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Newsvendor games: convex optimization of centralized inventory operations

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  • Samuel Burer
  • Moshe Dror

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

Suggested Citation

  • Samuel Burer & Moshe Dror, 2012. "Newsvendor games: convex optimization of centralized inventory operations," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 20(3), pages 707-728, October.
    • Handle: RePEc:spr:topjnl:v:20:y:2012:i:3:p:707-728
    DOI: 10.1007/s11750-010-0160-x
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    References listed on IDEAS

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    Cited by:

    1. Shuo Zeng & Moshe Dror, 2019. "Serving many masters: an agent and his principals," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 90(1), pages 23-59, August.

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