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The newsvendor model revisited: the impacts of high unit holding costs on the accuracy of the classic model

Author

Listed:
  • Shaolong Tang

    (Beijing Normal University-Hong Kong Baptist University, United International College)

  • Stella Cho

    (Beijing Normal University-Hong Kong Baptist University, United International College)

  • Jacqueline Wenjie Wang

    (The Hong Kong Polytechnic University)

  • Hong Yan

    (The Hong Kong Polytechnic University)

Abstract

The newsvendor problem has been applied in various business settings. It is often assumed that the decision variable, i.e., order-up-to level, has no impacts on the holding costs for average inventory cycled in a given period, which is the difference between beginning and ending inventory levels on hand in that period. The average holding cost for this portion of inventory is conveniently and approximately calculated as half the product of the unit holding cost and the expectation of the demand in one period if it is assumed that the inventory is approximately evenly consumed. It is a good approximation when the unit holding cost is significantly lower than the unit backorder cost as this optimal solution to inventory level is able to guarantee a low probability of understocking. However, if this condition does not hold, the approximation may deviate from the actual cost and cannot measure the expected holding cost for this portion of inventory. This paper examines the impact of the cycle stock holding cost on the newsvendor model and the conditions under which this portion of cost is not negligible.

Suggested Citation

  • Shaolong Tang & Stella Cho & Jacqueline Wenjie Wang & Hong Yan, 2018. "The newsvendor model revisited: the impacts of high unit holding costs on the accuracy of the classic model," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-14, December.
    • Handle: RePEc:spr:fobric:v:12:y:2018:i:1:d:10.1186_s11782-018-0034-x
    DOI: 10.1186/s11782-018-0034-x
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    References listed on IDEAS

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