Professional Documents
Culture Documents
MBA Program
Week 10:
Supply Chain contracts
Newsvendor
Zeynep Aksin
zaksin@ku.edu.tr
Hamptonshire Express
2
Question 1
3
Ordering Level and Profits in Vertically
Integrated Channel
4
Improving demand through effort
5
Question 2
6
Optimal Level of Effort in Vertically
Integrated Channel
h h+1 0.8 * 50 * ( h 1 h )
01 40
12 16.56
i* = 684
23 12.71 E[Profit] =
34 10.71 371.33
7
45 9.44
Delegating sales to Ralph
8
Question 3
400
350
300
250
ralph
$ 200
anna
150
100
50
0
3
9
0.
0.
0.
0.
0.
0.
0.
transfer price 11
Optimal Effort in Decentralized Channel
15
Example
400
350
300
250 ralph
$ 200
150 anna
100
50
0
3
8
0
15
45
71
74
77
0.
0.
0.
0.
0.
0.
0.
0.
buyback price
16
Reasons for return policies
17
Costs of Return Policies
18
The case of books
22
The Impact of Revenue Sharing
23
Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points
Supply
Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
Supply Chain Management: the challenge
Global optimization
Conflicting Objectives
Complex network of facilities
System Variations over time
Managing uncertainty
Matching Supply and Demand
Demand is not the only source of uncertainty
The newsvendor is all around us
Newspaper
Apparel industry
The flu shot
Recall Marks & Spencer
Perfect forecast
11-30
ONeills Hammer 3/2 wetsuit
Historical forecast performance at ONeill
7000
6000
.
5000
Actual demand
4000
3000
2000
1000
0
0 1000 2000 3000 4000 5000 6000 7000
Forecast
Forecasts and actual demand for surf wet-suits from the previous season
Empirical distribution of forecast accuracy
Product description Forecast Actual demand Error* A/F Ratio**
JR ZEN FL 3/2 90 140 -50 1.56
EPIC 5/3 W/HD 120 83 37 0.69
JR ZEN 3/2 140 143 -3 1.02
WMS ZEN-ZIP 4/3 170 163 7 0.96
HEATWAVE 3/2 170 212 -42 1.25
JR EPIC 3/2 180 175 5 0.97
WMS ZEN 3/2 180 195 -15 1.08
ZEN-ZIP 5/4/3 W/HOOD 270 317 -47 1.17
WMS EPIC 5/3 W/HD 320 369 -49 1.15 100%
EVO 3/2 380 587 -207 1.54 90%
JR EPIC 4/3 380 571 -191 1.50
WMS EPIC 2MM FULL 390 311 79 0.80 80%
HEATWAVE 4/3 430 274 156 0.64 70%
Probability
ZEN 4/3 430 239 191 0.56
EVO 4/3 440 623 -183 1.42 60%
ZEN FL 3/2 450 365 85 0.81 50%
HEAT 4/3 460 450 10 0.98
ZEN-ZIP 2MM FULL 470 116 354 0.25 40%
HEAT 3/2 500 635 -135 1.27 30%
WMS EPIC 3/2 610 830 -220 1.36
WMS ELITE 3/2 650 364 286 0.56 20%
ZEN-ZIP 3/2 660 788 -128 1.19 10%
ZEN 2MM S/S FULL 680 453 227 0.67
EPIC 2MM S/S FULL 740 607 133 0.82 0%
EPIC 4/3 1020 732 288 0.72 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75
WMS EPIC 4/3 1060 1552 -492 1.46
JR HAMMER 3/2 1220 721 499 0.59 A/F ratio
HAMMER 3/2 1300 1696 -396 1.30
Empirical distribution function for the historical A/F ratios.
HAMMER S/S FULL 1490 1832 -342 1.23
EPIC 3/2 2190 3504 -1314 1.60
ZEN 3/2 3190 1195 1995 0.37
ZEN-ZIP 4/3 3810 3289 521 0.86
WMS HAMMER 3/2 FULL 6490 3673 2817 0.57
* Error = Forecast - Actual demand
** A/F Ratio = Actual demand divided by Forecast
Normal distribution tutorial
All normal distributions are characterized by two parameters, mean = m and standard
deviation = s
All normal distributions are related to the standard normal that has mean = 0 and
standard deviation = 1.
