Stochastic Programming Newsvendor Problem
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Stochastic Programming: Two Stage Solution for the Newsvendor Problem
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Instructions: The objective is to determine the order size that maximizes expected return. This spreadsheet uses the OpenSolver Add-on. The Green cells denote user input, yellow are decision variablez determined by the solver, and the red cell is the problem objective.
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Retail Price (r)10
Value of the Stochastic Solution
37.50
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Cost (c)6
Value of Perfect Information
175.00
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Salvage Value (w)
2(r-c)/(r-w)0.50
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Order Quantity (x)
125
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Two Stage Stochastic Programming Solution (Maximize Expected Profit)
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ScenarioProbabilityDemandNo. OrderedNo. SoldNo. SalvagedProfit
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Low Demand0.25751257550100.00
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Medium Demand0.501251251250500.00
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High Demand0.252501251250500.00
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400.00
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Expected Value of the Mean Solution (Set Order equal to Mean Demand)
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ScenarioProbabilityDemandNo. OrderedNo. SoldNo. SalvagedProfit
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Low Demand0.2575144756925.00
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Medium Demand0.5012514412519425.00
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High Demand0.252501441440575.00
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143.75
<< Mean Demand
362.50
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Expected Value of Perfect Information (Unrealistic)
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ScenarioProbabilityDemandNo. OrderedNo. SoldNo. SalvagedProfit
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Low Demand0.257575750300.00
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Medium Demand0.501251251250500.00
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High Demand0.2525025025001000.00
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^^ Order is equal to Demand
575.00
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