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Unreliable Newsboy Problem with a forecast update

Summary of a research paper that tackles the problem of coming up with an optimum ordering policy for a seasonal product with a short selling season
Chirag Chadha (110110040) Nawroz Minsaria (11D100007) Ritesh Khichadia (110100001) Tej Vaidya (11D100004) Ritwik Topkar Amit Sarkar (110100067) Pratyush Nalla (110100085) Parveen Dhillon (110100093)

Extensively studied research problem

1 Places 2 sequential orders 2

Client Firm

2 nonidentical reliable suppliers

for a seasonal product

Before the start of selling season

Extensively studied research problem

Process Timeline:
1st stage order Observe & analyze market signals

Update Demand

2nd stage order

eg:Market trends, advance booking, similar preseason product sales observed between the 2 stages

Inferences from previous research

Previous research assumed that suppliers are reliable. They 1. Identified conditions when it is optimal to delay order till 2nd stage 2. Inferred that improved forecast updating process makes a firm less sensitive to lead time uncertainty
But is the assumption that suppliers are reliable, valid?

Suppliers are not reliable because of :

1. Quality Problems 2. In transit losses 3.

Supplier mandated order rationing

effect of uncertain supply Optimal inventory policy

Further research was done to identify


The researchers 1. concluded that more reliable but expensive supplier = optimal in some situations 2. computed Economic Order Quantity(EOQ) for multiple suppliers 3. for the unreliable newsboy problem: if demand uncertainty = low, optimal = diversify supply base If not the case, place order with low cost supplier 4. Average newsboy order quantity = higher with unreliable suppliers than otherwise 5. Considered 2 suppliers under EOQ and newsboy situations 6. attempted unreliable newsboy problem, with multiple orders placed simultaneously with suppliers

Uncertain Supply

What this paper investigates

It investigates effect of
Supply uncertainty characteristics ON optimal order quantities Computes like: 1. minimum order guarantee 2. max supply yield


with 1. unreliable suppliers 2. demand forecast update

Optimal order policy, to minimize supply chain costs which includes: 1. purchase cost 2. unmet demand penalty cost 3. salvage cost 4. holding cost

Process Timeline

Assume: Suppliers provide minimum order guarantee & that supply is constrained by maximum yields

q1 , q2 = orders placed at stages 1 , 2 respectively Demand while placing a 1st stage order is assumed stochastic (non-deterministic) Assume that true demand is revealed after a forecast update before the placement of a 2nd stage order Second stage supply uncertainty is represented by a general distribution

Optimal Ordering Policy

Optimal Ordering Policy

Using the expressions obtained for the cost function, the research paper proves the following

Optimal Ordering Policy

Impact of minimum order guarantee under uniformly distributed demandassume that demand is uniformly
distributed between a1 and a2
It is inferred that minimum order guarantee influences optimal order quantities and total supply chain costs

Extensive numerical experiments suggest that Lemma 3 holds true for normal and lognormal demand distributions. A unit improvement in the minimum order guarantee of a first stage supplier can result in a higher yield adjusted first stage order quantity and a lower cost for a firm, compared to a unit improvement in the first stage maximum yield percentage, although both increase the mean of the first stage supply yield. It happens because the increase in the first stage minimum order guarantee also reduces the first stage supply variability. This illustrates the importance of increasing the minimum order guarantee from a first stage supplier.

In contrast to a simultaneous ordering process used before a selling season it may be interesting to investigate how a n-stage sequential ordering process can be used as a mechanism to mitigate the supply risks of an unreliable newsboy.
Nurani et al. studied the relationship between process quality, optimal production policy and item issuing policy for an imperfect production process. It will be worthwhile to conduct a similar study.