Evaluating the Profit Maximizing Order Quantity at L. L.

Bean Change the order quantity in Cell C5 to ev

Cost to Mfg, c $ 45 Co = c − s $ 5 in Cell G23 and expected marginal contrib
Sale price, p $ 100 Cu = p − c $ 55 100 parkas in Cell F29. Entries in Cell C5 s
of 100.
Salvage value, s $ 40
Order Quantity = 1,000

Order Quantity = 1000

Probability Demand Pi sold overstock understock

pi Di = p(D<=Di) units units units profit
0.01 400 0.01 400 600 0 $ 19,000
0.02 500 0.03 500 500 0 $ 25,000
0.04 600 0.07 600 400 0 $ 31,000
0.08 700 0.15 700 300 0 $ 37,000
0.09 800 0.24 800 200 0 $ 43,000
0.11 900 0.35 900 100 0 $ 49,000
0.16 1,000 0.51 1,000 0 0 $ 55,000
0.20 1,100 0.71 1,000 0 100 $ 55,000
0.11 1,200 0.82 1,000 0 200 $ 55,000
0.10 1,300 0.92 1,000 0 300 $ 55,000
0.04 1,400 0.96 1,000 0 400 $ 55,000
0.02 1,500 0.98 1,000 0 500 $ 55,000
0.01 1,600 0.99 1,000 0 600 $ 55,000
0.01 1,700 1.00 1,000 0 700 $ 55,000
Expected Value 1,026 915 85 111 $ 49,900

Order Quantity + 100 = 1,100

Probability that additional 100 units do not sell = 0.51
Probability that additional 100 units sell = 0.49
Expected Profit $ 52,340
Expected Marginal Contribution of an additional 100 parkas $ 2,440

Order Quantity = 1100

Probability Demand Pi sold overstock understock

pi Di = p(D<=Di) units units units profit
0.01 400 0.01 400 700 0 $ 18,500
0.02 500 0.03 500 600 0 $ 24,500
0.04 600 0.07 600 500 0 $ 30,500
0.08 700 0.15 700 400 0 $ 36,500
0.09 800 0.24 800 300 0 $ 42,500
0.11 900 0.35 900 200 0 $ 48,500
0.16 1,000 0.51 1,000 100 0 $ 54,500
0.20 1,100 0.71 1,100 0 0 $ 60,500
0.11 1,200 0.82 1,100 0 100 $ 60,500
0.10 1,300 0.92 1,100 0 200 $ 60,500
0.04 1,400 0.96 1,100 0 300 $ 60,500
0.02 1,500 0.98 1,100 0 400 $ 60,500
0.01 1,600 0.99 1,100 0 500 $ 60,500
0.01 1,700 1.00 1,100 0 600 $ 60,500
Expected Value 1,026 964 136 62 $ 52,340
the order quantity in Cell C5 to evaluate expected profit
23 and expected marginal contribution of another
kas in Cell F29. Entries in Cell C5 should be multiples
Evaluating the Optimal Service Level for Seasonal Items (Example 13-1)

Input
Mean demand, μ = 350
Standard Deviation of Demand, s = 100
Cost per unit, c = $ 100.00
Retail price, p = $ 250.00
Salvage Value, s = $ 80.00

Results
Cost of overstocking per unit, Co = $ 20.00
Cost of understocking per unit, Cu = $ 150.00
Cycle service level, CSL* (eqn 13.1) = 0.88
Order size, O (eqn 13.2) = 469
Expected profit (eqn 13.3) = $ 49,147
Evaluating Expected Profit, Overstock, and Understock (Example 13-2)

Input Scenario 1 Scenario 2

Mean demand, µ = 350 350
Standard Deviation of Demand, s = 100 100
Cost per unit, c = $ 100.00 $ 100.00
Retail price, p = $ 250.00 $ 250.00
Salvage Value, s = $ 80.00 $ 80.00

Cost of overstocking per unit, Co = $ 20.00 $ 20.00

Cost of understocking per unit, Cu = $ 150.00 $ 150.00
Cycle service level, CSL (eqn 13.1)= 0.84 0.88
Order size, O = 450 469
Expected profit (eqn 13.3) = $ 49,084 $ 49,147
Expected overstock units (eqn 13.4) = 108 124
Expected understock units (eqn 13.5) = 8 6

