OUTLINE Questions? Quiz Go over Quiz Newspaper problem Uneven demand Lot for Lot Least Unit cost Part Period Balancing

Definitions Newspaper problem – Deciding how many of a perishable item to order, based on loss of profits (under stocking) and cost of unsold goods (over stocking) Excel Norm functions to calculate normal probabilities: NORMINV(percentage, mean, standard deviation) = Value NORMDIST(Value, mean, standard deviation, TRUE) = percentage

Newspaper problem Newspaper person’s cost = $0.25, no salvage value Profit on a paper = $0.50 Estimated average sales = 60 Estimated standard deviation of sales = 5 Percentage (Service level) = 0.50/(0.50+0.25) = .667 NORMINV(0.667, 60, 5) = 63 or Q= average + z(std. dev) If the overage cost is lower than the shortage cost we order more than the average Underage cost = lost profit = Selling price – Cost Overage cost = Excess unsalvageable inventory = Cost – salvage value Service level = Underage cost/ (Underage + overage cost)

The newspaper problem Expected Profit at Q = 62: $28.64 Expected Profit at Q = 63: $28.62 The formula for expected profit comes from the probability of demand being less or more than the order quantity

The newspaper problem

The newspaper problem

Least Unit Cost (LUC) Least unit cost method – a dynamic lot-sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with the lowest unit cost. Carrying cost = carrying cost per period x periods carried x quantity carried

Part Period Balancing This method sets the order horizon equal to the number of periods that most closely matches the total holding cost with the setup cost, which is $40 in our example. Therefore, we compute the absolute value of the difference between the holding and setup costs in each period and find the one with the lowest value.