Newsvendor Model

Overview

The newsvendor model determines optimal order quantity for a single selling period with uncertain demand. Balances overage cost (Co = cost - salvage) against underage cost (Cu = price - cost). Optimal Q* satisfies: P(D ≤ Q*) = Cu / (Cu + Co). Known as the critical ratio solution.

When to Use

Trigger conditions:

• One-time or seasonal purchasing decisions (fashion, holiday goods, event tickets)
• Perishable products with no restocking opportunity
• Setting initial stocking levels before demand is observed

When NOT to use:

• For continuous replenishment with stable demand (use EOQ)
• When backorders are acceptable and demand carries over (multi-period models)

Algorithm