Chapter 12 Assemble-to-Order, Make-to-Order, and Quick Response with Reactive Capacity

The demand-supply mismatch cost Definition – the demand supply mismatch cost includes the cost of left over inventory (the “too much” cost) plus the opportunity cost of lost sales (the “too little” cost): The maximum profit is the profit without any mismatch costs, i.e., every unit is sold and there are no lost sales: The mismatch cost can also be evaluated with Mismatch cost = Maximum profit – Expected profit

When is the mismatch cost high? Mismatch cost as a percent of the maximum profit where f(z) = density function of the Normal distribution (In Excel f(z)=normdist(z,0,1,0)) Hammer 3/2’s mismatch cost as a percentage of the maximum profit is The mismatch cost is high when (f(z) / F(z)) and (s / m) are high.

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:

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?

Apply Newsvendor logic even with a 2nd order option “Too much cost” “Too little cost” Critical ratio: Corresponding z-statistic Order quantity

Profit improvement due to the 2nd order option With a single ordering opportunity: Optimal order quantity Expected profit Mismatch cost as % of revenue The maximum profit is unchanged With a second order option: Reduction in mismatch cost

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?

All of these problems are too lengthy to put on a slide. Check pp All of these problems are too lengthy to put on a slide. Check pp. 279-281 for the problem statements for: 12.7 Sarah’s Wedding 12.8 Lucky Smokes 12.10 TEC