A New Generalized Newsvendor Model with Random Demand and Cost Misspecification

Newsvendor problem is an extensively researched topic in inventory management. In this class of inventory problems, shortage and excess costs are considered to be proportional to the quantity lost. But for critical commodities, inventory decision is a typical example where excess or shortage may lead to greater losses than merely the total cost of lost quantity. Such a problem has not been discussed much in the literature. Moreover, majority of the existing literature assumes the demand distribution to be completely known. In this paper, we propose a generalization of the newsvendor problem for critical goods or commodities with higher shortage or excess costs but of same degree. We also assume that, the parameters of the demand distribution are unknown. We also discuss different estimators of the optimal order quantity based on a random sample of demand. In particular, we provide different estimators based on (i) full sample and (ii) broken sample data (i.e., with single order statistic). We also report comparison of the estimators using simulated bias and mean square error (MSE). We have also compared the accuracy of nonlinear cost functions with the linear one in this problem under misspecified power in the cost function.