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Slide 1 Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon ChristianTerwiesch All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides.

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Slide 2 Low critical ratios high mismatch costs The mismatch cost is high when ( (z) / (z)) is high … … ( (z) / (z)) is high when the critical ratio is low:

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Slide 3 High demand uncertainty high mismatch costs The mismatch cost is high when the coefficient of variation, /, 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:

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Slide 4 Find your products mismatch cost (as % of maximum profit) …

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Slide 5 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 2 nd order quantity. ONeill forecast of total season sales is nearly perfect after observing initial season sales. How many units should ONeill order in October?

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Slide 6 Limited reactive capacity Units in the 2 nd order are no more expensive than in the 1 st order But there is limited capacity for a 2 nd order

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Slide 7 Sample of wetsuits 1 st order must be at least 10,200 suits so that there is enough capacity for the 2 nd order. What should we produce in the 1 st order?

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Slide 8 Profit and mismatch with only 1 ordering opportunity Use the Newsvendor model to evaluate the optimal order quantity, expected profit, maximum profit and mismatch cost A suits produced in the 1 st order earns the Newsvendor profit but a suit produced in the 2 nd order earns the maximum profit.

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Slide 9 Produce safer products early, produce risky products with reactive capacity Sort items by their mismatch cost to order quantity ratio. Fill the 1 st order up to the minimum quantity (10,200) with the items that have the lowest mismatch – quantity ratio The mismatch cost is reduced by 66%!

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