Introduction to Supply Chain

Analytics III
Rohit Kapoor
Quick Response

Rohit Kapoor
 Introduction
• Firm facing newsvendor situation
– Make to Stock
• Entire supply is committed before the random
demand occurs
 Newsvendor Model
• Mismatch Cost
– Tangible component?
– Intangible component?
 Apparel A Timeline and
Generate forecastEconomics
of demand and
submit an order
to TEC Spring selling season

Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Receive order Left over

from TEC at the units are
end of the discounted
month
• Economics:
• Each suit sells for p = $180
• TEC charges c = $110 per
suit
• Discounted suits sell for v = $90
 Summary of Performance Measures
Order Quantity 4095 Units
F(Q) = Cu/(Cu + Co)
Expected Demand 3192 Units
µ
Std. Dev. Of Demand 1181
σ
Expected Lost Sales 150 Units σ * L(Z)
Expected Sales 3042 Units µ - Expected Lost Sales
Expected Leftover Inventory 1059 Units Q – Expected Sales
Expected Revenue 642870 $ Price * Expected Sales + Salvage Value * Expected Leftover Inventory

Expected Profit 191760 $ Cu * Expected Sales – Co * Expected Leftover Inventory

Mismatch Cost 31680 Cu * Expected Lost Sales + Co * Expected Leftover Inventory
 Observation
• Mismatch cost
– Increases as demand variability increases
• Demand variability measure: CV
– Why CV is important measure?
 Some Guidelines
• CV values:
– Low
• CV value less than 0.25
– Medium
• 0.25 to 0.75
– High
• Above 0.75
– Above 1.5 is extremely high
– Anything above 3
» Demand forecast is essentially meaningless
 Concept of Reactive Capacity
Generate forecast Receive 1st order
of demand and from TEC at the
submit 1st order end of Jan Spring selling season
to TEC (Feb – Jul)

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Observe Feb and Receive 2nd Left over

Mar sales and order from units are
submit 2nd order TEC at the discounted
to TEC end of Apr
 Some Basic Assumptions
• We do not run out of inventory
– before the second order arrives
• After we observe initial sales
– we are able to perfectly predict sales in the
remaining portion of the season
• Validity of the assumptions?
 An Example
• Lets, Say XYZ can send a second order
• TEC will charge 20% premium
• Q?
3,263
• Expected second order quantity?
437
• Expected profit
maximum profit – [co * Expected leftover inventory + cu * expected second
order quantity] ?
 Analysis
• Expected profit with just one ordering
opportunity
$191,760
• Expected profit now
$203,666
• Increases in expected profit
6.2%
 Analysis
• Further,
– In terms of how much the IInd order reduces the
mismatch cost
• Mismatch cost with only 1 order
$31,680
• Mismatch cost now?
$223,440 - $203,666 = $19,774
38% reduction
 An Exercise Problem
• Sport’s Obermeyer?
 Another Approach to Estimate
Expected Profit
• Estimate Q1
• Estimate Expected Lost Sales based on Q1
– This becomes equal to Q2
• Estimate Expected Sales from Q1
• Estimate Expected Leftover Inventory from Q1
• Expected Profit
= Price * Expected Sales from Q1
+ Salvage Value * Expected Leftover Inventory from Q1
– Cost of ordering Q1 – Cost of ordering Q2 + Price * Q2