7 Newsvendor (Single Period Model)

Question 1

Procurement cost c

Answer 1

Unit cost

Question 2

p

Answer 2

Retail price

Question 3

Salvage value

Answer 3

Residual value of depreciable asset at end of useful life (what we charge if we didn‘t manage to sell it)

Question 4

For what kind of products do we use single period models?

Answer 4

For short lifecycle products

Question 5

How many order opportunities do we have in the single period model?

Answer 5

Only one order opportunity

Question 6

Do we know demand at the time of ordering/ does demand occur when we order?

Answer 6

No we don‘t know demand Asti will only occur after we order

Question 7

If Order Quantity > Demand

Answer 7

=> Excess inventory

Question 8

If order quantity < demand

Answer 8

Lose sales/profits

Question 9

Steps to identify order quantity

Answer 9

1. determine probability of different demand scenarios
2. profits in each scenario
3. given specific order quantity:
   - weight each profit scenario according to its likelihood
   - expected (average) profit for that scenario
   => ORDER QUANTITY THAT MAXIMIZES weighted average PROFIT

Question 10

Profit if you sell everything (demand > order quantity)

Answer 10

Selling price x units sold - VC/unit x units sold - FC

Question 11

Profits if you don’t sell everything (demand < order quantity)

Answer 11

Selling price * units sold - VC/unit * units bought - FC + salvage value * units not sold

Question 12

Which order quantity will you choose?

Answer 12

The one that maximizes weighted avg profit

Question 13

Expected/average profit

Answer 13

Profit considering all demand scenarios weighted by probability of occurrence

Question 14

Underage Cost is the same as what?

Answer 14

Marginal profit: how much if extra jacket sold

Question 15

Overage cost is the same as?

Answer 15

Marginal loss: how much if extra jacket not sold

Question 16

How do you calculate underage cost

Answer 16

Cu= 𝑝 − 𝑐 (selling price - cost) (since could’ve sold it for selling price but would’ve needed to buy it for c)

Question 17

How do you calculate overage cost

Answer 17

Co= c - s (variable cost - salvage value)

Question 18

Underage cost (order too much or too little? Is MP or MC bigger? Is order quantity or demand larger?)

Answer 18

Order too little
MP > MC
Order qt > demand

Question 19

Overage cost (order too much or too little? Is MP or MC bigger? Is order quantity or demand larger?)

Answer 19

Order too much
MP < MC
Order qt < demand

Question 20

How do profits behave with increasing order quantities

Answer 20

As order quantities increase, profits will increase until a production qt reaches certain level, the profits decrease

Question 21

4 characteristics newsvendor problem

Answer 21

1. demand uncertain
2. must order before demand realises
3. can only order once
4. cost for ordering too much and cost of ordering too few (miss out on profit)

Question 22

Overage cost newsvendor

Answer 22

Co=c (since could not salvage and did not sell)

Question 23

Overage cost newsvendor

Answer 23

Co=c (since could not salvage and did not sell)

Question 24

What is the probability of overage cost

Answer 24

P(D<Q)

Question 25

What is the probability of underage cost

Answer 25

P(D>Q)

Question 26

Meaning Cycle service level (CSL)

Answer 26

Probability of having enough stock to meet demand