HealthLawProf Blog

Editor: Katharine Van Tassel
Case Western Reserve University School of Law

Friday, July 30, 2021

The Nonstationary Newsvendor: Data-Driven Nonparametric Learning

Bora Keskin (Duke University), Xu Min (Tsinghua University) Jing-Sheng Jeannette Song (Duke University), The Nonstationary Newsvendor: Data-Driven Nonparametric Learning, SSRN:

We study a newsvendor problem with unknown demand distribution in a nonstationary demand environment over a multi-period time horizon. The demand in each period consists of a time-varying demand level and an additive random shock. Neither the demand level nor the random shock is separately observable. The amount of change in the demand level over the time horizon is measured by a cumulative variation metric. The problem has widespread applications, such as perishable inventory planning, staffing, and medical resource capacity planning in the wake of COVID-19. We design a nonparametric dynamic ordering policy, termed the moving window ordering policy, that tracks the shifts in the unknown demand level while accounting for the unobservable random demand shocks. To compute the order quantity in each period, this policy only needs the past demand observations, without any access to the underlying demand distribution. For a finite variation "budget," we prove that our ordering policy is first-order optimal in the sense that its regret grows at the smallest possible rate. We also extend our analysis to the case of asymptotically large variation budgets. Through case studies based on real-life data, we show that our policy can save 20-80% of overage and underage costs, relative to policies widely used for perishable inventory replenishment and nurse staffing.

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