Scenario 1 allows calculation of profits, overstock, and understock for a

specific order size (Cell E14).
Scenario 2 calculates the optimal order size (Cell F14) given the other inputs.
Example 13.2 Enter 450 in Cell E6. The solutions are in Cells E15 to E17.
Evaluating Service Level and Optimal Order Quantities for Seasonal Items with Quantity Discount (Example

Input No Discount Discount Discount Pricing

Mean demand, µ = 150 150 <=Quantity
Standard Deviation of Demand, s = 40 40 200
Cost per unit, c = $ 50.00 $ 45.00
Retail price, p = $ 200.00 $ 200.00
Salvage Value, s = $ - $ -

Intermediate Calculations
Cost of overstocking per unit, Co = $ 50.00 $ 45.00
Cost of understocking per unit, Cu = $ 150.00 $ 155.00

Optimal Results
Optimal order quantity, O* = 177 200
Optimal cycle service level, CSL* = 0.75 0.89
Expected Profit (eqn 13.3) = $ 19,958 $ 20,595
Expected overstock units (eqn 13.4) = 33 52
Expected understock units (eqn 13.5) = 6 2
Column E contains the results when quantity discounts are ignored.
Column F contains the results accounting for quantity discounts.
Enter the desired order quantity in Cell F15 to obtain expected profits
in Cell F17. Pick the order quantity with the highest profits.
Quantity Discount (Example 13-3)

count Pricing
Price
$ 50.00
$ 45.00
Evaluating Optimal Service Level for Continuously Stocked Items (Examples 13-4 and 13-5)

Demand during stockout is Demand during

backlogged stockout is lost
Safety Stock Evaluate Safety Evaluate Safety
Inputs Given (13-4) Stock (13-5) Stock (13-5)
Lot size, Q 400 400 400
Annual demand, D 100 100 100
SD of demand, σD 20 20 20
Lead time, L 2 2 2
Unit cost, C $ 3 $ 3 $ 3
Holding cost fraction, h 0.2 0.2 0.2
Holding cost, hC 0.6 0.6 0.6

Demand during lead time, DL 200 200 200

SD of demand during lead time, σL 28.28 28.28 28.28
Cost of understocking, Cu $ 226.83 2 2
CSL 0.999797 0.9769 0.9774
Reorder point, ROP 300 256.40 256.67
Safety stock 100 56.40 56.67

For Example 13-4, enter reorder point (ROP) in Cell B17 to obtain cost of
understocking in Cell B15.
For Example 13-5, enter cost of understocking in Cell C15 to obtain
desired safety inventory when demand during stockout is
backlogged (Cell C18) and when demand during stockout is lost (Cell E18).

Observe that the desired CSL is lower when demand during stockout
is backlogged compared to when demand during stockout is lost.
Evaluating the Impact of Improved Forecasts (Reducing the Standard Deviation of Demand) on Supply Chain Profitab

with Market
Input Research
Mean demand, µ = 350 350
Column E contains the results for th
Standard Deviation of Demand, s = 150 90 demand uncertainty.
Cost per unit, c = $ 100.00 $ 100.00 Column F contains results as dema
Retail price, p = $ 250.00 $ 250.00 reduces (change SD of demand in C
Cell F5 to build Table 13-3.
Salvage Value, s = $ 80.00 $ 80.00
Intermediate Calculations
Cost of overstocking per unit, Co = $ 20.00 $ 20.00
Cost of understocking per unit, Cu = $ 150.00 $ 150.00

Optimal Results
Optimal order quantity, O* (eqn 13.2) = 528 457
Optimal cycle service level, CSL* (eqn 13.1)= 0.88 0.88
Expected Profit (eqn 13.3) = $ 47,470 $ 49,482
Expected overstock units (eqn 13.4) = 186.7 112.0
Expected understock units (eqn 13.5) = 8.6 5.2
n Supply Chain Profitability (Example 13-6)

contains the results for the current

uncertainty.
contains results as demand uncertainty
change SD of demand in Cell F5). Change
build Table 13-3.
Evaluating the Impact of Improved Forecasts (Reducing the Standard Deviation of Demand) on Supply Chain Profitab

