Prof. Dr.
Guido Voigt
Solution to exercise chapter 4
2) Newsvendor
Martin wants to sell poker tables during his last year of studies. His fellow student Tom
produces them for 500 €/table. As Tom is not very interested in being responsible for the
sales, he offers Martin the tables for 800 €/table with a market value of 1200 €/table.
Martin plans with a normally distributed demand with an expected value of 50 and a
standard deviation of 10 in the last year of his studies. He can only place one order for the
whole year. Since Martin will not be able to operate the poker table business after his
studies, he has to give the remaining poker tables to “Joko und Klaas” for 200 €/table.
Exercise to chapter 4 Supply Chain Management 2
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
e) What wholesale price must be charged by Tom to maximize his profits?
f) Risk sharing contracts for order coordination.
g) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 3
2a) State the assumptions of the newsvendor model.
• One sales period
• Only one order can be placed at the beginning of the period
• No reorders allowed
• At the end of the period all remaining stocks are sold to a third party (or salvage )
• lost sales
• Demand is uncertain
• Demand is exogenous, therefore not influenceable
• …
Exercise to chapter 4 Supply Chain Management 4
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
e) What wholesale price must be charged by Tom to maximize his profits?
f) Risk sharing contracts for order coordination.
g) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 5
2b) Other products? “Poker tables” a good example? What makes the model
particularly suitable in the above scenario?
Name three other products for which the newsvendor setup seems appropriate.
(perishable products)
• Fashion trade, seasonal specials: Especially seasonal goods with a long lead time
(import) and therefore, without reorders, remaining stock can only be sold in a
remnants store after the season
• Tickets, e.g. for a concert: the size of the location (Q) has to be determined before the
sales period, salvage of the not sold tickets after the event
• Christmas trees: if only one order is allowed before the sales period
• Stall at the Christmas market: Hand-made Christmas goods in seasonal colours
(therefore only for sell in one sales period)
• …
Exercise to chapter 4 Supply Chain Management 6
2b) Other products? “Poker tables” a good example? What makes the model
particularly suitable in the above scenario?
Are “poker tables” a good example for a “newsvendor product”?
• Value stable for a long time
• Not perished after one period
• Not necessarily handed out the day it is sold
• Usually not ordered once for a whole sales period
• Reorders usually possible
• Storage of the whole quantity that is needed for a period is difficult due to the size and
value
Exercise to chapter 4 Supply Chain Management 7
2b) Other products? “Poker tables” a good example? What makes the model
particularly suitable in the above scenario?
What makes the model particularly suitable in the above scenario?
• One single period due to the end of the studies
• Martin can only place his order at the beginning of the period (year of study)
• Martin is not allowed to reorder
• At the end of the period all remaining stocks are sold to “Joko und Klaas”
• Demand is uncertain (and exogenous, therefore not influenceable)
• No other cost that have an impact on the order quantity
Exercise to chapter 4 Supply Chain Management 8
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
e) What wholesale price must be charged by Tom to maximize his profits?
f) Risk sharing contracts for order coordination.
g) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 9
2c) State Martin’s optimal order quantity.
• 𝑐 = 500, 𝑤 = 800, 𝑝 = 1200, 𝑠 = 200, 𝑑~𝑁(50,10 )
• 𝑄∗ = 𝐹
𝑃
1 𝐹 𝑑
0.5
𝐶𝑅
Q* demand d
Exercise to chapter 4 Supply Chain Management 10
2c) State Martin’s optimal order quantity.
• 𝑐 = 500, 𝑤 = 800, 𝑝 = 1200, 𝑠 = 200, 𝑑~𝑁(50,10 )
Exercise to chapter 4 Supply Chain Management 11
2c) State Martin’s optimal order quantity.
• 𝑐 = 500, 𝑤 = 800, 𝑝 = 1200, 𝑠 = 200, 𝑑~𝑁(50,10 )
∗
,
∗
, , ,
, ,
Exercise to chapter 4 Supply Chain Management 12
2c) State Martin’s optimal order quantity. Symmetry of standard normal distribution,
tabulation typically only for >0.5
Exercise to chapter 4 Supply Chain Management 13
2c) State Martin’s optimal order quantity.
𝑄 ∗ = 50 + 𝐹 , 0.4 ⋅ 10
= 50 + (−0.25) ⋅ 10 = 47.5 units
Exercise to chapter 4 Supply Chain Management 14
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
What wholesale price must be charged by Tom to maximize his profits?
e) Risk sharing contracts for order coordination.
f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 15
2d) What is the SC-optimal order quantity?
