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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
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
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)
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
Probability
0.2
0.2
0.2
0.2
0.2
Performance Measures