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Single Period Inventory Management Guide

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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Aniket Borse
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58 views12 pages

Single Period Inventory Management Guide

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.

Uploaded by

Aniket Borse
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

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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