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Expected Value of Distribution Information for the Newsvendor Problem

Department of Management and Marketing, Jennings A. Jones College of Business, Middle Tennessee State University, Murfreesboro, Tennessee 37132
Department of Management and Operations, College of Business and Economics, Washington State University, Pullman, Washington 99164-4736
Department of Management and Operations, College of Business and Economics, Washington State University, Pullman, Washington 99164-4736
jyue{at}mtsu.edu
chenbi{at}wsu.edu
mcwang{at}wsu.edu

This paper extends previous work on the distribution-free newsvendor problem, where only partial information about the demand distribution is available. More specifically, the analysis assumes that the demand distribution f belongs to a class of probability distribution functions (pdf) with mean µ and standard deviation . While previous work has examined the expected value of distribution information (EVDI) for a particular order quantity and a particular pdf f, this paper aims at computing the maximum EVDI over all f for any order quantity. In addition, an optimization procedure is provided to calculate the order quantity that minimizes the maximum EVDI.

Subject classifications: inventory/production: perishable/aging items; inventory/production: uncertainty; decision analysis: applications.
History: Received September 2003; revision received October 2005; accepted October 2005.

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