When a reordering opportunity is available during a single selling season but at

Question

When a reordering opportunity is available during a single selling season but at a higher cost (a “premium”) than for the pre-season order, this is an example of Reactive Capacity. How do the optimal (profit-maximizing) first order quantities differ with and without Reactive Capacity (the Newsvendor Model), where only one, pre-season order can take place? Hint: if you have a chance to buy during the season (= Reactive Capacity) do you think you need to buy more or less than if you don’t have that opportunity?

a) The optimal (first) order quantity without Reactive Capacity is smaller than the optimal (first) order quantity with Reactive Capacity.

b) The optimal (first) order quantity without Reactive Capacity is larger than the optimal (first) order quantity with Reactive Capacity.

c) The optimal (first) order quantities are the same.

Explanation / Answer

According to the newsvendor model more inventory has to be purchased if the purchase cost is less or equal to the expected purchase cost during the current opportunity or season. If the purchase cost is higher or equal to the expected purchase cost in the current opportunity the less inventory has to be purchased.

In the given scenario the reactive capacity is very expensive. The reordering opportunity is available at higher or premium price during the season. Hence considering the given condition the profit maximization is not possible under this reactive capacity or the opportunity to buy during the season.

Hence the Answer is a, The optimal (first) order quantity without Reactive Capacity is smaller than the optimal (first) order quantity with Reactive Capacity.

When there is expensive reactive capacity the order quantity will be maximum in other seasons. If there is no expensive reactive capacity season the order quantity will be smaller than with reactive capacity.

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