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Discounts
Constant vs Variable
Known vs Random
Continuous vs Discrete
n
n
Excess Demand
Lead Time
n
n
n
n
Instantaneous
Constant vs Variable
Deterministic vs Stochastic
Internally Replenished
n
n
n
n
n
Independent
Correlated
Indentured
n
n
n
n
Capacity / Resources
n
Continuous vs Periodic
Number of Locations
Unlimited
Limited / Constrained
Single Period
Finite Period
Infinite
Number of Items
n
One vs Many
Form of Product
n
n
None
Uniform with time
Non-linear with time
Planning Horizon
Review Time
n
None
All orders are backordered
Lost orders
Substitution
Perishability
Dependence of Items
n
None
All Units vs Incremental vs One Time
Single Stage
Multi-Stage
T*
Q*
Time
What will happen to Q* and T* if we allow
for planned backorders at some cost (cs)?
CTL.SC1x - Supply Chain and Logistics Fundamentals
Notation
D = Average Demand (units/time)
c = Variable (Purchase) Cost ($/unit)
ct = Fixed Ordering Cost ($/order)
h = Carrying or Holding Charge ($/inventory $/time)
ce = c*h = Excess Holding Cost ($/unit/time)
cs = Shortage Cost ($/unit/time)
Q = Replenishment Order Quantity (units/order)
T = Order Cycle Time (time/order)
N = 1/T = Orders per Time (order/time)
TRC(Q) = Total Relevant Cost ($/time)
TC(Q) = Total Cost ($/time)
CTL.SC1x - Supply Chain and Logistics Fundamentals
Inventory On Hand
Q-b
Q Qb
b
=
=
T
T1
T2
T2
T1
T1 Q b
=
T
Q
T2 b
=
T Q
Time
! D$
! 1 $! T1 $
! 1 $! T2 $
TRC(Q,b) = ct # & + ce # &# & Q b + cs # &# & b
"Q%
" 2 %" T %
" 2 %" T %
()
! D$
! 1 $! (Q b) $
! 1 $! b $
TRC(Q,b) = ct # & + ce # &#
& Q b + cs # & # & b
"Q%
" 2 %" Q %
" 2 %" Q %
()
!
! D$
# Qb
TRC(Q,b) = ct # & + ce #
# 2Q
"Q%
Single Period Inventory Models
"
Lesson:
$
! b2 $
&
&& + cs # 2Q &
" %
%
*
PBO
2ct D
ce
b* =
$
! b2 $
&
&& + cs # 2Q &
"
%
%
*
ceQPBO
(c
+ ce
(c
+ ce
cs
"
cs
$
= 1
$
cs + ce
#
Inventory Policy
Order Q*PBO when IOH = - b*
Order Q*PBO every T*PBO time periods
CTL.SC1x - Supply Chain and Logistics Fundamentals
) = Q (c
+ ce
cs
%
' Q*
' PBO
&
Critical Ratio
CR =
cs
(c
+ ce
1000%
Critical Ratio
900%
If cs is very small,
then Q*PBO>>Q*
800%
CR =
700%
cs
(c
+ ce
600%
500%
400%
If cs is very big,
then Q*PBO=Q*
300%
200%
100%
0%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Probabilistic Demand:
Single Period Models
CTL.SC1x - Supply Chain and Logistics Fundamentals
Discounts
Constant vs Variable
Known vs Random
Continuous vs Discrete
n
n
Excess Demand
Lead Time
n
n
n
n
Instantaneous
Constant vs Variable
Deterministic vs Stochastic
Internally Replenished
n
n
n
n
n
Independent
Correlated
Indentured
n
n
n
n
Capacity / Resources
n
Continuous vs Periodic
Number of Locations
Unlimited
Limited / Constrained
Single Period
Finite Period
Infinite
Number of Items
n
One vs Many
Form of Product
n
n
None
Uniform with time
Non-linear with time
Planning Horizon
Review Time
n
None
All orders are backordered
Lost orders
Substitution
Perishability
Dependence of Items
n
None
All Units vs Incremental vs One Time
Single Stage
Multi-Stage
11
n
n
n
Main Issue:
n
Question:
n
12
13
Data Table
=$D$4*MIN($B8,E$5)-$F$4*E$5
15
=SUMPRODUCT($C$7:$C$48,E7:E48)
Expected Profits
Expected Profit
$350.00
$325.00
$300.00
$275.00
$250.00
$225.00
$200.00
$175.00
$150.00
$125.00
$100.00
$75.00
$50.00
$25.00
$0
10
15
20
25
30
Order Quantity
35
40
45
50
18
Marginal Analysis
Marginal Analysis
Marginal Shortage and Excess Costs
$14.00
cs 1 P #$ x Q%&
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
ce P "# x Q$%
$2.00
$1.00
$0
10
15
20
25
30
35
40
45
50
55
60
Order Quantity
Excess Cost
Shortage Cost
20
Marginal Analysis
P "# x Q$% ce + cs = cs
P "# x Q$% =
cs
(c
+ cs
- solved
Solution:
n
n
n
n
cs = p c = 24 -10.90 = $13.10
ce= c = $10.90
CR = (13.10)/( 10.9 + 13.10) =0.546
Select Q where P[xQ] = 0.546
w Normal Table or use spreadsheet:
Case adapted from Parsons, J. (2004) Using A Newsvendor Model for Demand Planning of NFL Replica Jerseys, MIT
Supply Chain Management Program Thesis.
Image Source: http://commons.wikimedia.org/wiki/File:Tom_Brady_%28cropped%29.jpg
CTL.SC1x - Supply Chain and Logistics Fundamentals
23
24
Solution:
n
n
n
n
cs = p c = 24 -10.90 = $13.10
ce= c = $10.90
CR = (13.10)/( 10.9 + 13.10) =0.546
Select Q where P[xQ] = 0.546
w Normal Table or use spreadsheet:
w =NORMINV(CR, Mean, StdDev)
w =NORMINV(0.546, 32000, 11000)
25
cs = p c + B
ce = c - g
Critical Ratio = cs/(cs+ce)
= (p-c+B)/(p-c+B+c-g)
=(p-c+B)/(p+B-g)
Solution:
n
n
n
n
cs = p c = 24 - 10.90 = $13.10
ce= c - g = 10.90 7.00 = $3.90
CR = (13.10)/( 3.9 + 13.10) =0.771
Select Q where P[xQ] = 0.771
w Normal Table or use spreadsheet:
w =NORMINV(CR, Mean, StdDev)=NORMINV(.771, 32000, 11000)
27
28
Key Points
Newsvendor problems are everywhere
CR = Cs / (Cs + Ce)
CR = Pct of demand distribution to cover
= P[xQ]
caplice@mit.edu