NEWSBOY PROBLEM

Newsboy problem - A newspaper is concerned with controlling the number of papers to be distributed to newstands. The cost of a paper varies (i.e., Sunday vs. daily), and the demand is a random variable, q, with probability function P(q). Unsold papers are returned, with no salvage value the next day, losing millions of dollars in the production cost. The demand for newspapers is a random variable, with probability function P(q) = probability that demand equals q. It is possible, however, for a newstand to order more papers the same day. There are holding and shortage (penalty) costs. The problem is to determine a reorder policy so as to minimize total expected cost. This problem was used to consider a reorder policy with a 2-parameter decision rule:

1. s = inventory level at which an order is placed;
2. S = inventory level to which to order.

Then, the decision rule to be employed is the following policy:

Order nothing if the inventory of papers is >= s;

Order S-s if there are s papers on hand and s < S.

The significance of this problem is that it was used to introduce the notion (and optimality) of an (s, S) policy in inventory theory.