’the Newsvendor Problem

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The logic embeded in the newsvendor model has application in many areas of inventory management .First the formula from the Newsvendor Model can be directly applied to calculate optimal inventory levels in industries where replinishment is not possible during the product life cycle ( e.g. , certain fashion apparel, newspapers, periodical publishing).Second and more important , the logic in the newsvendor model forms the basis for „safety stock calculation” in many industries , and „yield management” in in the airline industry.

Problem # 2

Hamptonshire Express # 2 differs from the Newsvendor Model because Sheen can alter demand for the Express by investing in effort to improve the quality of the feature section.Demand for the Express increases ( non-linearly) as Sheen invests more effort in creating this section; thus this problem requires us to trade-off the cost of Sheen’s effort against the benefit derived from additional sales (that accrues as a result of this effort).

The relationship between channel effort and product demand is not surprising-channle members can usually increase demand for their products by investing additional effort in product development , advertsing, promotion,etc...For example product designers can develop better products if they work harder, or salespeople can induce more customers to choose a particular product by offering superior service.

The opportunity cost of Sheen’s time stems from the fact that by working more hours in creating the Profile section, Sheen is sacrificing time that she could have used to perform „fun” tasks like spending time with her family.

Sheen should work hard enough to equate the marginal cost of additional effort ($10 per hour ) with the marginal benefit of additional effort ( [pic 46] ). Solving for h from this equation, we obtain h=4.Through a simulation, you will find that optimal h is roughly in the same region(profit is not very sensitive to small changes in h around the optimum, so it is possible to identify slightly different optimal values for h.

The optimal level for h(i.e. ,the optimal effort that sheen should invest)would be affected by the opportunity cost of her effort ,the additional amount of sales generated from additional hour of effort invested, and the additional revenue derived from each additional unit of sales.