Input
Mean demand, μ = 350 This simulation provides the SD of profits (Cell E11
the max profit (Cell E12), and min profit (Cell E13)
Standard Deviation of Demand, s = 150 the order size in Cell E9. Press F9 to simulate. All
Cost per unit, c = $ 100.00 results are over 300 trials. Observe that decreasin
Retail price, p = $ 250.00 the standard deviation of demand not only increa
average profit (Cell E10), but also decreases the SD
Salvage Value, s = $ 80.00 profit (Cell E11).
Order size = 528
Average Profit $ 46,896
SD (Profit) $ 21,445
Max Profit $ 79,200
Min Profit $ (9,599)

Demand Overstock Understock Profit

196.28 332 - $ 22,807.97
649.11 - 121 $ 79,200.00
303.53 224 - $ 41,040.53
415.99 112 - $ 60,158.07
296.61 231 - $ 39,863.91
559.34 - 31 $ 79,200.00
70.35 458 - $ 1,399.58
341.41 187 - $ 47,479.61
478.27 50 - $ 70,745.65
274.08 254 - $ 36,033.03
5.66 522 - $ (9,598.55)
366.06 162 - $ 51,670.13
423.74 104 - $ 61,475.24
189.87 338 - $ 21,717.25
239.45 289 - $ 30,146.78
396.98 131 - $ 56,925.98
177.75 350 - $ 19,657.66
591.90 - 64 $ 79,200.00
199.05 329 - $ 23,278.21
173.75 354 - $ 18,977.89
452.27 76 - $ 66,326.08
667.47 - 139 $ 79,200.00
365.81 162 - $ 51,627.69
325.24 203 - $ 44,731.01
285.66 242 - $ 38,002.56
245.33 283 - $ 31,146.82
328.14 200 - $ 45,224.62
398.38 130 - $ 57,164.81
387.62 140 - $ 55,334.90
346.35 182 - $ 48,319.70
129.95 398 - $ 11,530.93
289.16 239 - $ 38,597.09
181.70 346 - $ 20,329.10
177.12 351 - $ 19,550.27
294.66 233 - $ 39,532.02
580.19 - 52 $ 79,200.00
318.42 210 - $ 43,572.06
227.99 300 - $ 28,197.80
198.09 330 - $ 23,116.11
406.87 121 - $ 58,607.43
206.74 321 - $ 24,585.87
385.63 142 - $ 54,997.33
378.09 150 - $ 53,714.50
447.61 80 - $ 65,533.03
132.01 396 - $ 11,881.45
569.05 - 41 $ 79,200.00
676.16 - 148 $ 79,200.00
282.29 246 - $ 37,428.76
134.75 393 - $ 12,347.08
249.15 279 - $ 31,796.20
443.55 84 - $ 64,843.67
565.50 - 38 $ 79,200.00
464.69 63 - $ 68,437.71
343.56 184 - $ 47,845.57
521.05 7 - $ 78,019.24
201.80 326 - $ 23,746.57
459.81 68 - $ 67,608.35
478.03 50 - $ 70,705.81
344.06 184 - $ 47,929.70
472.70 55 - $ 69,798.27
497.44 31 - $ 74,004.74
489.11 39 - $ 72,589.26
192.65 335 - $ 22,190.76
433.01 95 - $ 63,052.03
404.51 123 - $ 58,206.17
151.76 376 - $ 15,239.65
70.69 457 - $ 1,457.71
278.66 249 - $ 36,811.72
235.21 293 - $ 29,425.10
292.63 235 - $ 39,187.62
516.19 12 - $ 77,193.01
86.26 442 - $ 4,104.12
431.87 96 - $ 62,858.31
284.99 243 - $ 37,887.64
470.28 58 - $ 69,387.88
238.07 290 - $ 29,912.07
285.29 243 - $ 37,939.57
343.84 184 - $ 47,892.16
376.97 151 - $ 53,524.68
273.32 255 - $ 35,904.10
159.20 369 - $ 16,504.85
323.08 205 - $ 44,362.83
190.62 337 - $ 21,845.58
253.59 274 - $ 32,550.84
340.17 188 - $ 47,269.17
488.91 39 - $ 72,554.50
320.41 208 - $ 43,908.90
