Lower bound for cost deviation in the newsboy model

Abstract

Quality of decisions in inventory management problems depends on accuracy of param- eter estimates used for decision making. In many situations, error in decision making is unavoidable. In such cases, understanding sensitivity of objective function to sub-optimal decisions is necessary for better implementation of the model. We study sensitivity of expected demand-supply mismatch cost to sub-optimal ordering decisions in the newsboy model. We demonstrate through establishing a lower bound for cost deviation that the newsboy model is sensitive to error in ordering decisions. We generalize our conclusions to the discrete case too.