Managing a newsvendor network under uncertainty: case study of a pharmacy retailer in India

Wednesday, December 5, 2018 - 9:00am - 10:00am
Lind 305
Chaithanya Bandi (Northwestern University)
In this work, we consider a newsvendor network a major online pharmacy retailer in India whose distribution network
spans the entire country through fixed retail locations and online platforms. The decision makers
of this company observe a sizable uncertainty in demand over the course of the year (in addition to
seasonality) and significant correlations amongst various product categories. In close collaboration
with this company’s managers, we seek to design optimal implementable policies to control their
inventory levels in their network. With this goal, we introduce a new class of adaptive policies called periodic-affine policies, that allows a decision maker to optimally manage and control large-scale newsvendor networks in the presence of uncertain demand without distributional assumptions. These policies are data-driven and model many features of the demand such as correlation, and remain robust to parameter mis-specification. We present a model that can be generalized to multi-product settings and extended to multi-period problems. This is accomplished by modeling the uncertain demand via sets. In this way, it offers a natural framework to study competing policies such as base-stock, affine, and approximative approaches with respect to their profit, sensitivity to parameters and assumptions, and computational scalability. We show that the periodic-affine policies are sustainable, i.e. time consistent, because they warrant optimality both within subperiods and over the entire planning horizon. This approach is tractable and free of distributional assumptions, and hence, suited for real-world applications. We provide efficient algorithms to obtain the optimal periodic-affine policies and demonstrate their advantages on the sales data from the retailer.