Kuliah 9

MPP 2016

Perishable Items: Use of Marginal Analysis

Background
as much stock of a perishable product should be stocked each
period in order to maximize longhorn profit.
Example of perishable are edible (bread, milk, vegetable etc)
newspaper and other periodical, fresh flowers, anniversary cards
etc.
This problem is also known as newsboy problem due to the
newspaper vendor problem. The products are also called single
period items since they are most useful within a given period of
time i.e. they are a shelf life.
A characteristic of these items is that periodic demand is uncertain
but does follow some patterns which can be translated into a
probability distribution.
In such a case, an approach known as marginal analysis may be
used to recommend the optimal stock level.
Illustration

A newspaper vendor buys each newspaper copy at Sh.27 from the publisher and sells it for
Sh.35. If a paper is not sold on the particular day, it can be disposed of through other channels
later at Sh.4 per copy. From previous experience, the following data has been gathered.

No. of copies No. of days

Sold per day
110 10
120 20
130 40
140 70
150 40
160 10
170 10
200

Required
Recommend the best level of daily newspaper stock in order for the vendor to maximize long
term profitability.
Data requirement (Marginal analysis)

1) Unit purchase cost = 27

2) Selling price per unit = 35
3) Salvage/disposal value = 4 – the  also do disposal cost.

Let MP – marginal profit (35 – 27) = 8 shillings

ML – marginal loss (25 – 4) = 23 shillings

p – Probability that demand > supply (desirable)

(1 – p) – Probability that demand <supply (not desirable)

Logically, the vendor should stock additional copies as long as the following condition holds;

1) Expected marginal profit > expected marginal loss.

p x MP > (1-p) x ML

Objective: Max p, subject to

pMP = ML – pML

pMP + pML = ML

p(MP + ML) = ML

ML
p>
ML  MP

The newspaper vendor should stock additional copies as long as

23 23
= , p > 0.74
23  8 31
Daily demand
 p p that D > 

110 0.05 1  > 0.74

120 0.10 0.95 > 0.74

130 0.20 0.85 > 0.74

140 0.35 0.65 <0.74

150 0.20

160 0.05

170 0.05

1.00

This optimal quantity to stock is between 130 and 140 copies daily.
 0.85 P

0.74 Q

0.65 S

130  140

PQ S
 
PS ST

0.85  0.74 130  

  = 135.5 = 136 copies
0.85  0.65 140  130
 Fit a normal distribution and hence recommend the optimal daily supply.
Decision role remains P > 0.74

Mean =  =   i Pi = 139 copies

S =  X 1   ) 2 Pi  13.74

The optimal supply be 

0.24

0.74

0.26

 139


Z 


  139
Z   0.64
13.74

  1.39
 0.64   8.7936    139
13.74
 = 130.2
 Marginal analysis uniform distribution (Rectangular or even distribution

P ( )

f ( ) 0.26 0.74

1
40

0 x

130  170

Assume  is uniform between 130 and 170 copies

(170   ) 1  0.74
40

4.25  0.025   0.74

351  0.025 

 = 140