Title: On modelling and lot sizing of the newsvendor problem with surrogate product

Authors: Layek Abdel-Malek; Pinyuan Shan; Roberto Montanari

Addresses: Department of Mechanical and Industrial Engineering, New Jersey Institute of Technology, Newark, NJ 07102, USA ' Department of Mechanical and Industrial Engineering, New Jersey Institute of Technology, Newark, NJ 07102, USA ' Dipartimento di Ingegneriae Architettura, Università di Parma, Viale delle Scienze, 43100 Parma, Italy

Abstract: There is a growing interest in the newsvendor problem and its extensions. One of these extensions is in the area of product substitution. In this work, we model the situation where two perishable products are considered, a primary product and a surrogate one. The primary product yields higher profit than the surrogate. The objective of the model is to find the optimal lot sizes of both products that minimise the total ordering cost (alternatively, maximise the profit). Numerical analysis and examples to show the contribution of the surrogate approach to the overall performance of the policy are presented as well as some managerial insights. The applications of this model can occur in retail of perishable commodities, fashion sector, and products of high rates of technological obsolescence as well as service industries such as hotel reservation and car rentals.

Keywords: newsvendor problem; stochastic optimisation; supply chain management; product substitute; decision making.

DOI: 10.1504/IJOR.2024.141327

International Journal of Operational Research, 2024 Vol.51 No.1, pp.59 - 80

Received: 16 Jun 2021
Accepted: 21 Nov 2021
Published online: 09 Sep 2024 *

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