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Inventory Management and Risk Pooling - Single stage inventory - Single period models

4 important questions on Inventory Management and Risk Pooling - Single stage inventory - Single period models

What is specific for single period models?

There is only one product and not in stock.

How is the optimal order quantity reached?

The optimal order quantity is not necessarily equal to forecast, or average, demand. The optimal quantity depends on the relationship between marginal profit achieved from selling an additional unit and marginal cost. More importantly, the fixed cost has no impact on the production quantity, only on the decision whether to produce or not. Thus, given a decision to produce, the production quantity is the same independently of the fixed production cost.

What happens to profit when order quantity increases?

As the order quantity increases, average profit typically increases until the production quantity reaches a certain value, after which the average profit starts decreasing.

What happens to risk when production quantity increases?

As production quantity increases, the risk - that is, the probability of large losses - always increases. At the same time, the probability of large gains also increases. This is the risk/reward trade-off.

The question on the page originate from the summary of the following study material:

Designing and Managing the Supply Chain | 9780071270977 | David Simchi Levi

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