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What is the Single Period Inventory Model
A single period inventory model is a method where the order is placed only once rather than repeating the same order quantity continuously. This is due to the demand remain for a short time period. At the end of the demand, some items may have a salvage value while the value of some items deteriorates to zero.
Though the demand stay for a shorter period and the demand vary, the possibility of predicting the demand is reasonable as demand follows a probability distribution.
Here you get only one chance to increase profit or to make a mess of your balance sheet with oversupply. This is applicable to products with seasonal demand and for the products with once time demand. Or you could simply say the “perishable products”.
The single period inventory model is also known as the salvageable model, newsvendor model, and newsboy model.
Thus, this is much more popular as the “Newsboy problem”. Do you know why?
Here is the answer to “Why?”
A newspaper vendor has to place the order for the next day’s demand during the prior day for newspaper printing. If the vendor is unable to make a closer assumption to the actual demand vendor will lose. If the demand goes higher than the ordered newspaper quantity, the vendor has to bear a loss due to the loss of sales. The vendor’s revenue loss is equivalent to the revenue generated from the uncatered demand. If the ordered newspaper count is higher than the demand, the vendor’s loss is equivalent to the difference between the total procuring cost and salvage value.
Let’s consider another example. Will take an airplane run on a schedule. Here we have a limitation on changing the supply depending on the demand. However, the number of seats available per voyage is the supply. If the passengers are available to fill the total number of seats, it becomes an equilibrium point. If the available passengers are less than the available seats, excess supply becomes a loss of supply. Once the flight take off, excess seats become a perishable supply and loss cannot be compensated with another voyage. If the demand is higher than the available seats, again airline is at a loss as the excess passengers cannot be allocated to the same flight.
The same goes for the number of tickets issued in a cinema hall. The maximum number of tickets can be issued are equal to the number of seats available in the cinema hall. Or to the tram where its capacity limits to the maximum passenger loading count.
How about a flower bouquet vendor?. Once the flowers are cut down from the tree and bouquets are made, the shelf life of the flowers becomes limited. If the vendor is unable to sell the bouquets prior to flowers wither vendor ends up with a loss.
The same concept is applicable to perishable demand. Perishable demand is always a loss of revenue to the vendor.
If we consider a seasonal demand, the Christmas greetings cards become outdated in the next year if the “year” is mentioned on the card. This will have no salvage value or the vendor becomes lucky if it could be sold to a recycling plant.
Sometimes you’ll be able to sell seasonal products like decoration items next year at a discounted price. Yet, think about the inventory holding cost. You have to keep them for a year in your warehouse. This will block your cash invested on products, and require warehouse space which you can allocate to a fast-moving product. There are much of pitfalls in holding this inventory.
This is applicable to most of the food items in a pastry shop. If you are procuring sandwiches from an outsourced company, you won’t be able to make orders a few times during the morning of the same day to meet the demand fluctuation.
Now, you have a better understanding of why the “Newsboy problem” is a real problem.
What you should consider when making a decision on Single period inventory?
When making orders for single period inventory, you need to think about:
Cost of purchase
Salvage value
Product price or the Selling price
demand fluctuation
And the maximum profit you can make as you can order only once!
Marginal Analysis of Profit and Loss
A marginal analysis is an approach to identify the gain and loss with overstocks and understocks. Here the cost of overage and cost of underage are calculated to make the decision on inventory. Based on the cost and profit in two situations, you have the chance to make the decision which gives the maximum profit.
The cost of overage or the overstock cost per unit is identified by taking the difference between the purchase price and the salvage value.
The cost of underage or understock is identified with the difference between the selling price and the purchase price.
Inventory decisions can be made by comparing the benefit of two situations.
Cost of unbalanced Inventory
The cost of unbalanced inventory is always an opportunity cost to the vendor. Loss of sales, inventory holding cost, and obsolete items are a few costs items involved with an unbalanced inventory.
We have spoken in-depth on inventory management in a different article. And you may read it for a better understanding of what is inventory management, the pros and cons of inventory management, and what will happen with overstocks and understocks.