An Analysis of the Multiproduct

Newsboy Problem with a Budget

Constraint

Carol Huayunga
Navjot Singh
IE 440
Professor Malek
April 28, 2014

I.

Introduction

Many people have long faced budget constraint problems in

real life. A budget constraint problem is when a consumer and or
a producer are restricted in purchasing/making goods and
services due to a certain income. In consequences, a single
period stochastic inventory model has been created and used
throughout many years in fiscal and operational management
fields with the ultimate goal to reduce costs and increase profits
during the process of obtaining and selling products. Then, this
newsboy problem is an ideal tool in order to find solutions to
stocking issues in todays supply chain problems.
Therefore, in the article, Exact, approximate, and generic
iterative model for the multiproduct newsboy problem with
budget constraint (Abdel Malek 2004) , which was inspired by
Lau and Lau (Eur Operational Research 1996), gives an exact
answer to the problem where the demand probability density
function is uniform. In other words, all the demands are equally
likely and near optimal solution when the demand is distributed
otherwise. Then, the approach for the solution will add the space
being divided into three regions. These three regions are later
than marked by two unique thresholds.
Furthermore out of the three regions, the first region consists
of where the budget is very large and the solution stays exactly
like the unconstrained problem. Secondly, the second region is
where the budget is not very large but is medium with the

constraint binding. In other words, the newsboy can order the

products using Lagrangian approach. Lastly, the third region
consists of were the budget is very small and the negativity
constraints will lead to negative ordered quantities. This shows
that some products need to be removed from the native list. By
reading further it will profoundly explain how the values in the
three regions are computed in order to find the optimal order
quantity for the products.
To start with the looking solution, the following equation set
by Hadley and Whitin (1963) shows the expected minimum cost.

With the budget restriction:

Where:
E= Expected Cost.
N= Total number of items.
= The item index.
c =The cost per unit of product

x =The amount to be ordered of item

(variable decision).

h =The inventory cost.

D =The scholastic demand of the item.
f (D ) = Probability demand function of the demand.

v = Cost of revenue or Loss per unit.

B =The budget.

Then to can find the probability that estimates the optimum lot
size, it is necessary to use the Lagrangian approach. In
consequence, the solution for the equation (1) is.

Where:
F ( x ) =Cumulative distribution function.
= The Lagrangian multiply.

x =Optimal solution under budget constraint.

II.

The Problem
At the beginning the analysis decision-market does not
consider the budget constraints as part of newsboy issue. Later,
this factor will be included on the next studies. Hadley and
Whitins (1963) obtained the equation that minimizes the
expected cost of order. To find the optimum lot size order, they
used the Lagrangian approach that relaxes the non-negative
constraint. However, Lau and Lau (1995,1996) figured out that
using this approach gave negative orders. On the other hand, if

an analysis the lower bounds are not relaxing and the KuhnTucker condition is applied, the newsvendor problem results
infeasible too. The reason is because the number of equations
that are obtained results more than 20. Then, to obtain an
optimum order this case should be studied. The fig (1) shows the
case when exist an available budget and if the Lagrangian
approach is applied, the optimum lot size are obtained.

Fig 1.(a)Solution space where non-negativity constraint can be relaxed.

The opposite case is represent in the fig (2). There, if we have a tight
budget and the Lagrangian approach is used to find the desired
number of orders, some of those items will have negative values.

Fig 2. (b) A solution space where non-negativity constraint must be

considered (relaxing the non-negativity constraints may lead to negative
order quantities).

Then, as this paper is based in An analysis of the multi-product

newsboy problem with a budget constraint (Abel Malek et al.,
2005), the problem will be analyzed different cases according the
budget tightness. Finally, the selection of optimum order will be
possible to find using a convenient approach.

III.

Approach

As it was mentioned before, the newsvendor problem will be

analyzed depending the available budget. Therefore, the space
that represent this budget will be divided in tree regions as the
fig (3) shows.

Fig
(3). Thresholds for the budget ranges.

These three regions are separated for two thresholds that

will permit to get the desired budget classification. The two
thresholds are merely equations that take factor such as the cost
of unit, number of units, cost of inventory of units and the
demand probability distribution. Then, three regions are:
Region1:
BG
This region represents the case where is sufficient budget.
Therefore, if the newsvendor opts to order certain number of

item according the x

of the first equation (1), he will obtain the

optimum order. This is feasible because there is not budget

restriction in this area. Then solution in this part should be:

: The optimum number of quantities to order.

