Accurate Response

n the classical news vendor problem, one must decide the best order quantity that maximizes profits given that some money is lost if all of the units do not sell and given the fact that potential profits are lost if the units sell out. In some situations, a second order can be placed once the sales period begins. Such an opportunity helps one to better match supply and demand, since the first order can be a quantity equal to the expected demand minus a selected number of standard deviations ( 2, for example) below that mean. Of course, any minimum order quantities must be taken into account.

In many industries, the variance in demand is proportional to the variance in the forecasts for that demand. This relationship even exists in stock price forecasting. When this relationship holds, it can be used to estimate the mean demand and its variance, and these values can be used in optimization models.

For seasonal goods such as winter sportswear, which has a short selling season and long lead times, a firm can do several things to better match supply and demand:

• Additional events can be held before large trade fairs in order to secure orders further in advance.

• Supplier capacity can be reserved without specifying the exact product mix. This postponement of the final mix has benefits similar to those of postponing product customization until the distribution center.

• Common parts can be used in designs in order to pool some of the variation between individual demands.