Extending the newsvendor model to account for uncontrolled inventory transfers

Abstract

In this paper we consider the single-period newsvendor model with uncontrolled inventory transfers. The newsvendor or buyer places a single order for identical items. Independently of the order, the buyer can also receive an additional random amount of the same item in the same time period via “transfer”. Thus, there is uncertainty associated with both the demand and the quantity that is transferred. We formulate this problem as a newsvendor problem with two independent supply streams (one deterministic and one random) and compare our analytical results for different demand distribution/transfer distribution combinations to analytical results associated with the classic newsvendor model. Uncontrolled inventory transfers present a challenging problem in the health care industry with respect to the management of blood inventory. However, the proposed extension can be generalized and applied to any situation where perishable items are transferred from satellite locations to a centralized location in order to increase the probability that the items will be sold before they expire.