4inventory2009 - Prof. Dr. Fsun lengin Fusun Ulengin, 2009...

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Prof. Dr. Füsun Ülengin 1 Fusun Ulengin, 2009
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Demand Uncertainty The forecast is always wrong It is difficult to match supply and demand The longer the forecast horizon, the worse the forecast It is even more difficult if one needs to predict customer demand for a long period of time Aggregate forecasts are more accurate. More difficult to predict customer demand for individual SKUs Much easier to predict demand across all SKUs within one product family 2 Fusun Ulengin, 2009
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The Effect of Demand Uncertainty Many companies treat the world as if it were predictable, making production and inventory decisions based on forecasts of the demand made in advance of the selling season Recent technological advances have increased the level of uncertainty Many products have short life cycle At the same time a large variety of products compete in the same market To illustrate the importance of incorporating demand uncertainty and forecast demand into the analysis consider the following example Fusun Ulengin, 2009 3
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The impact of demand uncertainty on the inventory policy : Single Order Case A company designs, produces and sells summer fashion items such as swimsuits. They have identified several possible scenarios for sales in the coming season For example, the marketing department believes that a scenario that leads to 8,000 unit sales has an 11 percent chance happening; other scenarios leading to different sale levels have different probabilities of occuring(see Figure 1) 4 Fusun Ulengin, 2009
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Probabilistic forecast 0% 5% 10% 15% 20% 25% 30% 8.000 10.000 12.000 14.000 16.000 18.000 Unit Sales Probability EXAMPLE: Figure 1 5 Fusun Ulengin, 2009
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Example (continues) This probabilistic forecast suggest that average demand is about 13,000 units, but there is a probability that demand will be either larger or smaller than average To start production, the manufacturer has to invest $100,000 independent of the amount produced ( fixed production cost ) The variable production cost per unit equals $80 During the summer season, a swimsuit is sold at $125 per unit. This value is the selling price Any swimsuit not sold during the summer season is sold to a discount store for $20 ( salvage value ) (see the example computation of the profit) 6 Fusun Ulengin, 2009
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Marginal profit-marginal cost What is the relationship between the optimal production quantity and average demand(13,000 units)?. Should the optimal quantity be equal to, more than or less than the average demand? Marginal profit and marginal cost of producing an additional swimsuit: If this swimsuit is sold during the summer season: Marginal profit : (difference between the selling price and variable cost per unit) =125-80=$45 If this swimsuit is not sold during the summer season Marginal cost : ( difference between the variable production cost and the salvage value per unit)= 80-20=$60 7 Fusun Ulengin, 2009
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Average profit as a function of production quantity Therefore the cost of not selling this additional
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4inventory2009 - Prof. Dr. Fsun lengin Fusun Ulengin, 2009...

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