Optimal Ordering Policy for Perishable Items in an Advanced Booking System with Stochastic Reservation Cancellations

Advanced booking and reservation policies involving perishable items have been extensively applied in striving to deal with volatile demand in a highly competitive marketplace. Furthermore, retailers of perishable items generally allow customers with a reservation to arbitrarily cancel their advanced bookings in order to encourage sales. Under this circumstance, retailers have difficulty in making precise order quantity decisions, especially for the higher rate and volatility involved in reservation cancellations. Accordingly, this study extends the newsvendor model to allow for advanced booking system with stochastic reservation cancellations. A transformation model for the cancellation rate variable is also developed here to conform to lognormal distribution, which is considered as more realistic and accurate for cancellations behavior. Additionally, an effective and practical ordering model for retailers is eventually developed to optimally determine the order quantity of a given perishable item during an upcoming selling period in an advanced booking system with stochastic reservation cancellations. Numerical example demonstrates that the proposed optimal ordering model in this study can find an optimal solution to maximize the expected profits of retailers. Moreover, some valuable findings for managerial reference are revealed through conducting sensitivity analysis.