Uncertain Demand The Newsvendor Model.ppt

Uncertain Demand: The Newsvendor Model Inventory Models Background: expected value What is the expected profit for a stock of 100 mangoes ? 0.8 x 100 ($4) + 0.2 x 100 x ($1) = 320 + 20 = $340 Probability Profit $ 1 $ 4 20% 80% Damaged mango Undamaged mango random variable: ai probability: pi Expected value = a1 p1 + a2 p2 + … + ak pk = Si = 1,,k aipi A fruit seller example Probabilistic models: Flower seller example Wedding bouquets: Selling price: $50 (if sold on same day), $ 0 (if not sold on that day) Cost = $35 0.08 0.14 0.17 0.24 0.20 0.12 0.05 probability 9 8 7 6 5 4 3 number of bouquets How many bouquets should he make each morning to maximize the expected profit? Probabilistic models: Flower seller example.. 0.08 0.14 0.17 0.24 0.20 0.12 0.05 probability 9 8 7 6 5 4 3 number of bouquets CASE 1: Make 3 bouquets probability( demand ≥ 3) = 1 Exp. Profit = 3x50 – 3x35 = $45 CASE 2: Make 4 bouquets if demand = 3, then revenue = 3x $50 = $150 if demand = 4 or more, then revenue = 4x $50 = $200 prob = 0.05 prob = 0.95 Exp. Profit = 150x0.05 + 200x0.95 – 4x35 = $57.5 Probabilistic models: Flower seller example -10 21 45 60.5 64 57.5 45 Expected profit 0.08 0.14 0.17 0.24 0.20 0.12 0.05 probability 9 8 7 6 5 4 3 number of bouquets Making 5 bouquets will maximize expected profit. Compute expected profit for each case ? Probabilistic models: definitions 0.08 0.14 0.17 0.24 0.20 0.12 0.05 probability 9 8 7 6 5 4 3 number of bouquets Discrete random variable Probability (sum of all likelihoods = 1) Continuous random variable: Example, height of people in a city Probability density function (area under curve = integral over entire range = 1) 140 150 160 170 180 190 200 Probabilistic models: normal distribution function Standard normal distribution curve: mean = 0, std dev. = 1 a b P( a≤ x ≤ b) = ?ab f(x) dx Property: normally distributed random variable x, mean = m, standard deviation = s, Corresponding standard random variable: