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.
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