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Cu
F (Q)
Co Cu
PROD 529: Chapter 13 3
Example, CR, CV, Mismatch
Cu Co
Loss due to
Margin, $ Coefficient of
Product salvaging, $ CR
per unit variation
per unit
Lowest
Snow 900 100 0.2 0.90
Ice 1600 400 0.25 0.80
Freeze 100 200 0.85 0.33 Highest
Zazz, a maker of a hot new MP3 player, is concerned about the availability of flash
memory chips, a key component in the Zazz3 player.
Zazz expects that demand for chips in July is normally distributed with a mean of
250,000 and a standard deviation of 200,000.
It is the start of April and Zazz must commit to a flash memory chip quantity for
delivery in July. Each chip ordered now will cost Zazz $40.
If Zazzs demand in July exceeds its regular order (the amount ordered in April) then
Zazz can obtain additional units on the spot market. The spot market price for these
chips in July is estimated to be $50.
Chips not used in July will certainly be used in August. However, chips ordered in
May for August delivery are expected to cost $36. Furthermore, there is a $1 cost to
hold each chip from one month to the next (due to the opportunity cost of capital and
physical storage costs).
How many chips should Zazz order in April?
How many chips are expected to be bought on the spot market?
First order quantity, Q1 = m + zs = 250000 + .44*200000 = 338000 players F(.43) = .6664; F(.44) = .67;
So z = 0.44
Second order quantity, Q2 =Expected lost sales: Q2 = s*L(z) z = (338000 250000)/200000 = 0.44
L(z) = 0.2169