340.58 187 - $ 47,337.76
462.41 66 - $ 68,050.44
308.00 220 - $ 41,799.31
607.22 - 79 $ 79,200.00
260.87 267 - $ 33,787.06
287.86 240 - $ 38,376.39
155.40 373 - $ 15,857.36
448.91 79 - $ 65,754.21
167.74 360 - $ 17,955.24
274.82 253 - $ 36,159.12
167.32 361 - $ 17,884.66
331.97 196 - $ 45,874.70
408.90 119 - $ 58,952.60
282.06 246 - $ 37,389.54
187.85 340 - $ 21,373.76
241.39 287 - $ 30,476.09
308.00 220 - $ 41,800.74
370.98 157 - $ 52,506.04
276.98 251 - $ 36,526.52
239.89 288 - $ 30,221.34
363.15 165 - $ 51,175.61
269.77 258 - $ 35,301.41
351.50 177 - $ 49,194.47
340.41 188 - $ 47,309.52
458.54 69 - $ 67,392.30
426.94 101 - $ 62,020.55
326.56 201 - $ 44,955.91
302.46 226 - $ 40,858.95
330.46 198 - $ 45,617.45
301.63 226 - $ 40,717.19
206.14 322 - $ 24,484.36
351.76 176 - $ 49,238.54
499.36 29 - $ 74,331.73
213.56 314 - $ 25,744.79
426.84 101 - $ 62,002.81
294.76 233 - $ 39,549.65
265.23 263 - $ 34,529.37
138.20 390 - $ 12,934.37
245.80 282 - $ 31,226.05
125.24 403 - $ 10,731.00
351.17 177 - $ 49,138.20
530.12 - 2 $ 79,200.00
185.09 343 - $ 20,905.71
464.52 63 - $ 68,407.69
161.32 367 - $ 16,864.05
515.29 13 - $ 77,039.76
533.13 - 5 $ 79,200.00
289.84 238 - $ 38,713.15
266.79 261 - $ 34,794.43
440.26 88 - $ 64,284.35
17.46 511 - $ (7,592.12)
248.78 279 - $ 31,732.03
156.85 371 - $ 16,105.16
303.43 225 - $ 41,022.44
457.16 71 - $ 67,157.15
578.80 - 51 $ 79,200.00
395.90 132 - $ 56,743.39
279.44 249 - $ 36,945.24
651.57 - 124 $ 79,200.00
382.34 146 - $ 54,437.53
612.67 - 85 $ 79,200.00
237.72 290 - $ 29,853.20
515.99 12 - $ 77,158.77
200.67 327 - $ 23,553.46
451.01 77 - $ 66,112.23
168.97 359 - $ 18,164.76
300.91 227 - $ 40,594.17
308.77 219 - $ 41,931.57
466.63 61 - $ 68,767.58
226.75 301 - $ 27,987.69
622.85 - 95 $ 79,200.00
199.65 328 - $ 23,380.01
283.43 245 - $ 37,623.15
628.04 - 100 $ 79,200.00
219.68 308 - $ 26,785.39
306.03 222 - $ 41,465.61
407.25 121 - $ 58,672.04
288.89 239 - $ 38,551.59
548.05 - 20 $ 79,200.00
401.05 127 - $ 57,618.70
339.63 188 - $ 47,177.07
184.48 344 - $ 20,801.74
318.90 209 - $ 43,652.20
546.55 - 19 $ 79,200.00
326.39 202 - $ 44,926.57
404.06 124 - $ 58,130.58
370.45 158 - $ 52,417.20
445.82 82 - $ 65,229.98
302.21 226 - $ 40,815.41
343.94 184 - $ 47,909.26
649.29 - 121 $ 79,200.00
457.99 70 - $ 67,298.56
305.22 223 - $ 41,326.72
236.76 291 - $ 29,689.74
484.21 44 - $ 71,756.48
335.68 192 - $ 46,504.89
32.21 496 - $ (5,084.01)
374.29 154 - $ 53,069.66
412.62 115 - $ 59,585.39
387.55 140 - $ 55,324.31
255.11 273 - $ 32,809.27
276.19 252 - $ 36,392.52
269.30 259 - $ 35,221.50
472.38 56 - $ 69,744.56
143.45 385 - $ 13,827.30
190.90 337 - $ 21,893.01
235.95 292 - $ 29,551.67
97.31 431 - $ 5,982.62
545.45 - 17 $ 79,200.00
387.32 141 - $ 55,284.54
227.94 300 - $ 28,189.39
282.52 245 - $ 37,468.68
