isen 315 spring 2011 dr. gary gaukler. newsvendor model - assumptions assumptions: one short selling...
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ISEN 315Spring 2011
Dr. Gary Gaukler
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Newsvendor Model - Assumptions
Assumptions:
• One short selling season
• No re-supply within selling season
• Single procurement at start of season
• Known costs, known demand distribution
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Newsvendor Model – Continuous Demand
Demand:
• pdf f(x)
• Cdf F(x)
Cost parameters:
• “overage” co: cost per unit of inventory remaining at end of season
• “underage” cu: cost per unit of unsatisfied demand
Total cost over season: G(Q, D)
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Review the Newsvendor Solution
Safety Stock– Amount of inventory held to hedge against
demand uncertainty
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Extension – initial inventory
• Assume we have initial inventory of y units
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Extension – initial inventory and setup cost
• Assume we have initial inventory of y units, and there is a setup cost K when we order
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When to Use Newsvendor Models
• Short selling season, no replenishment
• Buying seasonal goods– Fashion products
• Making “last-run” decisions– Product end of life
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A Behavioral Issue
• Consider you are a buyer for a store that sells DVDs. You can return unsold DVDs to the wholesaler for a small restocking fee, say 20% of the wholesale cost of $5. Your profit margin on each DVD is high: $10.
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Service Level of the Newsvendor
What is service level?
A naïve proxy: probability that demand will be less than what we stock
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Service Level of the Newsvendor
What is wrong with this proxy definition of service level?
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Service Level of the Newsvendor
Instead, use expected fill rate as service level measure:
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Demand Uncertainty
How do we come up with our random variable of demand?
Recall naïve method:
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Demand Uncertainty
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Demand Uncertainty and Forecasting
Using the standard deviation of forecast error:
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Example
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Example