• 𝑐 = 500, 𝑤 = 800, 𝑝 = 1200,
𝑠 = 200, 𝑑~𝑁(50,10 )
• SC-optimal order quantity:
𝑝−𝑐
𝑄∗ = 𝐹
𝑝−𝑠
1200 − 500 700
𝑄∗ = 𝐹 , =𝐹 , =𝐹 , 0.7
1200 − 200 1000
=𝜇+𝐹 , 0.7 ⋅ 𝜎 = 50 + 𝐹 , 0.7 ⋅ 10 = 50 + 0.52 ⋅ 10 = 55.2
Exercise to chapter 4 Supply Chain Management 16
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
What wholesale price must be charged by Tom to maximize his profits?
e) Risk sharing contracts for order coordination.
f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 17
2d) What wholesale price must be charged by Tom to maximize his profits?
• How to calculate Tom’s (the supplier’s) profit:
• For
𝑃 𝑄∗ = 𝑤 − 𝑐 ⋅ 𝑄 ∗ = 500 − 500 ⋅ 55.2 = 0
𝑝−𝑤
With 𝑄 ∗ = 𝐹 ,
𝑝−𝑠
Exercise to chapter 4 Supply Chain Management 18
See Excel File provided on
learning platform
2d) What wholesale price must be charged by Tom to maximize his profits?
wholesale price w critical fractile Q* profit Tom
500 0.70 55.2 0€
550 critical fractile:
600 𝑝−𝑤
650 =
𝑝−𝑠
700
750
800
850
900
Q∗ :
950 𝑝−𝑤
1000
=𝐹,
𝑝−𝑠
1050
1100
1150
Exercise to chapter 4 Supply Chain Management 19
2d) What wholesale price must be charged by Tom to maximize his profits?
wholesale price w critical fractile Q* profit Tom
500 0.70 55.2 0€
550 0.65 53.9 critical fractile:
600 0.60 52.5 𝑝−𝑤
650 0.55 51.3 =
𝑝−𝑠
700 0.50 50.0
750 0.45 48.7
800 0.40 47.5
850 0.35 46.1
900 0.30 44.8
Q∗ :
950 0.25 43.3 𝑝−𝑤
1000 0.20 41.6
=𝐹,
𝑝−𝑠
1050 0.15 39.6
1100 0.10 37.2
1150 0.05 33.6
Exercise to chapter 4 Supply Chain Management 20
2d) What wholesale price must be charged by Tom to maximize his profits?
wholesale price w critical fractile Q* profit Tom
500 0.70 55.2 0€
550 0.65 53.9 2693 € critical fractile:
600 0.60 52.5 5253 € 𝑝−𝑤
650 0.55 51.3 7688 € =
𝑝−𝑠
700 0.50 50.0 10000 €
750 0.45 48.7 12186 €
800 0.40 47.5 14240 €
850 0.35 46.1 16151 €
900 0.30 44.8 17902 €
Q∗ :
950 0.25 43.3 19465 € 𝑝−𝑤
1000 0.20 41.6 20792 €
=𝐹,
𝑝−𝑠
1050 0.15 39.6 21800 €
1100 0.10 37.2 22311 €
1150 0.05 33.6 21808 €
Exercise to chapter 4 Supply Chain Management 21
2d) What wholesale price must be charged by Tom to maximize his profits?
• How to calculate Martin’s (the buyer’s) profit:
𝐸 𝑃 𝑄∗ = 𝑝 − 𝑤 ⋅ µ − 𝑝 − 𝑠 ⋅ 𝑓 , 𝑧∗ ⋅ 𝜎 with 𝑧 ∗ = 𝐹 ,
• Formula: for derivation and proof see Chopra, Meindl (2013): Supply Chain
Management: Strategy, Planning and Operation, 5th Edition, Chapt. 13, p.375
∗
Using 𝐸 𝑃 𝑄 ∗
= 𝑝−𝑠 ⋅∫ 𝑑 − 𝑄 ∗ ⋅ 𝑓 𝑑 𝑑𝑑 + 𝑝 − 𝑤 ⋅ 𝑄 ∗
With 𝑑~𝒩 𝜇, 𝜎 and 𝑄 ∗ = 𝜇 + 𝑧 ∗ ⋅ 𝜎
Exercise to chapter 4 Supply Chain Management 22
2d) What wholesale price must be charged by Tom to maximize his profits?
