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Rohit Kapoor

Summary

Process for using

Historical A/F ratio

To construct an empirical distribution

Step1: Assemble a data set of products for which the

forecasting task is comparable to the product of interest

Data set should include products that we expect would

have similar forecast errors to the product of interest

Data should include initial forecast of demand and the

actual demand for each item

An initial forecast for the product for the upcoming

season

Summary

Step 2

Evaluate A/F ratio for each product in the data set

Step 3

Sort the data in ascending A/F ratio order and

rank the items from 1 to N

N is the number of items in the data set

Step 4

Probability of the ith item equals i/N

Empirical Distribution

Expected actual demand = Expected A/F ratio * Forecast

3192 (0.9976 * 3200)

1181 (0.369 * 3200)

Cumulative Distribution

Normdist(Q, 3192, 1181, 1)

1.00

0.90

Probability

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00

0

1000

2000

3000

4000

5000

6000

Quantity

mean 3192 and standard deviation 1181 (solid line)

Newsvendor Model

Critical Ratio?

Ordering one more unit increases the

chance of overage

Expected loss on the Qth unit = Co x F(Q)

F(Q) = Distribution function of demand = Prob{Demand <= Q)

unit

the reduction in the chance of underage:

Expected gain on the Qth unit = Cu x (1-F(Q))

An Exercise Problem

In August, L. L. Bean, Inc. must decide on how many of next years

cardigans should be ordered. Each cardigan costs L. L. Bean $2 and it is

sold for $4.50. After January 1, any unsold cardigans are returned to the

supplier for a refund of 75 cents per cardigan. The product manager

believes the number of cardigans sold by January 1 follows the probability

distribution shown in Table L. L. Bean wants to maximize the expected net

profit from cardigans sales. How many cardigans should the product

manager order in August?

Probability

100

0.3

150

0.2

200

0.3

250

0.15

300

0.05

Suppose that for a given inventory situation, average annual

demand is 1000 and the EOQ is 100. Demand during lead time

is random and is described by the probability distribution. For

a reorder point of 30 units determine the fill rate and

expected no. of cycles having shortages.

Lead

Time

Demand

20

30

40

50

60

Probability

0.2

0.2

0.2

0.2

0.2

Performance Measures

Expected sales

Expected leftover inventory

Expected profit

Fill rate

In-Stock probability

Stock-out probability

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