The Newsvendor Model Flashcards
What is the definition of inventory?
Stock of goods and materials to satisfy customer demand or to support the production of goods or services
What are the inventory related costs?
-Carrying cost
-Shortage cost
What factors into the carrying cost?
-Cost of capital
-Storage and handling cost
-Tax and insurance
-Shrinkage
What factors into the shortage cost?
-Lost sales or market share
-Expediting cost
Why is inventory held?
-Demand: Demand uncertainty, fast delivery and availability
-Production: Buffers, production smoothing, capacity limit
-Supply: Economies of scale, discounts, speculation
What is the definition of overage cost?
The marginal cost of over-stocking one unit
What is the definition of underage cost?
The marginal benefit lost by under-stocking one unit
How do you calculate the critical ratio?
Underage cost/ (Underage Cost + Overage Cost)
How do you find the optimal order quantity?
- Inverse normal of the critical ratio if mean and standard deviation are given
-Mean + S.D.* Standard normal inverse of critical ratio
How do you calculate the expected mismatch cost?
Underage cost * Expected lost sales + Overage cost * Expected leftover inventory
How do you calculate expected leftover inventory?
S.D*I(z)
How do you calculate expected sales?
Q-Expected Leftover Inventory
How do you calculate expected lost sales?
Mean- Expected Sales
What is the in stock probability?
F(Q)= Critical Ratio
What is the stockout probability?
1-F(Q)
1- Critical Ratio
