Single-period_Inventory_Model

Single-period_Inventory_Model - Single-Period Inventory...

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Probability Distribution of Demand for the Next Period Quantity Demanded, D Probability Density P( D < Q ) Q Single-Period Inventory Model
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Single-Period Inventory Model If the objective is only to determine the order quantity ( Q ) to satisfy demand for the next period with uncertain demand ( D ), one could choose an order quantity on the basis of an arbitrarily set value of P( D Q ). But this is not the same as setting a service level as the probability distribution of demand is only known for the next period and may change in the future. One simple analytical approach to deal with single-period inventory problems is the marginal analysis in which the value P( D Q ) is set on the basis of marginal profit and cost. Let’s start the analysis with any order quantity, Q . At a particular Q value, one would consider whether it is beneficial to order one more or one fewer unit. If one more unit is ordered but demand falls short of that unit, it would not be sold and need to be held in inventory. A (marginal) cost of holding one unit is assumed to be c o .
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Single-Period Inventory Model Marginal Analysis If, on the other hand, one fewer unit is ordered but there is demand for that unit, the profit of that unit would be lost as you run out of stock. The (marginal) profit forgone because of a stockout is assumed to be c u per unit. The expected marginal cost is therefore equal c o P( D Q ). Likewise, the
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This note was uploaded on 10/18/2010 for the course MACAU macau taught by Professor Macau during the Spring '10 term at University of Macau.

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Single-period_Inventory_Model - Single-Period Inventory...

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