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

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. 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

8. 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