OUTLINE Questions? Quiz Go over Quiz Go over homework New Homework More Inventory Equations Newspaper problem Uneven demand

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

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/(0.50+0.25) = .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)

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

The newspaper problem

The newspaper problem

Uneven demand So far we assumed that the demand was more or less constant and used one of the four systems of inventory policy – (s,Q), (s,S), (R,S) and (R,s,S) We now consider when there is fairly large variation in demand from period to period We make a number of assumptions – all transaction occur at the beginning of each period and are on time There is no definite separation between constant and varying demand – use judgement when to stop using EOQ and follow one of the methods to deal with uneven demand

Least unit cost One of the common methods among several is the least unit cost method (LUC) It keeps adding the next period’s demand to the original, thus reducing the ordering cost. However this increases the inventory cost as the next period’s demand will have to be kept in inventory for a month So we order additional periods only if the average cost per unit ordered keeps going down