Matching Supply with Demand An Introduction to Operations

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Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon Christian. Terwiesch All

Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon Christian. Terwiesch All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides. Slide 1

Low critical ratios high mismatch costs § The mismatch cost is high when (f(z)

Low critical ratios high mismatch costs § The mismatch cost is high when (f(z) / F(z)) is high … § … (f(z) / F(z)) is high when the critical ratio is low: Slide 2

High demand uncertainty high mismatch costs § § The mismatch cost is high when

High demand uncertainty high mismatch costs § § The mismatch cost is high when the coefficient of variation, s/m, is high. The coefficient of variation is the right measure of demand uncertainty: - The probability demand is within 20% of the forecast demand depends on the coefficient of variation (COV) and not the standard deviation: Slide 3

Find your product’s mismatch cost (as % of maximum profit) … Slide 4

Find your product’s mismatch cost (as % of maximum profit) … Slide 4

Unlimited, but expensive reactive capacity § § TEC charges a premium of 20% per

Unlimited, but expensive reactive capacity § § TEC charges a premium of 20% per unit ($132 vs. $110) in the second order. There are no restrictions imposed on the 2 nd order quantity. O’Neill forecast of total season sales is nearly perfect after observing initial season sales. How many units should O’Neill order in October? Slide 5

Limited reactive capacity § § Units in the 2 nd order are no more

Limited reactive capacity § § Units in the 2 nd order are no more expensive than in the 1 st order But there is limited capacity for a 2 nd order Slide 6

Sample of wetsuits § 1 st order must be at least 10, 200 suits

Sample of wetsuits § 1 st order must be at least 10, 200 suits so that there is enough capacity for the 2 nd order. § What should we produce in the 1 st order? Slide 7

Profit and mismatch with only 1 ordering opportunity § Use the Newsvendor model to

Profit and mismatch with only 1 ordering opportunity § Use the Newsvendor model to evaluate the optimal order quantity, expected profit, maximum profit and mismatch cost § A suits produced in the 1 st order earns the Newsvendor profit but a suit produced in the 2 nd order earns the maximum profit. Slide 8

Produce “safer” products early, produce “risky” products with reactive capacity § Sort items by

Produce “safer” products early, produce “risky” products with reactive capacity § Sort items by their mismatch cost to order quantity ratio. Fill the 1 st order up to the minimum quantity (10, 200) with the items that have the lowest mismatch – quantity ratio § The mismatch cost is reduced by 66%! § Slide 9

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