• How to calculate Martin’s (the buyer’s) profit:
• For w = 500:
𝐸 𝑃 𝑄∗ = 𝑝 − 𝑤 ⋅ µ − 𝑝 − 𝑠 ⋅ 𝑓 , 𝑧∗ ⋅ 𝜎
With 𝑧 ∗ = 𝐹 , :
𝐸 𝑃 𝑄∗
1200 − 500
= 1200 − 500 ⋅ 50 − 1200 − 200 ⋅ 𝑓 , 𝐹 , ⋅ 10
1200 − 200
= 1200 − 500 ⋅ 50 − 1200 − 200 ⋅ 𝑓 , 0.52 ⋅ 10
= 31523
Exercise to chapter 4 Supply Chain Management 23
2d) What wholesale price must be charged by Tom to maximize his profits?
• Calculation of buyer‘s profit in Excel:
𝑝−𝑤
𝑝 − 𝑤 ⋅ 𝜇 − 𝑝 − 𝑠 ⋅ 𝑁𝑂𝑅𝑀. 𝑆. 𝐷𝐼𝑆𝑇 𝑁𝑂𝑅𝑀. 𝑆. 𝐼𝑁𝑉 ; 𝐹𝐴𝐿𝑆𝐸 ⋅ 𝜎
𝑝−𝑠
• Supply Chain profit:
𝐸(𝑃 𝑄∗ ) = 𝐸(𝑃 𝑄 ∗ ) + 𝑃 𝑄∗
Exercise to chapter 4 Supply Chain Management 24
2d) What wholesale price must be charged by Tom to maximize his profits?
wholesale price w critical fractile Q* profit Tom exp. profit Martin exp. profit SC
500 0.70 55.2 0€ 31523 € 31523 €
550 0.65 53.9 2693 € 28796 € 31489 €
600 0.60 52.5 5253 € 26137 € 31390 €
650 0.55 51.3 7688 € 23542 € 31230 €
700 0.50 50.0 10000 € 21011 € 31011 €
750 0.45 48.7 12186 € 18542 € 30728 €
800 0.40 47.5 14240 € 16137 € 30377 €
850 0.35 46.1 16151 € 13796 € 29947 €
900 0.30 44.8 17902 € 11523 € 29425 €
950 0.25 43.3 19465 € 9322 € 28787 €
1000 0.20 41.6 20792 € 7200 € 27992 €
1050 0.15 39.6 21800 € 5168 € 26968 €
1100 0.10 37.2 22311 € 3245 € 25556 €
1150 0.05 33.6 21808 € 1469 € 23277 €
Exercise to chapter 4 Supply Chain Management 25
2d) What wholesale price must be charged by Tom to maximize his profits?
profit
35000 €
30000 €
25000 €
20000 € Profit Tom
expected profit Martin
15000 €
expected profit SC
10000 €
5000 €
0€ w
500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150
Exercise to chapter 4 Supply Chain Management 26
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
What wholesale price must be charged by Tom to maximize his profits?
e) Risk sharing contracts for order coordination.
f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 27
2e) Risk sharing contracts for order coordination.
Risk sharing:
• Revenue sharing contract: relatively low wholesale price , supplier receives a share
of the buyer‘s revenue
• Buy back contract: relatively high wholesale price , supplier agrees to take back any
leftover inventory at a unit price
• What about quantity discount?
Exercise to chapter 4 Supply Chain Management 28
Exercise 2
a) State the assumptions of the newsvendor model.
b) Other products? “Poker tables” a good example? What makes the model particularly
suitable in the above scenario?
c) State Martin’s optimal order quantity.
d) What is the SC-optimal order quantity?
