On modelling and lot sizing of the newsvendor problem with surrogate product

There is a growing interest in the newsvendor problem and its extensions. One of these extensions is in the area of product substitution. In this work, we model the situation where two perishable products are considered, a primary product and a surrogate one. The primary product yields higher profit than the surrogate. The objective of the model is to find the optimal lot sizes of both products that minimise the total ordering cost (alternatively, maximise the profit). Numerical analysis and examples to show the contribution of the surrogate approach to the overall performance of the policy are presented as well as some managerial insights. The applications of this model can occur in retail of perishable commodities, fashion sector, and products of high rates of technological obsolescence as well as service industries such as hotel reservation and car rentals.