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

2. 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

3. 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/( ) = .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)

4. 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

5. The newspaper problem

6. The newspaper problem

7. 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

8. 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.