Filling Out the Doughnuts; The Single Period Inventory Model in Corporate Pricing Policy

Abstract

The single period inventory problem deals with goods which have a characteristically short shelf life or selling season. For this reason the inventory decision is simply how much to produce or stock in order to meet the demand of one selling period. While there are several areas of application which come to mind, perhaps the clearest example of this situation is in the newspaper industry. The problem here is to determine how many papers to supply a newsstand in order to optimize profitability. For this reason the single period inventory problem is oftentimes referred to as “The Newsboy Problem.” In this paper we describe an application of the single period inventory problem to another product which has an extremely short shelf life, donuts. The application of the model was not, however, made for the purpose of determining an optimal production plan. Rather, it was used to give the management of a highly decentralized chain of donut shops an indication as to how modifications in pricing structure could result in individual store managers making decisions which more closely paralleled the objectives of the firm. The model also gave an estimate of the increase in profitability which was possible from such modifications.