Practice #9
Solutions
Newsvendor Model
BUAD311
–
Operations Management
Fall 2009
Hiroshi Ochiumi
1) Consider a newsvendor problem and we are now thinking of increasing the order
quantity from Q to Q+1. The potential benefit of ordering this one unit is that you could
meet the demand of one customer that we would otherwise lose. What is the potential
loss of ordering this one unit?
If the demand realization is such that this one unit is unsold, we have to salvage it under
cost, or incur holding cost.
2) In a typical newsvendor problem what do we know about the demand?
We don’t know the exact demand but we do know the distribution of the demand.
3) Solve the newsvendor problem. What is the optimal order quantity?
Probability
0.2
0.1
0.1
0.2
0.3
0.1
Value
1
2
3
4
5
6
purchase cost c = 15
selling price p = 25
salvage value v = 10
Pr[demand < 1]=0
Q: Is this (strictly) less than (pc)/(pv)=0.66..? A: Yes.
Pr[demand < 2]=0.2
Q: Is this (strictly) less than 0.66..? A: Yes.
Pr[demand < 3]=0.3
Q: Is this (strictly) less than 0.66..? A: Yes.
Pr[demand < 4]=0.4
Q: Is this (strictly) less than 0.66..? A: Yes.
Pr[demand < 5]=0.6
Q: Is this (strictly) less than 0.66..? A: Yes.
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 '07
 Vaitsos
 Management, Normal Distribution, Optimal Target, optimal target level, Hiroshi Ochiumi

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