Identifying demand sources that minimize risk for a selective newsvendor

Consider a firm that offers a product during a single selling season. The firm has the flexibility of choosing which demand sources to serve, but these decisions must be made prior to knowing the actual demand that materialize in each market. Moreover, we assume the firm operates on a tight budget and cannot afford to record several successive financial losses spanning consecutive periods. In this case, it is likely that their objective is not only to maximize expected profit, but to minimize the variance from that goal. We provide insights into the tradeoff between expected profit, expected revenue, and demand uncertainty. Finally, we present a solution approach, via simulation, to determine the best set of markets to pursue and the associated order quantity when the firm´s objective is to minimize the probability of receiving a profit below a critical threshold value.