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Cachon and Terwiesch Chapter 12: O'Neill Hammer 3/2 wetsuit newsvendor

ToolInventory Policy
SourceCachon, G., and Terwiesch, C. (2013). Matching Supply with Demand: An Introduction to Operations Management, 3rd ed. McGraw-Hill/Irwin, New York. Chapter 12.
LevelUndergraduate

Problem

O'Neill sells the Hammer 3/2 wetsuit for $190, buys it for $110 and salvages leftovers at $90; season demand is normal with mean 3,192 and standard deviation 1,181. Find the order quantity that maximizes expected profit and, for an order of 4,184 suits, the expected lost sales, sales, leftover inventory, profit and in-stock probability.

Inputs to Enter

  • Model newsvendor (loads the example), normal demand: unit cost 110, price 190, salvage 90, mean 3,192, SD 1,181
  • Evaluate Q = 4,184
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Answers

  • c_u = 80, c_o = 20, critical ratio 0.80, z = 0.84, Q* = 4,184 (book, z table; tool 4,186 exact)
  • At Q = 4,184: expected lost sales 1,181 L(0.84) = 132, expected sales 3,060, expected leftover 1,124, expected profit $222,320, in-stock probability 0.80

Notes

Choose the newsvendor model; the select fills the published inputs.

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