Your store sells a product for which the daily demand is Poisson with an average value of 10. The…
Your store sells a product for which the daily demand is Poisson with an average value of 10. The product sells for $50, and its holding cost is $1.50 per unit per day. Every time you order the product, you pay $32.50 per unit plus a $70 per order handling fee. There is a one day “lag” after an order is placed: for example, an order placed at the end of day 1 will arrive at the beginning of day 3. If you run out of stock, sales are lost.
Your ordering policy is as follows, described by two parameters R and L:
• At the end of each day, let I be the ending inventory, and Y be the amount ordered yesterday
If I + Y > R, do not order anything
If I + Y < R, order L – (I + Y) units, that is, try to bring the inventory up to L
On day one, you have a starting inventory of 43, and you have not ordered in the previous two days. Using a period of 100 days and a sample size of at least 250, experiment with all possible combinations of R = 10, 15, 20, 25 and L = 40, 45, 50, 55. Which policy gives the highest average profit over the 100-day period? Give your answer both with and without a $25/unit “salvage” correction, applied to all units in inventory during the last day or ordered over the last two days.