MS&E 107 Lecture Notes - Lecture 5: Risk Management, Ergodicity, Standard Deviation
13 Oct 2016
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Mindle 4 - plans based on uncertain assumptions. Red words for mindle: jensen"s inequality, function of random variables. Demand for penicillin: uncertain (36 months predicted but not expecting a huge spike) Average demand is 5 units, so stock 5. If actual demand is 4, then the stuff goes to perish and the company loses profit due to expiration costs. If the demand is above the average, we need to transport the additional products and we lose money due to additional shipping costs. Poll: using point estimate for demand in the inventory example: provides a quick way to get the approximate average cost, gives the correct average cost but misses the variation, other. Answer: costs cannot be negative - if undersold, expiration costs increase, if oversold, then delivery costs increase (costs rarely 0! Excel: initialize the model, number of trials, define outputs, name the cell demand, pm sheet comes up, can graph data too.
