A Copula Approach to Inventory Pooling Problems with Newsvendor Products

TL;DR

This paper introduces a copula-based analytical framework to understand how pooling demands affects inventory levels in newsvendor problems, considering various dependence structures and demand distributions.

Contribution

It develops a novel copula approach to model demand dependence and analytically examines its impact on inventory pooling decisions in newsvendor settings.

Findings

Pooling can increase or decrease total inventory depending on demand dependence.

Dependence structure significantly influences pooling benefits.

Numerical results highlight the importance of demand distribution and dependence in inventory management.

Abstract

This study focuses on the inventory pooling problem under the newsvendor framework. The specific focus is the change in inventory levels when product inventories are pooled. We provide analytical conditions under which an increase (or decrease) in the total inventory levels should be expected. We introduce the copula framework to model a wide range of dependence structures between pooled demands, and provide a numerical study that gives valuable insights into the effect of marginal demand distributions and dependence structure on the effect of pooling to inventory levels.