Revenue management using Littlewood’s rule
This posting contains two example problems on Revenue
management using Littlewood’s rule.
1. A trucking firm has current daily capacity of 200,000
cubic feet. A large manufacturer is willing to purchase the entire capacity at
$0.10 per cubic foot per day. The manager of this trucking firm has observed
that on the spot market, trucking capacity sells for an average $0.13 per cubic
foot. Demand, however, is not guaranteed at this price. The manager forecasts
daily demand on the spot market to be normally distributed with mean 60,000
cubic feet and a standard deviation of 20,000. How much trucking capacity
should the manager save for the spot market?
2. A manager at a larger manufacturer is planning warehouse
e needs for the coming year. She predicts that warehousing needs will be
normally distributed with a mean of 500,000 square feet and a standard
deviation of 150,000 sq feet. The manager can obtain a full year lease at $0.50
per square feet per month or purchase storage space on the spot market. Spot
market rates have averaged $0.70 per square foot per month. How large an annual
contract should the manager sign?
