A common inventory management problem occurs when the product in question has limited shelf life (e.g., newspapers, produce, computer hardware). There is a cost of over ordering, because the product will shortly become obsolete and worthless. There is also an opportunity cost of under ordering associated with forgone sales. Under such a situation, the question of how much of a product to order to maximize expected profit is classically referred to as the newsboy problem. In this example, we assume demand has a Poisson distribution. However, this is not mandatory. Refer to any operations research textbook for a derivation of the formulas involved.

MODEL:

 

DATA:

 

! The average demand;

   MU = 144;

 

! Opportunity cost of each unit of lost demand;

   P = 11;

 

! Cost/unit of excess inventory;

   H = 5;

 

ENDDATA

 

! Calculate the order-up-to point, S, using the

  newsboy problem equation;

 @PPS( MU, S) = P / ( P + H);

 

! PS is the expected profit of being at S;

 PS = P * MU - H * (S -MU) - (P + H) * @PPL(MU, S);

 

END

Model: EZNEWS