For example:
Let Q be the order quantity, and (m, s) the parameters of the normal demand
forecast.
Prob{demand is Q or lower} = Prob{the outcome of a standard normal is z or
lower}, where
Qm
z or Q m z s
s
(The above are two ways to write the same equation, the first allows you to
calculate z from Q and the second lets you calculate Q from z.)
Look up Prob{the outcome of a standard normal is z or lower} in the Standard
Normal Distribution Function Table.
11-34
Converting between Normal distributions
0.0180
Start with 0.0160 Center the
m= 100, 0.0140
distribution over 0
s= 25, 0.0120
by subtracting the
0.0100
Q = 125 0.0080 mean
0.0060
0.018
0.0040
0.016
0.0020
0.014
-
0 25 50 75 100 125 150 175 200 0.012
0.01
0.008
0.006
0.004
0.45
0.002
Qm
0.40
z
0
0.35
s
-100 -75 -50 -25 0 25 50 75 100
0.30
0.20
25 0.15 Rescale the x and y
1 0.10
axes by dividing by
0.05
0.00
the standard
-4 -3 -2 -1 0 1 2 3 4
deviation
11-35
Using historical A/F ratios to choose a
Normal distribution for the demand forecast
Start with an initial forecast generated from hunches, guesses, etc.
ONeills initial forecast for the Hammer 3/2 = 3200 units.
Evaluate the A/F ratios of the historical data:
Actual demand
A/F ratio
Forecast
11-36
ONeills Hammer 3/2 normal distribution
Product description
forecast
Forecast Actual demand Error A/F Ratio
JR ZEN FL 3/2 90 140 -50 1.5556
EPIC 5/3 W/HD 120 83 37 0.6917
JR ZEN 3/2 140 143 -3 1.0214
WMS ZEN-ZIP 4/3 170 156 14 0.9176
ZEN 3/2 3190 1195 1995 0.3746
ZEN-ZIP 4/3 3810 3289 521 0.8633
WMS HAMMER 3/2 FULL 6490 3673 2817 0.5659
Average 0.9975
Standard deviation 0.3690
0.60
Probability
0.50
0.40
0.30
0.20
0.10
0.00
0 1000 2000 3000 4000 5000 6000
Quantity
Empirical distribution function (diamonds) and normal distribution function with
mean 3192 and standard deviation 1181 (solid line)
11-38
Demand Scenarios for a Jacket
Demand Scenarios
30%
Probability
25%
20%
15%
10%
5%
0%
Profit =
Revenue - Variable Cost - Fixed Cost + Salvage
Best Solution
Scenario One:
Suppose you make 12,000 jackets and demand ends
up being 13,000 jackets.
Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000
Scenario Two:
Suppose you make 12,000 jackets and demand ends
up being 11,000 jackets.
Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $
335,000
Scenarios and their probabilities
Demand
8000 10000 12000 14000 16000 18000 Average
Expected
11% 11% 28% 22% 18% 10% Profit
Profit
5,000 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000
5,500 $147,500.00 $147,500.00 $147,500.00 $147,500.00 $147,500.00 $147,500.00 $147,500
6,000 $170,000.00 $170,000.00 $170,000.00 $170,000.00 $170,000.00 $170,000.00 $170,000
6,500 $192,500.00 $192,500.00 $192,500.00 $192,500.00 $192,500.00 $192,500.00 $192,500
7,000 $215,000.00 $215,000.00 $215,000.00 $215,000.00 $215,000.00 $215,000.00 $215,000
Production quantity
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
Expected Profit
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
Expected Profit
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
Important Observations
Tradeoff between ordering enough to meet demand and
ordering too much
Several quantities have the same average profit
Average profit does not tell the whole story
100%
80%
Probability
60% Q=9000
40% Q=16000
20%
0%
00
00
00
0
0
00
00
00
00
00
00
00
10
30
50
-3
-1
Cost
Key Insights from this Model
Co = 10 and Cu = 20
Generalization of the Incremental Analysis
Cash
Pr{Demand n} nth unit needed Flow
Cu
Stock n Chance
Point
Base Case 0
Stock n-1
Generalization of the Incremental Analysis
Decision
Point
Base Case
Stock n-1
Generalization of the Incremental Analysis
Then order n units, where n is the greatest number that satisfies the
above inequality.
