BU8401-Lect11-Inventory-Probabilistic.pdf - Nanyang Business School BU8401 Management Decision Tools Seminar 11 Inventory Management – II(Stochastic

BU8401-Lect11-Inventory-Probabilistic.pdf - Nanyang...

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Nanyang Business School BU8401: Management Decision Tools Seminar 11: Inventory Management II (Stochastic Demand)
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2. Inventory Control Policies with Stochastic Demand 2 a) The Newsboy Problem b) The Fixed Order Quantity Re-order Point Policy or the (r, Q) Policy c) The Periodic-Review Order-up-to Policy
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Inventory Control with Stochastic Demand 3 In many cases, demand (or some other factor) is not known with certainty and a probabilistic inventory model should be used. These models tend to be more complex than deterministic models. The probabilistic models covered in this chapter are: a) The newsboy model b) The continuous-review fixed-order quantity reorder-point model c) The periodic-review order-up-to model
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a) The Newsboy Problem -- Optimizing order quantity for a single period (perishables) 4
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An Example: Freddie’s News Stand 5 Freddie opens a news stand at Orchard Rd and sells a wide variety of newspapers and magazines. The day’s copies of the Financial Times , one of the most expensive items, are brought to the news stand early each morning by a distributor. To encourage ordering a large number of copies, any copies unsold at the end of the day can be returned to the distributor the next morning for a refund. Here are Freddie’s cost figures: Freddie pays $1.00 per copy delivered. Freddie sells it at $2.50 per copy. Freddie’s refund is $0.50 for each unsold copy. How many copies should Freddie order from the distributor per day?
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Analysis of Expected Profit 6 Based on past sales record, Freddie sells 9 copies on 30% of the days, 10 copies on 40% of the days, and 11 copies on 30% of the days. Demand Order 9 10 11 EV 9 13.5 13.5 13.5 13.5 10 13 15 15 14.4 11 12.5 14.5 16.5 14.5 Prob. 0.3 0.4 0.3
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