Newsvendor Model
Continuous Variables go along which type of distribution
Normal Distribution or Gamma distribution
Discrete Variables go along with which type of distribution
Poisson Distribution
Expected Lost Sales
expected number of units by which demand exceeds the order quantiy in english: if demand is high, but you dont have enough quanity to meet demand, then you've lost money due to people who walked away since you can not give the what they want.
How do we find the In-Stock Probability?
find a z value, then look inside the standard normal distrubtion function table to find the probability :)
Newsvendor Model Definition
how to make the trade-off betweek having too much vs. too little demand
What is encompassed in the 'Choosing an objective' step of the Newsvendor Model?
in this step we need to figure out if we want to maximize profit or statisfy an in-stock probability
Purchase Price/Cost to vendor
manufacturing price of the item
Selling Price
what price the item is sold for in stores
If Co > Cu (think about it)
will order less than the expected demand
if Co < Cu (think about it)
will order more than expected demand
What is encompassed in the 'Generate Demand Forecast' step of the Newsvendor Model?
within this step we are to determine the distribution function, normal vs. poisson
What happens in the 'Gathering Economic Inputs'step of the Newsvendor Model?
within this step we need to gather the following: Selling price, production coast, salavage value
When looking for expected profit, what is the first thing we always find?
Expected lost sales!
Salvage Value/Discount Price
Items not sold by X time need to be sold at a lower price
Which table do we use for the expected lost sales z value?
Loss Function table (there is one for normal dist and one for poisson)
What is this an example of: probability demand will be exactly 5 units
Mass/Density Function
What are some important variables within a normal distribution?
Mean (μ ) & Standard deviation (σ)
If no mean or standard deviation is given, how do we find them?
Through the A/F ratio!
True/False: Expected Sales is always less than expected demand
True
True/False: If the underage cost is greater than the overage cost (i.e. it's more expensive to lose a sale than it is to have leftover inventory), then the profit maximizing order quantity is larger than the expected demand.
True
True/False: profit maximizing quanities generally dont equal expected demand
True
How do we find the mean with the A/F Ratio?
a/f ratio number X forecast given
How do we find the standard deviation with the A/F ratio?
af ratio for std dev X forecast given
Newsvendor Model Objective
bet an amount that correctly balances overage costs and loss of sales costs.
Undersage Cost (Cu)
consequence of ordering one fewer unit thant what you would have ordered if you had known demand
If demand is < quanity ordered, lost sales =
0
Newsvendor Model Implementation Stesp
1) Generate Demand forecast 2)Gather economic inputs 3)Choose an Objective 4)Choose a quanity to order
How do we describe random variables?
1) Mass/Density Function 2) Distribution Function
What are 6 performance measures?
1) instock prob 2) stockout prob 3) expected lost sales 4) expected sales 5) Left over inventory 6) expected profit
Stockout Probability Equation
= 1 - instock probability
Overage Cost (Co) Equation
= Cost - Salvage Value
Undersage Cost (Cu) Equation
= Price - Cost
A/F Ratio
Actual demand/forecast demand
What is this an example of: probability demand will be atleast 5 units
Distribution Function
When looking for probabiltiy inside the standard normal ditrubtion function table, we should always do what with the numbers?
ROUND UP!
Continuous Variables:
Random variables that take any numerical value in interval or collection of intervals
Discrete Varibales:
Random variables that take any of a specified list of exact values
All noraml distributions are related to the_________ __________, which has a mean = 0 and a standard deviation = 1
Standard Normal
The critical ratio finds which value?
The probability within in the inside of the standard normal distribution function table
In-Stock Probability
probability that all demand is statisfied
Stockout Probabiltiy
probabiltiy that demand is not satisfied
Demand Model
specifies what demand outcomes are possible and the probability of these outcomes
Distribution Function
tells you the probability the out come with be a particular value or smaller ***typically working with in this class
Overage Cost (Co)
the consequnce of ordering one more unit than you would have ordered if you knew demand
Mass/Density Function
the probability (in a discrete RV case), or the likelihood (in a continuous RV case), of a particular outcome occuring
when the Cu > Co what happens?
the profit maximizing quantity is > the expected demand
The formula z = (Q - μ ) / σ finds which value ?
the quantities on the outside, which then lead to the probabilities on the inside
