Single Period Inventory Model

Numerical Solution
SCM Session 4
Module 1
 The Context
• Perishable item – demand lasts for a limited period
• Demand is probabilistic
• The lead time for procurement/production exceeds the
demand period – hence, a single order needs to be
placed well before the demand commences
• If order quantity Q < demand D: opportunity cost – we
lose the profit we could have made on quantity (D – Q)
• If order quantity Q > demand D: we are left with excess
inventory at the end of demand period – we lose the
money invested in the excess inventory (Q – D)
Example: NFL Replica Jerseys
• Reebok has the sole rights to sell NFL
replica football jerseys
• Each jersey has a unique name and number
• Peak demand lasts about 8 weeks
• Lead time from contract manufacturer is
about 12-16 weeks

Key issue:
Reebok must commit to order quantities in
advance, while the demand is uncertain

How many jerseys of each

player should Reebok order?
 What is known?
• Unit cost = $ 10.9/jersey
• Unit selling price = $ 24/jersey
• Demand = N(m = 32000, s = 11000)
– Demand is forecasted from historical data

• Select order quantity Q* that maximizes profit

Profit = p.[min(x, Q)] – c.Q

where x = actual demand

 Numerical Solution
1. Discretize the normally distributed demand
into a range of discrete demands with
respective probabilities
2. Consider a range of order quantities Q
3. For each Q, calculate profit for the range of
discrete demands
4. Calculate the expected profit for each Q
5. Select the Q that gives the maximum
expected profit
 Solution
• From data table, Q* = 34,000

• This is the quantity that maximizes the

expected profit