Optimal resource acquisition policy for a newsvendor under supply risk

Abstract

We consider a single-period manufacturing problem involving uncertainty in the availability of a production resource. The resource is stochastically available at the regular cost, but by paying a premium it is possible to reserve and hence guarantee any desired level of the resource in advance. Given the resource consumption rates for a number of products, the manufacturer needs to determine the optimal forward purchase quantity of the resource such that expected profit from selling the products is maximized. The problem is formulated as an extension of the traditional multi-item newsvendor problem. A computational optimization procedure is developed for solving the problem. We find that depending on the profit margins associated with the products, the optimal reservation amount of the resource may increase or decrease as the supply variability increases. The demand volatilities of products are observed to influence the forward purchase quantity of the resource in a similar manner.