The Newsvendor Model and Apparel

The newsvendor model provides inventory planners with a framework for setting optimal order quantities when demand is uncertain and there is a limited selling window – as in seasonal apparel. Buy too little and you run the risk of early stockout and missed sales, too much and you risk write-offs and markdowns. Here, we cover:

• The classical formula for profit-maximizing order size, and also
• A numerical example for apparel. Here, the model indicates that one should typically aim to stock out by season's end about $1/3$ of the time. However, this target can increase sharply as costs rise – as they have recently with inflation and tariffs.

In practice, the optimal order quantity results we cover here may often serve as upper bounds. In apparel, for example, substitutable products can often soften the cost of stocking out on any single item. We’ll explore that dynamic in a future post.

Need help applying these formulas? VarietyIQ's demand forecasting algorithms provide all the inputs needed for ready order optimization.

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