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models
D = DDet + DRan
where
DDet = Deterministic component of demand
and
DRan = Random component of demand.
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Inventory Control with Uncertain
Demand
There are a number of circumstances under which
it would be appropriate to treat D as being
deterministic even though D Ran is not zero. Some
of these are:
ZWhen the variance of the random component,
DRan is small relative to the magnitude of D .
ZWhen the predictable variation is more
important than the random variation.
ZWhen the problem structure is too complex to
include an explicit representation of
randomness in the model.
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Inventory Control with Uncertain
Demand
Example:
A newsstand purchases a number of copies of The
Computer Journal (weekly). The observed
demands during each of the last 52 weeks were:
15 19 9 12 9 22 4 7 8 11
14 11 6 11 9 18 10 0 14 12
8 9 5 4 4 17 18 14 15 8
6 7 12 15 15 19 9 10 9 16
8 11 11 18 15 17 19 14 14 17
13 12
0 6
0 2 4 6 8 10 12 14 16 18 20 22
Inventory Control with Uncertain
Demand
Example :
Estimate the probability that the number of copies
of the Journal sold in any week.
The probability that demand is 10 is estimated to
be 2/52 = 0.0385, and the probability that the
demand is 15 is 5/52 = 0.0962.
Cumulative probabilities can also be estimated in
a similar way.
The probability that there are nine or fewer copies
of the Journal sold in any week is (1 + 0 + 0 + 0 + 3
+ 1 + 2 + 2 + 4 + 6) / 52 = 19 / 52 = 0.3654.
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Inventory Control with Uncertain
Demand
1 n
D= Di
n i =1
1 n
s =
2
(Di D )2
n 1 i =1
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Inventory Control with Uncertain
Demand
0.12
0.10
0.08
0.06
0.04
0.02
0
-4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26
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Optimization Criterion
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The Newsboy (girl) / newsvendor Model
(Continuous Demands)
The demand is approximately normally distributed
with mean 11.731 and standard deviation 4.74.
Each copy is purchased for 25 cents and sold for
75 cents, and he is paid 10 cents for each unsold
copy by his supplier.
One obvious solution is approximately 12 copies.
Suppose Mac purchases a copy that he doesn't
sell. His out-of-pocket expense is 25 cents 10
cents = 15 cents.
Suppose on the other hand, he is unable to meet
the demand of a customer. In that case, he loses
75 cents 25 cents = 50 cents profit. 13
0 Q
= 0 + co f ( x )dx + 0 + cu [ f ( x )]dx
dG Q
dQ 0 Q
= co f ( x )dx cu 1 f ( x )dx
Q Q
0 0
= (co + cu ) f ( x )dx cu = (co + cu ) F (Q) cu
Q
d 2G
The optimal solution equation = (co + cu ) f (Q) 0
dQ 2
( )
F Q* =
cu
co + cu
15
10
G(Q)
8
(Thousands)
0
-10 -6 -2 0 100 200 300 400
O Q Q* 16
The Newsboy Model
(Continuous Demands)
Example (continued):
Normally distributed with mean = 11.73 and standard
deviation = 4.74.
co = 25 10 = 15 cents.
cu = 75 25 = 50 cents.
The critical ratio is c (c + c ) = 0.50/0.65 = 0.77.
u o u
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f(x)
Area = 0.77
11.73 Q* x18
The Newsboy Model
(Continuous Demands)
Example (continued):
Using the data of the normal distribution we
obtain a standardized value of z = 0.74. The
optimal Q is
Q * = z + = 4.74 0.74 + 11.73 = 15.24 15
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The Newsboy Model
XLRI is holding its annual convention in Dubai. Six months
before the convention begins XLRI must decide how many
rooms should be reserved in the convention hotel. At this time
XLRI can reserve rooms at a cost of $50 per person, but six
months before the convention XLRI doesn't know with certainty
how many people will attend the convention. XL believes that
the number of rooms required is normally distributed with a
mean of 5000 rooms and a standard deviation of 2000 rooms. If
the number of rooms required exceeds the number of rooms at
the convention hotel, extra rooms will have to be found at
neighboring hotels at at a cost of $80 per room. It is
inconvenient for convention participants to stay at neighboring
hotels. We measure this inconvenience by assessing an
additional cost of $10 for each room obtained at a neighboring
hotel. If the goal is minimize the expected cost to XLRI, how
many rooms should XLRI reserve at the convention hotel?
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