Newsvendor Discrete Critical Fractile
Minimize expected mismatch cost and see why discrete quantile optima can tie.
Free theory articleMinimize expected mismatch cost and see why discrete quantile optima can tie.
Concept & interpretation
The newsvendor model minimizes the expected mismatch cost between an inventory level and uncertain demand. It evaluates the expected shortage cost when demand exceeds stock and expected leftover cost when stock exceeds demand.
Experiment
You can test various distributions using the interactive Newsvendor Discrete Critical Fractile module.
- Set Demand to "Uniform".
- Set Shortage cost to 2.
- Set Leftover cost to 1.
- Set Stock to 3. Notice the expected cost is 1.6, and the critical fractile is 0.6666666666666666.
- Change Stock to 4 and observe the expected cost rise to 2.0.