Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon ChristianTerwiesch All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides.

Low critical ratios  high mismatch costs The mismatch cost is high when (f(z) / F(z)) is high … … (f(z) / F(z)) is high when the critical ratio is low:

High demand uncertainty  high mismatch costs The mismatch cost is high when the coefficient of variation, s/m, is high. The coefficient of variation is the right measure of demand uncertainty: The probability demand is within 20% of the forecast demand depends on the coefficient of variation (COV) and not the standard deviation:

Find your product’s mismatch cost (as % of maximum profit) …

Unlimited, but expensive reactive capacity TEC charges a premium of 20% per unit ($132 vs. $110) in the second order. There are no restrictions imposed on the 2nd order quantity. O’Neill forecast of total season sales is nearly perfect after observing initial season sales. How many units should O’Neill order in October?

Limited reactive capacity Units in the 2nd order are no more expensive than in the 1st order But there is limited capacity for a 2nd order

Sample of wetsuits 1st order must be at least 10,200 suits so that there is enough capacity for the 2nd order. What should we produce in the 1st order?

Profit and mismatch with only 1 ordering opportunity Use the Newsvendor model to evaluate the optimal order quantity, expected profit, maximum profit and mismatch cost A suits produced in the 1st order earns the Newsvendor profit but a suit produced in the 2nd order earns the maximum profit.

Produce “safer” products early, produce “risky” products with reactive capacity Sort items by their mismatch cost to order quantity ratio. Fill the 1st order up to the minimum quantity (10,200) with the items that have the lowest mismatch – quantity ratio The mismatch cost is reduced by 66%!