omnewsvendor.ppt

8/29/00 S. Chopra / Demand Planning Newsvendor Model Chapter 9 Learning Goals Determine the optimal level of product availability Demand forecasting Profit maximization Other measures such as a fill rate O’Neill’s Hammer 3/2 wetsuit Hammer 3/2 timeline and economics The “too much/too little problem”: Order too much and inventory is left over at the end of the season Order too little and sales are lost. Marketing’s forecast for sales is 3200 units. Newsvendor model implementation steps Gather economic inputs: selling price, production/procurement cost, salvage value of inventory Generate a demand model to represent demand Use empirical demand distribution Choose a standard distribution function the normal distribution, the Poisson distribution. Choose an objective: maximize expected profit satisfy a fill rate constraint. Choose a quantity to order. The Newsvendor Model: Develop a Forecast Historical forecast performance at O’Neill How do we know the actual  when the actual demand forecast demand If we underestimate the demand, we stock less than necessary. The stock is less than the demand, the stockout occurs. Are the number of stockout units (= unmet demand) observable, i.e., known to the store manager? Yes, if the store manager issues rain checks to customers. No, if the stockout demand disappears silently. No implies demand filtering. That is, demand is known exactly only when it is below the stock. Shall we order more than optimal to learn about demand when the demand is filtered? Empirical distribution of forecast accuracyOrder by A/F ratio 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