Newsvendor games: Convex optimization of centralized inventory operations

Samuel Burer, Moshe Dror

Research output: Contribution to journalArticle

2 Scopus citations

Abstract

A finite set of outlets with randomly fluctuating demands bands together to reduce costs by buying, storing and distributing their inventory jointly. This is termed inventory centralization and is a type of risk pooling. The expected centralization cost can be lowered even further, without disrupting the demand behavior at individual outlets, by inducing the outlets to correlate their individual demands. Given that the outlets' demands are normally distributed, the lowering of the centralized cost corresponds to a semidefinite optimization problem. This paper establishes a closed-form optimal solution of the semidefinite program and a fair allocation of the centralized cost at optimality.

Original languageEnglish (US)
Pages (from-to)707-728
Number of pages22
JournalTOP
Volume20
Issue number3
DOIs
StatePublished - Oct 2012

Keywords

  • Convex optimization
  • Cooperative game theory
  • Inventory centralization
  • Risk pooling

ASJC Scopus subject areas

  • Modeling and Simulation
  • Discrete Mathematics and Combinatorics
  • Management Science and Operations Research
  • Information Systems and Management

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