A dynamic newsvendor problem with goodwill-dependent demands and minimum commitment. (December 2019)

• Record Type: Journal Article
• Authors: Han, Xiaoya; Yu, Yugang; Hu, Guiping
• Is Part Of: Omega. Volume 89(2019)
• Page Start: 242
• Page End: 256
• Publication Date: 2019-12
• Subjects: Dynamic newsvendor -- Stochastic programming -- Goodwill-dependent demands -- Minimum commitment -- Robust optimization; Management -- Periodicals; 658.4005
• DOI: 10.1016/j.omega.2018.10.012
• Languages: English
• ISSNs: 0305-0483

Abstract

Highlights: Investigate minimum commitment with price discount and consumers' goodwill. Obtain explicit solutions by using a robust optimization approach. Prove consumers' goodwill monotonically converges to a steady-state one. Find the retailer who ignores long-run implication of ordering policy loses profit. Find that steady-state goodwill may decrease in committed minimum quantity. Abstract: A retailer provides products to satisfy consumers whose goodwill towards the retailer is positively correlated to the past fulfillment levels of the retailer. Consumer goodwill changes with fulfillment levels and influences the demand. The retailer makes a commitment on order quantity to suppliers who offer price discounts. This paper focuses on the decision-making problem faced by the retailer to determine the minimum commitment at the beginning of the planning horizon and ordering policies in the long run. The objective is the retailer's profit maximization. We model the problem as a stochastic dynamic programming model and solve the model with a robust optimization approach considering consumers' goodwill. We find that all goodwill paths monotonically converge to a constant steady-state goodwill characterized by implicit equations. Moreover, if the retailer ignores long-term implications of its ordering policy, it may lose profits. In addition, the steady-state goodwill may decrease even with increased committed minimum quantity.