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Inventory Management-Short Life Cycle-Newsvendor Problem

The document discusses the newsvendor problem, which is an inventory management model for products with uncertain demand and short life cycles. It describes how the newsvendor problem was first applied to bank note inventory and later studied more extensively. The key aspects of the newsvendor problem are that it involves a single period with fresh orders each period, demand is uncertain, orders must be placed before demand is known, there is one order per period, and there are costs associated with overstocking and understocking. The document provides an example calculation of using the newsvendor model to determine the optimal order quantity for a newspaper vendor.

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52 views8 pages

Inventory Management-Short Life Cycle-Newsvendor Problem

The document discusses the newsvendor problem, which is an inventory management model for products with uncertain demand and short life cycles. It describes how the newsvendor problem was first applied to bank note inventory and later studied more extensively. The key aspects of the newsvendor problem are that it involves a single period with fresh orders each period, demand is uncertain, orders must be placed before demand is known, there is one order per period, and there are costs associated with overstocking and understocking. The document provides an example calculation of using the newsvendor model to determine the optimal order quantity for a newspaper vendor.

Uploaded by

durga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Inventory Management:

Short Life cycle product


Prof. Gourav Dwivedi
Solution Approach:
Newsvendor Problem

https://www.youtube.com/watch?v=1T12i5Jgv80
Newsvendor Problem
• One of the most popular analytical model

• First application was seen in Edgeworth (1888) in bank note inventory


problem

• Later the standard problem was studied by Morse and Kimball (1951)

• Newsvendor has to decide optimal order quantity


Problem Characteristics
• Single period inventory system – fresh order in each period

• Demand is uncertain

• Order before demand is known

• One order per period

• Cost of over-stocking

• Cost of under-stocking
Example: Newsvendor Problem
Market price of news paper = Rs. 5.00
Cos of newspaper = Rs. 3.00
Salvage value = Rs. 2.50

Probability forecast for the newspaper

Demand, d 60 70 80 90 100 110 120 130 140


Probability 3% 6% 13% 18% 20% 15% 16% 6% 3%

Calculate Optimal Order Quantity?


Solution
Market price of news paper, P = Rs. 5.00
Cos of newspaper, C = Rs. 3.00
Salvage value, S = Rs. 2.50

Probability forecast for the newspaper

Demand, d 60 70 80 90 100 110 120 130 140


Probability 3% 6% 13% 18% 20% 15% 16% 6% 3%
F(d) 3% 9% 22% 40% 60% 75% 91% 97% 100%

Cumulative probability
Critical Ratio:
Where, Cost of Under-stocking or Underage cost

Cost of Over-stocking or Overage Cost

Probability that the demand is less than equal to

Calculations: “Stocking level is calculated by


placing unit shortage cost over the
Underage cost sum of unit shortage cost and unit
leftover cost. It represents the
optimal probability of having
Overage Cost enough, or more than enough,
products to supply. After you get
Critical ratio, stocking level and the distribution
with parameters, you can then
come up with an order quantity.” as
So the optimal order quantity corresponding to
quoted by Professor in Case: Beijing
this ratio is: units Opera Mask Sales
Calculation of Expected Profit when order quantity

Over Under Expected


Demand, d Probability Sale Pay off
Stock Stock Value

60.00 0.03 60.00 60.00 0.00 90.00 2.70


70.00 0.06 70.00 50.00 0.00 115.00 6.90
80.00 0.13 80.00 40.00 0.00 140.00 18.20
90.00 0.18 90.00 30.00 0.00 165.00 29.70
100.00 0.20 100.00 20.00 0.00 190.00 38.00
110.00 0.15 110.00 10.00 0.00 215.00 32.25
120.00 0.16 120.00 0.00 0.00 240.00 38.40
130.00 0.06 120.00 0.00 10.00 220.00 13.20
140.00 0.03 120.00 0.00 20.00 200.00 6.00
Expected Profit 185.35

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