Region2:
BG
However, in this region the budget is little tight. Then, the
newsboy has to consider the budget restrictions. Therefore, to
get the solution for this second region, the non-negativity should
be relaxed using the Lagrangian approach. In this way, the
optimum order lot size will be reached. Also, in Abdel-Maleks
paper, a determined solution could get using the demand
probability density function. The solution is represented by this
equation:

Region3:
BG
In this case, the degrees of tightness of budget are more
than the last region. Therefore, if the newsboy chose to use the
Lagrangian approach to get his desired number of order, he will
get negative values. The explanation is because the lower
bounds are not being considered. The solution starts deleting the

items that have lower marginal utility. In this way, the cost
function value keeps low until it can match with the constraint
budget. After this, it is possible use the Lagrangian approach and
the optimum lot size are obtained.
IV.

Numerical Example:
Next we will follow a precise numerical example in order to
make things more lucid. From the given article we are looking at
Example 2 (4.2) and we see that we are given a 17-item
situation with a budget constraint Bg=$2500. The table below
(table 2) will show the data and demand normally distributed.

Therefore, our next step learning from earlier of this article will
be to defining the two thresholds. The two thresholds are BG(1)
and BG(2). Next, we will find the first threshold and in order to
do that we will use equation (4) from the article:

This is where we obtain BG (1)> BG-> $21988 >$2500.

Next we will find the next threshold by using equation (5) and
equation (6) from the article:

The following table (table 3) will help us find N

For BG(2) j and j=1, N can be found using the table above.
BG(2) > BG ($18807 > $2500) since BG(2) is larger we will
use Range 3 from the 3 degree budget tightness method.

Since BG(2) is from the items list, we need to reduce the

list to make the problem feasible by taking out item 9 (lowest
marginal utility) and go from lowest to highest in ascending
order. We will start with the following:
, And substituting its value in the following
equation:

We get:

which is larger than the available

budget in which at this point items 9 and 15 have been deleted.

By keep repeating this procedure at this rate, until we get
. When

($2163 <= $2500) we see that this is

the optimal solution under the budget constraint $2500. As you

can see, products 9, 15, 2, 7, 3, 14, 16, 10, 5, and 4 needs to be
omitted from the original list for the problem to become
practicable.
Furthermore, in order to compute the initial solution
required for GIM we use the following table 4 and table 5 (left)
and the following equation (right):

The purpose of table 4 is that it shows the results of the initial

values while table 5 however is the final solutions by using GIM.

V.

Conclusion
The newsvendor problem is a way for decision making in
manufacturing and service industries in the real world. Also, the
newsvendor models are applied in numerous situations that help
resolve problems concerning budgets and supply chain.
Therefore, the main goal is to find what will be the
optimum lot size that a newsboy can order to get to maximize

profits, reduce costs, and be very efficient. For this reason,

throughout history many people have attempted to solve this
problem by creating mathematical models. One of the steppingstone for the early news vendor problem started with Lau and
Lau (1996). When Lau and Lau applied the newsboy model with
a budget constraint, he figured out that the optimum order
quantity came out to be negative which makes an infeasible
solution. The reason was the lower bound that was not
considered as another constraint. Next, in a research paper
Exact, approximate, and generic iterative models for the multiproduct Newsboy problem with budget constraint (Layek 2004)
this constrain will be taken to account. In this article, the budget
constrains are analyzed by divided on three regions. Each region
will be divided by two thresholds. We first define our first region
to be a perfect model where the budget is very large and every
product can be purchased with the optimal order quantity that is
easily done. Next, the second region is where the budget is not
very large and becomes an obstacle with the constraint binding.
Therefore, to calculate the optimum lot size, it is necessary to
use Lagrangian approach. Lastly, the third region is where the
budget is very tight which makes it impossible to purchase all the
products. Then, to resolve that, the article proves that we first
need to remove the item with lower utility from the newsboys

list in ascending order. We keep repeating this procedure until we

start seeing the products within the margin line of the existing
budget.
In conclusion, a newsvendor problem occurs whenever the
amount of items needed of a given situation is random, one
must make a decision in which how much amount of the
budget to have available before finding out how much is
needed is. Furthermore, the newsvendor models are applied in
numerous situations that help resolve problems concerning
budgets and supply chain. Therefore, in this paper the object
of study was to find a feasible solution when the budget was
very tight.

Works Cited

Malek, Abdel, and Roberto Montanari. "An analysis of the

multi-product newsboy problem with a budget constraint."
International Journal of Production Economics 97.3 (2005):
296-307. ScienceDirect. Web. 18 September 2005.
Malek, Abdel, Roberto Montanari and Libia Cristina
Morales. " Exact, approximate, and generic iterative models for
the multi-product Newsboy problem with budget constraint."
International Journal of Production Economics 91.2 (2004):
189-198. ScienceDirect. Web. 28 September 2004.
Yan Qin, Ruoxuan Wang, Asoo J.Vakharia, Yuwen Chen
and Michelle M.H.Seref " The newsvendor problem: Review
and directions for future research." European Journal of
Operation Research 213 (2011): 361-374. ScienceDirect. Web.
16 September 2010.