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MBPFC7 Newsvendor

# MBPFC7 Newsvendor - Chapter 7 7.3 Optimal Service Level The...

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1 Chapter 7 7.3 Optimal Service Level: The Newsvendor Problem Fashion goods Short product life cycle of a few months 1 or 2 buying opportunities Perishable items GOAL Determine optimal order quantity

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2 Newsvendor Problem Decision making under uncertainty Balance expected cost of too much With expected cost of too little ROLE of uncertainty No scale economies
3 Example 7.5 Big George is an electronics superstore. It sells consumer electronics. Big is considering carrying a plasma HDTV for Christmas sales. Each HDTV sells for \$2,500. Big George purchases each unit for \$1,800. Unsold TVs can be salvaged for \$1,700. Estimated demand is between 100 and 200 with probability weights given in the table. How many HDTVs should Big George purchase for the season’s sales?

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Table 7.3 Demand for HDTV at Big George Demand r Probability (R=r) 100 0.02 110 0.05 120 0.08 130 0.09 140 0.11 150 0.16 160 0.20 170 0.15 180 0.08 190 0.05 200 0.01 R= uncertain demand R can take the values shown as r
Table 7.3 Demand for HDTV at Big George Demand r Probability (R=r) Cumulative Prob Prob(R≤ r) 100 0.02 0.02 110 0.05 0.07 120 0.08 0.15 130 0.09 0.24 140 0.11 0.35 150 0.16 0.51 160 0.20 0.71 170 0.15 0.86 180 0.08 0.94 190 0.05 0.99 200 0.01 1 Probability that R will be less than or equal to particular value of r For example, the cumulative probability that demand will be less than or equal to 130 is 0.24

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Table 7.3 Demand for HDTV at Big George Demand r Probability (R=r) Cumulative Prob Prob(R≤ r) Complementary Cumulative Probability Prob(R > r) 100 0.02 0.02 0.98 110 0.05 0.07 0.93 120 0.08 0.15 0.85 130 0.09 0.24 0.76 140 0.11 0.35 0.65 150 0.16
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