Newsvendor Model Calculator (How Much to Order for Uncertain Demand)

What this tool does

The newsvendor problem balances two mistakes: ordering too little loses the margin on every sale you miss, ordering too much loses the difference between cost and what leftovers fetch. The best order is the quantity at which the chance of not running out equals the critical ratio, margin divided by margin plus loss — so a high-margin item should be ordered above average demand and a low-margin one below it. Demand is assumed normal, and the 'extra above average' is the safety stock that pays for itself. The model works well for perishable, seasonal or one-shot goods.

Formula

critical ratio = (price − cost) ÷ (price − salvage) · best order Q* = μ + z σ, z = Φ⁻¹(critical ratio)

Variables

Worked example

Limitations

• The result is an estimate based only on the values you type. Real situations often include factors this calculator does not know about.
• The tool works with whatever currency you use for the inputs; it does not convert between currencies.