MRKT 452 Lecture Notes - Lecture 3: Canadian Tire, Expected Loss, Stockout
11 Jun 2018
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Newsvendor Model
Assume that you are Canadian Tire and wish to place an order at the suppliers for Christmas
decorations. As a operations manager, the challenges are:
• Estimation of the demand (seasonal demand with high variability)
• Most of the time, they are selling the inventories at the end of the season on discount (at
lower prices than the costs).
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If they cannot sell the newly introduced product by the end of the season, they have to provide
huge discounts.
The designs are done in the company and they place the order to their suppliers in China, which
takes 3 months to receive the order.
They design the product by the end of the previous year and have a demand estimation for the
product. Based on this demand estimation, they place the order at the beginning of November
and receive it at the end of Jan-Beginning of Feb. They sell it for spring (6 months). Since the
lead time is high (3 months) and selling season is short (6 months).
The demand depends on the performance of the product and the new products introduced by
the competitors. Therefore, the demand side is highly uncertain.
First, you can introduce the product to the market and based on the demand for the first couple
of months, you can forecasst for the next months.
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Salvage value: Value of inventory left
It can be negative (ex: dealing with chemical products that need to be taken away at a certain
cost)
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