Chapter 13 Exam 3 Calculating Newsvendor: salvage value, critical ratio, order quantity

The newsvendor model

A decision tool is needed to make the best out of this difficult decision where you try to match supply with demand. You try to order the amount you think you can sell. What is the tool called?

The Newsvendor Model Cont.

Choses an order quantity that either fails to satisfy all demand or leaves some units left over can make smart tradeoffs too much (overage) - too little (underage)

The Newsvendor Model 3/4

Overage Cost: the cost of orderiong one unit too many; that is, the cost of over ordering by one unit Critical Ratio: the ratio of the underage cost to the sum of the overage and underage cost Round up Rule: When considering probability in a statistical table if the probability falls between two entries, chose the larger probability Standard normal distribution: A normal distribution with mean 0 and standard deviation of 1

The Newsvendor Model 2/4

Salvage value: The value that can be obtained per unit for inventory left over at the end of the selling season Density Function: a function that returns the probability a given outcome occurs for a particular statistical distribution underage cost: the cost of ordering one unit too few; that is, the cost of under ordering by one unit

The Newsvendor Model 1/4

The critical ratio balances the two types of costs, determining the quantity that maximizes expected profit the quantity is seldom the mean of the demand distribution -more is ordered when the underage cost dominates -less is ordered when the overage cost dominates has considerations implicating customer service change the economics (for ex: increasing critical ratio)

The Newsvendor Model

This model represents one of the canonical (recognized) challenges faced in operations the combination of uncertain demand with inflexible supply

Learning Objectives

Use the newsvendor model to decide how much product to order when demand is perishable and uncertain