Report

ISEN 315 Spring 2011 Dr. Gary Gaukler 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 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) Review the Newsvendor Solution Safety Stock – Amount of inventory held to hedge against demand uncertainty Extension – initial inventory • Assume we have initial inventory of y units Extension – initial inventory and setup cost • Assume we have initial inventory of y units, and there is a setup cost K when we order When to Use Newsvendor Models • Short selling season, no replenishment • Buying seasonal goods – Fashion products • Making “last-run” decisions – Product end of life 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. Service Level of the Newsvendor What is service level? A naïve proxy: probability that demand will be less than what we stock = = Service Level of the Newsvendor What is wrong with this proxy definition of service level? Service Level of the Newsvendor Instead, use expected fill rate as service level measure: Demand Uncertainty How do we come up with our random variable of demand? Recall naïve method: Demand Uncertainty Demand Uncertainty and Forecasting Using the standard deviation of forecast error: Example Example