Incremental Analysis
Incremental
Demand Decision Pr{Demand n-1}Order the unit?
1 First 0.00 YES
Cu /(Co +Cu)=20/(10+20)=0.66
Transform 0.0
0.1
0.5000
0.5398
0.5040
0.5438
0.5080
0.5478
0.5120
0.5517
0.5160
0.5557
0.5199
0.5596
0.5239
0.5636
0.5279
0.5675
0.5319
0.5714
0.5359
0.5753
0.2 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.6064 0.6103 0.6141
X = N(mean,s.d.) to 0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517
0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879
z = N(0,1) 0.5
0.6
0.6915
0.7257
0.6950
0.7291
0.6985
0.7324
0.7019
0.7357
0.7054
0.7389
0.7088
0.7422
0.7123
0.7454
0.7157
0.7486
0.7190
0.7517
0.7224
0.7549
0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852
z = (X - mean) / s.d. 0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133
0.9 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
X* = mean + z*s.d.
3.2 0.9993 0.9993 0.9994 0.9994 0.9994 0.9994 0.9994 0.9995 0.9995 0.9995
3.3 0.9995 0.9995 0.9995 0.9996 0.9996 0.9996 0.9996 0.9996 0.9996 0.9997
Example
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
If we want to 0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.5279 0.5319 0.5359
95% 0.3
0.4
0.6179
0.6554
0.6217
0.6591
0.6255
0.6628
0.6293
0.6664
0.6331
0.6700
0.6368
0.6736
0.6406
0.6772
0.6443
0.6808
0.6480
0.6844
0.6517
0.6879
z=1.64 0.5
0.6
0.6915
0.7257
0.6950
0.7291
0.6985
0.7324
0.7019
0.7357
0.7054
0.7389
0.7088
0.7422
0.7123
0.7454
0.7157
0.7486
0.7190
0.7517
0.7224
0.7549
0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852
0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133
0.9 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
1.0 0.8413 0.8438 0.8461 0.8485 0.8508 0.8531 0.8554 0.8577 0.8599 0.8621
1.1 0.8643 0.8665 0.8686 0.8708 0.8729 0.8749 0.8770 0.8790 0.8810 0.8830
1.2 0.8849 0.8869 0.8888 0.8907 0.8925 0.8944 0.8962 0.8980 0.8997 0.9015
1.3 0.9032 0.9049 0.9066 0.9082 0.9099 0.9115 0.9131 0.9147 0.9162 0.9177
Then:
2.1 0.9821 0.9826 0.9830 0.9834 0.9838 0.9842 0.9846 0.9850 0.9854 0.9857
2.2 0.9861 0.9864 0.9868 0.9871 0.9875 0.9878 0.9881 0.9884 0.9887 0.9890
A textile company in UK orders coats from China. They buy a coat from
250 and sell for 325. If they cannot sell a coat in winter, they sell it
at a discount price of 225. When the demand is more than what
they have in stock, they have an option of having emergency
delivery of coats from Ireland, at a price of 290.
The demand for winter has a normal distribution with mean 32,500
and std dev 6750.
A textile company in UK orders coats from China. They buy a coat from
250 and sell for 325. If they cannot sell a coat in winter, they sell it at
a discount price of 225. When the demand is more than what they
have in stock, they have an option of having emergency delivery of
coats from Ireland, at a price of 290.
The demand for winter has a normal distribution with mean 32,500 and
std dev 6750.
Cu=75-35=40
Co=25
F(z)=40/(40+25)=40/65=0.61z=0.28
q=32500+0.28*6750=34390
Example 3: Single Period Inventory
Management Problem
Manufacturing cost=60TL,
Selling price=80TL, Discounted price (at the end of the season)=50TL
Market research gave the following probability distribution for demand.
Find the optimal q, expected number of units sold for this orders size, and
expected profit, for this order size.