Teaching the Newsvendor Model Using Spreadsheet Models
Sam Choi
Zeigler College of Business, Bloomsberg University of PA, USA
Volume 15: 2021, pp. 173-200; ABSTRACT
The newsvendor model is one of the most important and popular teaching topics for operations and supply chain management classes. The optimal solution for this model is a closed-form that uses the critical fractile which can be a sort of customer service level (CSL) and rounding-up rule. Students who lacked quantitative skills were not able to understand the meaning of critical fractile to calculate the expected profit. Using this teaching brief, however, students got a better sense of the concept that both cost structure and demand pattern affect the optimal solution by testing the combinations of three demand patterns (i.e., symmetric, right-skewed, and left-skewed) and three cost structure cases (i.e., underage cost = overage cost, underage cost > overage cost, and underage cost < overage cost) numerically. Using this scenario-based approach, instructors can better relate the insights gained from the numerical study to the newsvendor solution. Instructors can then more easily show students how to compute the optimal order quantity and its related expected profit using spreadsheet models. When CSL, defined by the probability of satisfying demand, is given, students can find the corresponding order quantity and its expected profit. For any offered order quantity, students were able to get CSL as well as determine the expected profit. Students need to understand the relationships between order quantity, CSL, and the expected profit. Comparative studies for successive semesters demonstrated the effectiveness of our approach, as students’ quiz performance significantly improved, resulting in final letter grade improvement.
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