393.28 135 - $ 56,297.43
528.00 - 0 $ 79,200.00
404.52 123 - $ 58,209.19
442.62 85 - $ 64,685.79
574.45 - 46 $ 79,200.00
126.60 401 - $ 10,962.48
239.85 288 - $ 30,214.84
311.46 217 - $ 42,387.45
397.80 130 - $ 57,065.62
412.74 115 - $ 59,606.04
201.96 326 - $ 23,772.78
208.10 320 - $ 24,816.84
445.68 82 - $ 65,204.91
514.01 14 - $ 76,821.62
392.35 136 - $ 56,139.66
228.19 300 - $ 28,232.05
222.58 305 - $ 27,278.18
188.34 340 - $ 21,457.43
156.88 371 - $ 16,109.50
328.00 200 - $ 45,199.29
448.14 80 - $ 65,623.12
142.93 385 - $ 13,738.91
296.79 231 - $ 39,894.99
419.26 109 - $ 60,713.57
460.18 68 - $ 67,671.10
476.17 52 - $ 70,388.68
443.65 84 - $ 64,861.29
201.48 327 - $ 23,691.87
533.17 - 5 $ 79,200.00
436.23 92 - $ 63,599.00
375.25 153 - $ 53,232.75
286.57 241 - $ 38,156.27
427.95 100 - $ 62,190.95
406.59 121 - $ 58,559.46
301.95 226 - $ 40,771.09
108.93 419 - $ 7,958.76
823.46 - 295 $ 79,200.00
416.68 111 - $ 60,275.26
299.37 229 - $ 40,333.51
476.88 51 - $ 70,510.08
129.90 398 - $ 11,522.52
483.00 45 - $ 71,549.86
307.10 221 - $ 41,647.23
355.29 173 - $ 49,840.06
532.00 - 4 $ 79,200.00
552.78 - 25 $ 79,200.00
365.08 163 - $ 51,503.34
477.75 50 - $ 70,658.13
332.18 196 - $ 45,909.96
311.85 216 - $ 42,454.94
343.94 184 - $ 47,909.13
232.13 296 - $ 28,902.86
265.06 263 - $ 34,500.14
140.80 387 - $ 13,376.72
305.96 222 - $ 41,453.01
238.46 290 - $ 29,978.98
121.47 407 - $ 10,090.11
365.77 162 - $ 51,621.47
567.32 - 39 $ 79,200.00
170.45 358 - $ 18,417.26
437.56 90 - $ 63,825.72
541.36 - 13 $ 79,200.00
580.05 - 52 $ 79,200.00
510.74 17 - $ 76,266.03
446.87 81 - $ 65,408.18
290.22 238 - $ 38,777.84
317.09 211 - $ 43,344.92
363.72 164 - $ 51,272.51
172.73 355 - $ 18,803.93
457.37 71 - $ 67,193.41
457.16 71 - $ 67,156.95
341.41 187 - $ 47,479.24
143.51 384 - $ 13,837.37
457.95 70 - $ 67,292.21
460.41 68 - $ 67,709.68
468.75 59 - $ 69,128.35
468.37 60 - $ 69,063.26
163.51 364 - $ 17,236.52
286.74 241 - $ 38,185.78
583.56 - 56 $ 79,200.00
327.09 201 - $ 45,046.12
289.27 239 - $ 38,615.53
96.41 432 - $ 5,829.09
411.94 116 - $ 59,469.82
260.65 267 - $ 33,750.65
454.98 73 - $ 66,786.80
495.88 32 - $ 73,739.67
288.22 240 - $ 38,437.80
401.59 126 - $ 57,709.47
568.80 - 41 $ 79,200.00
395.76 132 - $ 56,719.12
369.99 158 - $ 52,337.65
559.30 - 31 $ 79,200.00
288.67 239 - $ 38,513.65
316.13 212 - $ 43,182.24
411.24 117 - $ 59,350.42
397.95 130 - $ 57,090.91
462.47 66 - $ 68,060.49
461.53 66 - $ 67,900.31
343.63 184 - $ 47,857.87
128.91 399 - $ 11,354.23
emand) on Supply Chain Profitability (Example 13-6)

n provides the SD of profits (Cell E11),

(Cell E12), and min profit (Cell E13) for
n Cell E9. Press F9 to simulate. All
r 300 trials. Observe that decreasing
eviation of demand not only increases
(Cell E10), but also decreases the SD of
).