The Generalized Newsboy Problem, Contract Negotiations and Secondary Vendors

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Abstract
The single period inventory model, known as the newsboy problem, has been extended by considering the supply of inventory as a random variable. A rule for acceptance of inventory from the primary vendor (supplier) is given. Analyses for the newsboy's use in contract negotiations with his supplier are presented. The analyses ensure that the newsboy suffers no decrease in expected revenue by determining values for fixed and proportional penalties when shortages exist. In addition, the unit cost that the newsboy can afford to pay to purchase the excess supply is determined so that there is no decrease in expected revenue. The optimal use of secondary vendors is derived when the specific amount of shortage is known and when the specific amount (if any) of shortage is not known. Illustrative distributions for supply and demand and specific numerical cases are given.

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