A multi-item newsvendor problem with preseason production and capacitated reactive production

Chung C., Flynn J., Kirca O.

EUROPEAN JOURNAL OF OPERATIONAL RESEARCH, vol.188, no.3, pp.775-792, 2008 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 188 Issue: 3
  • Publication Date: 2008
  • Doi Number: 10.1016/j.ejor.2007.05.011
  • Journal Name: EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Page Numbers: pp.775-792
  • Keywords: inventory, stochastic, newsvendor, single period, supply chain, NEWSBOY PROBLEM
  • Middle East Technical University Affiliated: Yes

Abstract

Given items with short life cycles or seasonal demands, one can potentially improve profits by producing during the selling season, especially when its production capacity is substantial. We develop a two-stage, multi-item model incorporating reactive production that employs a firm's internal capacity. Production occurs in an uncapacitated preseason stage and a capacitated reactive stage. Demands occur in the reactive stage. Reactive capacities are pre-allocated to each item in the preseason stage and cannot be changed during the reactive stage. Reactive production occurs during the selling season with full knowledge of demands. The objective is expected profit maximization. Unsatisfied demand is lost. The revenue, salvage value, and production and lost sales costs are proportional. Assuming no fixed costs, we present a simple algorithm for computing optimal policies. For a model with fixed costs for allocating preseason stage production and reactive stage capacity to product families, we characterize optimal policies and develop optimal and heuristic algorithms. (C) 2007 Elsevier B.V. All rights reserved.