← What the Snack Machine Knows · Lesson 3 of 3
Stocking under uncertainty
A sandwich slot is filled once a week, and nobody knows the week’s demand in advance. Stock too few and a sale is missed; stock too many and a sandwich is thrown away. Each mistake has a price: a missed sale costs the profit it would have made, a wasted sandwich costs what it cost to buy.
The newsvendor rule says: stock enough to cover demand with probability (cost of a miss) ÷ (cost of a miss + cost of waste). If a sandwich costs 75¢ and sells for $1.50 with nothing back for leftovers, the two costs are equal and the aim is a half: stock the middle of the demand range. If leftovers can be sold off for 50¢, waste gets cheaper, the aim rises to three quarters, and the stock goes up.
The same rule sits behind how many papers a newsstand orders, which is where it got its name. LedgerQuest has older children move the salvage value and watch the stock move with it.
Muffins cost 50¢ and sell for $2.00; unsold ones are thrown away. What chance of covering the week’s demand should the stock aim for?