralized system. Under multiplicative random yield, centralization is better than decentralization in terms of the expected cost, while decentralization is better than centralization in terms of the cost variance. Both the analytical and numerical results suggest that, when considering supply uncertainty, the comparison between centralization and decentralization highly depends on demand uncertainty.

Suggested Citation

  • Xiao, Li & Wang, Ce, 2023. "Multi-location newsvendor problem with random yield: Centralization versus decentralization," Omega, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:jomega:v:116:y:2023:i:c:s0305048322002018
    DOI: 10.1016/j.omega.2022.102795
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    References listed on IDEAS

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