Visualising newsvendor profits: the single-period problem with location-scale demand distributions

Abstract

The single-period, or newsvendor, problem is typically formulated to maximise expected profits or minimise expected costs. Recent research has suggested that decision-makers tend not to act in accordance with this objective, and extensions to the model have been introduced that take into account other objectives, such as risk tolerance or achieving target profits. The purpose of this research is to provide decision support via visualisation to assist in the determination of an appropriate order quantity. A visual characterisation of the single-period profit distribution is provided for problems with location-scale demand distributions. From this, bounds on the profit as well as stochastically dominated solutions are identified, and the profit distribution is formulated as a mixture distribution of two extremes. This visualisation provides novel insight into the structure and alternative solution methods for single-period problems. Alternative decision criteria are then presented as a direct consequence of the visualisation, including quantile optimisation.