Managing the Newsvendor Modeled Product System with Random Capacity and Capacity-Dependent Price

Abstract

We consider a newsvendor modeled product system, where the firm provides products to the market. The supply capacity of the product is random, so the firm receives either the amount of order quantity or the realized capacity, whichever is smaller. The market price is capacity dependent. We consider two types of production cost structures: the procurement case and the in-house production case. The firm pays for the received quantity in the former case and for the ordered quantity in the latter case. We obtain the optimal order quantities for both cases. Comparing with the traditional newsvendor model, we find that the optimal order quantity in both the procurement case and the in-house production case are no greater than that in the traditional newsvendor model with a fixed selling price. We also find that the optimal order quantity for the procurement case is greater than that for the in-house production case. Numerical study is conducted to investigate the sensitivity of the optimal solution versus the distribution of the random capacity/demand.