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    Session10 P

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    Aniket Borse
    The document discusses inventory management concepts like the newsvendor model, which involves determining the optimal order quantity when demand is uncertain. It provides an example of applying the newsvendor model to determine the order quantity for winter apparel based on a probabilistic demand forecast. The document also discusses how to calculate the optimal order quantity when demand follows a continuous probability distribution.

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    Session10 P

    Uploaded by

    Aniket Borse
    28 views12 pages
    The document discusses inventory management concepts like the newsvendor model, which involves determining the optimal order quantity when demand is uncertain. It provides an example of applying the newsvendor model to determine the order quantity for winter apparel based on a probabilistic demand forecast. The document also discusses how to calculate the optimal order quantity when demand follows a continuous probability distribution.

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    Session1 p

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    The document discusses inventory management concepts like the newsvendor model, which involves determining the optimal order quantity when demand is uncertain. It provides an example of applying the newsvendor model to determine the order quantity for winter apparel based on a probabilistic demand forecast. The document also discusses how to calculate the optimal order quantity when demand follows a continuous probability distribution.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    28 views12 pages

    Session10 P

    Uploaded by

    Aniket Borse
    The document discusses inventory management concepts like the newsvendor model, which involves determining the optimal order quantity when demand is uncertain. It provides an example of applying the newsvendor model to determine the order quantity for winter apparel based on a probabilistic demand forecast. The document also discusses how to calculate the optimal order quantity when demand follows a continuous probability distribution.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 12

    Session 10: Inventory Management

    Inventory Management of Style


    Goods
    Single Period Models
    (also known as newsvendor problem)
    Applications of too much-too little
    • Capacity planning
    • Inventory management
    • Airline overbooking
    • Cash reserves for redemptions in mutual fund
    • Placements
    • Admissions
    • Attendance
    • Monthly cellphone plan
    Single period inventory problem

    • Only one ordering opportunity


    • Mismatch
    – Co: Overstocking cost per unit
    – Cu: Understocking cost per unit
    • Context
    – Demand is uncertain and follows a probability
    distribution
    – How much to order?
    Single period problem
    Newsvendor Problem
    • Mismatch
    – Co: Overstocking cost per unit
    – Cu: Understocking cost per unit
    – Optimal service Level (SL) is determined by this
    critical ratio

    $%
    !" =
    $% &$'

    – Service level (probability of not stocking out)


    Example of newsvendor trade-offs
    • Consider a fashion apparel
    – About 6 months before winter production quantities are
    determined based on demand forecasts
    – One production opportunity
    – Based on past sales, knowledge of the industry, and economic
    conditions, the marketing department has a probabilistic
    forecast
    – Overestimating demand leads to unsold inventory
    – Underestimating demand leads to lost sales
    Demand Forecast

    Demand Scenarios

    30%
    Probability

    25%
    20%
    15%
    10%
    5%
    0%

    Sales
    Relevant Costs
    • Production cost per unit (C): 80

    • Selling price per unit (S): 125

    • Salvage value per unit (V): 20

    • Q is order quantity, D is random variable of demand


    Solution
    Demand Probability Cum Prob.
    8000 0.11 0.11
    10000 0.11 0.22
    12000 0.27 0.49
    14000 0.22 0.71
    16000 0.19 0.9
    18000 0.1 1

    125−80 45
    Pr(D ≤ Q) = = = 0.43
    125−80 +80 − 20 105
    Q =12000
    Continuous Distribution
    • Let P = 5, C = 1.25
    • μ=9000
    • σ=2000
    • Cu = 3.75
    • Co = 1.25
    • SL* = (3.75/5) = 0.75
    • Z(SL=0.75) = 0.674
    • Q = 9000 + (.674)2000 = 10,348
    Continuous Distribution
    • Let P = 5, C = 3
    • μ=9000
    • σ=2000
    • Cu = 2
    • Co = 3
    • SL* = (2/5) = 0.4
    • Z(SL=0.4) = -0.25
    • Q = 9000 – (0.25)2000 = 8,500
    Observations
    • Why Q < μ
    • Expected profit is same for Q = 9000, Q = 16000
    – What to chose?

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