Naive Newsvendor Adjustments: Are They Always Detrimental?

Abstract

Newsvendor problems are an important and much-studied topic in stochastic inventory control. One strand of the literature on newsvendor problems is concerned with the fact that practitioners often make judgemental adjustments to the theoretically "optimal" order quantities. Although judgemental adjustment is sometimes beneficial, two specific kinds of adjustment are normally considered to be particularly naive: demand chasing and pull-to-centre. We discuss how these adjustments work in practice and what they imply in a variety of settings. We argue that even such naive adjustments can be useful under certain conditions. This is confirmed by experiments on simulated data. Finally, we propose a heuristic algorithm for "tuning" the adjustment parameters in practice.