A distribution-free newsvendor model with balking penalty and random yield

Abstract

Purpose: The purpose of this paper is to extend the analysis of the distribution-free newsvendor problem in an environment of customer balking, which occurs when customers are reluctant to buy a product if its available inventory falls below a threshold level.

Design/methodology/approach: We provide a new tradeoff tool as a replacement of the traditional one to weigh the holding cost and the goodwill costs segment: in addition to the shortage penalty, we also introduce the balking penalty. Furthermore, we extend our model to the case of random yield.

Findings: A model is presented for determining both an optimal order quantity and a lower bound on the profit under the worst possible distribution of the demand. We also study the effects of shortage penalty and the balking penalty on the optimal order quantity, which have been largely bypassed in the existing distribution free single period models with balking. Numerical examples are presented to illustrate the result.

Originality/value: The incorporation of balking penalty and random yield represents an important improvement in inventory policy performance for distribution-free newsvendor problem when customer balking occurs and the distributional form of demand is unknown.