I was hoping you could help us with this problem- The Manager at a large manufac

Question

I was hoping you could help us with this problem- The Manager at a large manufacturer is planning warehousing needs for the coming year she predicts that warehousing needs will be normally distributed with a mean of 500,000 sq ft and an SD of 150,000 the manager can obtain a full year lease at 0.50 cents a sqft/month or purchase space on the spot market for 0.70 cents per sqft per month how large an annual contract should the manager sign. This comes from chapter 16 question 5 of the Supply Chain Management Strategy, planning, and operations 6th edition and I got the answer but I do not understand why we need to do 1-p* in the book it says to only do p*. Can you help?

Explanation / Answer

This is a newsvendor problem (warehouse space leasing is a perishable service)

Underage Cost, Cu = 0.7-0.5 = 0.2 cents

Overage Cost, Co = 0.5 cents

Critical ratio = Cu/(Cu+Co) = 0.2/(0.2+0.5) = 0.2857

z-statistic = NORMSINV(0.2857) = -0.566

Optimal space that she should contract = 500000+(-0.566)*150000 = 415,101 sqft

So, the manager should sign an annual contract for 415,101 sqft

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.