What wholesale price must be charged by Tom to maximize his profits?
e) Risk sharing contracts for order coordination.
f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
Exercise to chapter 4 Supply Chain Management 29
2f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
For the coordinated supply chain:
• As: 𝑤 = 1 − 𝛼 ⋅ 𝑐 and 𝛾 = 1 − 𝛼
• Critical fractile (constant):
𝑝−𝑐 1200 − 500
= = 0.7
𝑝−𝑠 1200 − 200
• Optimal order quantity:
𝑄∗ = 𝐹 , 0.7 = 55.2
Exercise to chapter 4 Supply Chain Management 30
2f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
• Exp. profit of the supply chain:
𝐸 𝑃 𝑄∗ = 𝑝−𝑐 ⋅ 𝜇 − 𝑝 − 𝑠 ⋅ 𝑓 , (𝐹 0.7 ) ⋅ 𝜎
• Exp. profit of Martin:
𝐸 𝑃 𝑄∗ =𝛾⋅𝐸 𝑃 𝑄∗ or 𝐸 𝑃 𝑄∗ = 𝛾 ⋅ 𝑝 − 𝑤 ⋅ 𝜇 − 𝛾 ⋅ 𝑝 − 𝑠 ⋅ 𝑓 , (𝐹 0.7 ) ⋅ 𝜎
• Exp. profit of Tom:
𝐸 𝑃 𝑄∗ =𝐸 𝑃 𝑄∗ −𝐸 𝑃 𝑄∗ or 𝐸 𝑃 𝑄 ∗ = 1−𝛾 ⋅𝐸 𝑃 𝑄∗
Exercise to chapter 4 Supply Chain Management 31
2f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
wholesale price w share of profit of Martin, 𝛾 critical fractile Q* expected profit Tom expected profit Martin expected profit SC
0 0.00 0.70 55.2 31523 € 0€ 31523 €
20 0.04 0.70 55.2 30262 € 1261 € 31523 €
40 0.08 0.70 55.2 29001 € 2522 € 31523 €
60 0.12 0.70 55.2 27740 € 3783 € 31523 €
80 0.16 0.70 55.2 26479 € 5044 € 31523 €
100 0.20 0.70 55.2 25218 € 6305 € 31523 €
120 0.24 0.70 55.2 23958 € 7566 € 31523 €
140 0.28 0.70 55.2 22697 € 8826 € 31523 €
160 0.32 0.70 55.2 21436 € 10087 € 31523 €
180 0.36 0.70 55.2 20175 € 11348 € 31523 €
200 0.40 0.70 55.2 18914 € 12609 € 31523 €
220 0.44 0.70 55.2 17653 € 13870 € 31523 €
240 0.48 0.70 55.2 16392 € 15131 € 31523 €
250 0.50 0.70 55.2 15762 € 15762 € 31523 €
260 0.52 0.70 55.2 15131 € 16392 € 31523 €
280 0.56 0.70 55.2 13870 € 17653 € 31523 €
Exercise to chapter 4 Supply Chain Management 32
2f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
wholesale price w share of profit of Martin, 𝛾 critical fractile Q* expected profit Tom expected profit Martin expected profit SC
220 0.44 0.70 55.2 17653 € 13870 € 31523 €
240 0.48 0.70 55.2 16392 € 15131 € 31523 €
250 0.50 0.70 55.2 15762 € 15762 € 31523 €
260 0.52 0.70 55.2 15131 € 16392 € 31523 €
280 0.56 0.70 55.2 13870 € 17653 € 31523 €
300 0.60 0.70 55.2 12609 € 18914 € 31523 €
320 0.64 0.70 55.2 11348 € 20175 € 31523 €
340 0.68 0.70 55.2 10087 € 21436 € 31523 €
360 0.72 0.70 55.2 8826 € 22697 € 31523 €
380 0.76 0.70 55.2 7566 € 23958 € 31523 €
400 0.80 0.70 55.2 6305 € 25218 € 31523 €
420 0.84 0.70 55.2 5044 € 26479 € 31523 €
440 0.88 0.70 55.2 3783 € 27740 € 31523 €
460 0.92 0.70 55.2 2522 € 29001 € 31523 €
480 0.96 0.70 55.2 1261 € 30262 € 31523 €
500 1.00 0.70 55.2 0€ 31523 € 31523 €
Exercise to chapter 4 Supply Chain Management 33
2f) Calculate the profit shares and the expected profit of Martin, Tom and the supply
chain for different for a revenue sharing contract.
35.000 €
30.000 €
25.000 €
Exp. profit
20.000 € Tom
Exp. profit
15.000 € Martin
Exp. profit
10.000 € SC
5.000 €
0€
0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400 420 440 460 480 500
Exercise to chapter 4 Supply Chain Management 34
Literature
Chopra, Meindl (2013): Supply Chain Management: Strategy, Planning and Operation, 5th Edition
Exercise to chapter 4 Supply Chain Management 35