Single Period Inventory Model

The newsboy model was found to be more effective when the managers face the one-time inventory buys. There was a classical problem faced by the vendors of the newspaper who gave birth to this name. With no possibilities of reordering the vendors are bound to place a one-time order for the next day’s papers. The inability to recognize the demand for the next day newspaper made the vendors to either land up in too much ordering or in not enough situations. The possibility of being overstocked is faced by the vendor when they order too much and the problem of being understocked when it is the other way round. The interest for balancing between the two costs arouse among the vendors inorder to make good profits.

The cost of the leftover product which is of any salvage value is included in the cost of being overstocked. There are possibilities of the salvage value to reach a negative point though in the cases of the useless products and they have to dispose the excess amount. Even there would be cost involved in disposing things for example; if the newsboy is going to dump the leftovers then he would charge a amount for taking them there. On the other hand, there is a lost profit when they are understock. In addition the loss of profit, the vendors would also lose the goodwill of the customer.

The inventory control policies are the basic framework of the inventory analysis in a situation where the inventory decision would be limited. Another good example would be the fresh cut Christmas tree example which is more similar to the newspaper vendor. The Christmas trees which are ordered for  the thanksgiving festival would be delivered to the vendor well the festival and the vendor has to sell it completely during the festival times. If all the trees are sold out before Christmas he won’t be able to order trees again. Similarly if there are some Christmas trees left it would become valueless after the festival since no would be there to buy it after Christmas.

Situations like this make the manager to land up in a state of dilemma. The result is the marginal analysis approach which compare the marginal profit when one more unit is sold is compared with the marginal loss that is occurred. With some algebra the analysis is carried out to ensure safety. This idea of marginal analysis is found to be helpful to find safety even in the multiple period models.