Mathematical Sciences

(Including Statistics)

Newsboy Problem: Optimal Order

Quantity in Presence of Random Supply

SOUMIK PURKAYASTHA & DEBRAJ BOSE

Department of Statistics
St. Xaviers College
30 Park Street. Kolkata 700016

Keywords: Classical Newsboy Problem, Random Supply, Expected Cost Minimization, Variance
Minimization.

Email: purkayasthasoumik@gmail.com

ABSTRACT
We have considered the classical newsboy problem where a newspaper vendor starts
his day with certain amount (q) of newspapers. The demand being random, at the end
of the day he experiences shortage or excess and accordingly bears shortage or excess
cost. The problem is to obtain q by minimizing the expected total cost. In this
paper along with demand, supply also has been considered as a random variable, which
is assumed to have a Uniform distribution about (q). The optimal value of (q) has
been obtained not only by minimizing the expected total cost, but also by bounding the
variance of the total cost to safeguard against a high value of cost in any given
situation. Several choices of demand distributions have been considered. These consist
of: Uniform, Exponential and Gamma. It is observed in some situations, that bounding
the variance of cost provides a different answer than only minimising the expected cost.

Introduction

We consider the classical newsboy problem where a newspaper vendor starts his day with a certain
amount of newspapers (q) in his hand. The demand being random, at the end of the day he either
faces a shortage or is left with some excess newspapers in his hand. Accordingly, he incurs either
shortage cost or excess cost. The standard approach is to determine the optimal order quantity
(q0 ) which consists in minimising the expected cost.
In practice, the sellable items do not match with the order quantity. Owing to many random
phenomena, supply (whatever is received) differs from the order quantity (whatever is ordered).
Hence it may be reasonable to assume that along with demand, supply also is a random variable. In
this paper we have considered three models for demand distribution, viz. uniform, exponential
and gamma, while supply has been considered to vary uniformly around the order quantity.
Further, in the classical setup, optimal order quantity is obtained by minimizing the expected
total cost. However, even if the expected cost is a minimum, in practice actual cost may be very
large. To safeguard against that, we have obtained the optimal order quantity by minimizing the
expected total cost, subject to the variance being bounded, by a pre-specified quantity.
All our computation are based on simulation. This allows us to avoid having to evaluate
complicated integrals either algebraically or numerically. The organisation of the paper is as
follows: In Section 2, we describe the problem mathematically. In Section 3, the simulation
schemes are described. In Section 4, the results are presented along with comments. In Section 5,
some problems for further study are mentioned.

Description of the Problem

We consider the classical newsboy problem where a newspaper vendor places an order of a certain
amount (q) of newspapers. We assume that the demand of newspapers is a random quantity
which is denoted by X. We also assume that the actual supply of newspapers is a random quantity,
denoted by S. While the demand distribution is given exogenously, the supply distribution depends
on the order quantity (q).
The problem is to determine the optimal order quantity (q0 ) given the demand and supply distributions. A standard approach to this problem is to minimise the expected total cost. However,
even if the expected cost is minimal, in practice the actual cost may be very large. To safeguard
against that, we obtain the optimal order quantity by minimizing the expected total cost, subject
to the variance being bounded, by a pre-specified quantity.
Let S be the random variable denoting supply of the item. We assume the supply to be a
random variable following a uniform distribution, i.e.,
S U [q a, q + a].
3

(1.1)

Let X be the random variable denoting the demand of an item. In such a case, the following three
demand distributions have been considered:
X R(, ), X Exp(), X (p, ).

(1.2)

Let us use the following notation: (a) c1 = shortage cost per unit short, (b) c2 = excess cost per
unit excess. The cost incurred (C), a random variable, is then given by:
C = c1 (X S)IXS + c2 (S X)ISX .

(2)

Our aim is to obtain that optimum order quantity q0 which gives the minimum expected cost
E(C), subject to its variance V (C) being bounded by a pre-assigned quantity, say . This guards
against possible values of q0 with small expected cost E(C) and not so small V ar(C).
We notice that
RR
RR
E(C) = c1
(x s)Ixs f (x)g(s) dx ds + c2
(s x)Isx f (x)g(s) dx ds,
RR
2
2
E(C ) =
[c1 (x s)Ixs + c2 (s x)Isx ] f (x)g(s) dx ds,

(3)

where f is the probability density function (pdf) of X and g is the pdf of S. The integrals in (3)
may involve tedious algebraic computation. We avoid this by using simulation based computation.
The steps are described in the net section.

Description of Simulation Scheme

We generate a sample of size N (N large) for each of the specification of f and g. We denote these
values by Xi , i = 1, . . . , N and Si , i = 1, . . . , N . Then the following approximation to E(C) and
E(C 2 ) (cf. (3)) are used:
N
1 X
[c1 (Xi Si )IXi Si + c2 (Si Xi )ISi Xi ],
E(C)
N I=1
N
1 X
2
E(C )
[c1 (Xi Si )IXi Si + c2 (Si Xi )ISi Xi ]2 .
N I=1

(4)

Next we study E(C) and address the problem of minimizing it subject to Var(C) . The
situations we consider are presented in the table below.

3.1

S is uniform and X is uniform

For several choices of a and q and several choices of and , we simulate N observations from
each of U [q a, q + a] and U [, ]. Then we compute the quantities appearing on the right hand
4

side of (4). This is following by minimization of minimization of E(C) subject to Var(C) . The
minimization is done also without the variance restriction. This gives an idea of how the criterion
of variance restriction has been meaningful.
The situations we consider are presented in the table below.
In order to minimize E(q), we then compute the first derivative of E(q), plot graphs of the
same to obtain an initial approximation of the root of the equation:
E 0 (q) = 0
Then, by numerical methods, we compute that value of q0 for which
E(q) = 0
. We apply a similar process for V(q).
3.1.1

Numerical Examples:

1. To optimize E(q)
Taking c1 = 1, c2 = 1, = 10, = 20, a = 1. Root at q0 = 15. Please refer to figure 1.
Taking c1 = 1, c2 = 2, = 10, = 20, a = 1. Root at q0 = 13.33. Please refer to figure
2.
Taking c1 = 1, c2 = 0.5, = 10, = 20, a = 1. Root at q0 = 16.67. Please refer to
figure 3.
2. To optimize V (q)
Taking c1 = 1, c2 = 1, = 10, = 20, a = 1. Root at q0 = 15. Please refer to figure 4.
Taking c1 = 1, c2 = 2, = 10, = 20, a = 1. Root at q0 = 10.04. Please refer to figure
5.
Taking c1 = 1, c2 = 0.5, = 10, = 20, a = 1. Root at q0 = 15.38. Please refer to
figure 6.