THE CUTOFF TRANSACTION SIZE OF A QUADRATIC CONCAVE HOLDING AND PENALTY COST FUNCTIONS TO THE INFORMATION VALUE APPLYING TO THE NEWSBOY MODEL

Abstract

This investigation adopts the perspective of the retailer and incorporates information flow between a retailer and customers. Two new models are considered that differ in terms of information completeness. The first model involves the retailer having incomplete information regarding the state of customers demand, namely extending the model of Dekker et al. (IIE Transactions, 32, 2000, 461) by considering the quadratic concave holding and penalty cost functions based on the law of diminishing marginal cost to fit in with the some practical situations. Meanwhile, the second model involves the retailer having full information on the state of customers demand. Precise expressions are derived for the expected total profit of these two newsboy models with a cutoff transaction size and compound Poisson demand distribution. It is worthwhile to measure the value of information and identify the effect of factors for enterprise decision making regarding whether or not to pay for information that can help increase profits. Moreover, we adopt and modify the golden section search technique (Haftka et al., 1990) to determine an optimal order-up-to level S and a cutoff transaction size q systematically. Finally, numerical examples are given to illustrate the result derived.