Inventory, Production & Supply Chain Mgt.
Inventory, Production, and
Supply Chain Management
One carries inventory for a variety of reasons:
protect against uncertainty in demand,
avoid high overhead costs associated with ordering or producing small quantities
supply does not occur when demand occurs, even though both are predictable
(e.g., seasonal products such as agricultural products, or anti-freeze)
protect against uncertainty in supply,
unavoidable “pipeline” inventories resulting from long transportation times (e.g.,
shipment of oil by pipeline, or grain by barge)
for speculative reasons because of an expected price rise.
We will illustrate models useful for choosing appropriate inventory levels for situations (a), (b),
(c) and (d).
17.2 One Period News Vendor Problem
For highly seasonal products, such as ski parkas, the catalog merchant, L. L. Bean makes an estimate
for the upcoming season, of the mean and standard deviation of the demand for each type of parka.
Because of the short length of the season, L.L. Bean has to make the decision of how much to produce
of each parka type before it sees any of the demand. There are many other products for which
essentially the same decision process applies, for example, newspapers, Christmas trees, anti-freeze,
and road salt. This kind of problem is sometimes known as the one-period newsvendor problem.
To analyze the problem, we need the following data:
= purchase cost/unit.
= revenue per unit sold.
= holding cost/unit purchased, but not sold. It may be negative if leftovers have a positive
= explicit penalty per unit of unsatisfied demand, beyond the lost revenue.