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Demand forecast is 21,734

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1. Demand forecast is 21,734. No uncertainty (standard deviation 0).
   1. How much would you order?
   2. In addition, you want 500 units of safety stock. How much would you order?
2. Demand forecast is 21,734 units with standard deviation 3,421. You order 25,000 units.
   1. What is the safety stock?
   2. What is the probability of a stockout? (Use the Norm.Dist function in Excel)
   3. How many units should you order so that the service level is 99%?
   4. For c), what is the corresponding safety stock?
3. A product costs $140. You sell it for $210. Any leftover inventory goes to a liquidator who pays you $120 per unit.

a) The “upside” of ordering more: What is the loss on one unit if we stock out?

i. Is this the “underage” or the “overage”?

b) The “downside” of ordering less: What is the loss on one unit if we have excess inventory?

i. Is this the “underage” or the “overage”?

c) What is the service level that balances the upside and the downside (aka “critical fractile”)?

d) Demand forecast has mean 10,000 and std dev 2,000.

i. What is the order size?

ii. What is the safety stock?

4. Repeat 3., expect now you pay the liquidator $5 to take them off your hands.

5. In plain English, without using technical jargon, explain why the safety stock for 3 and 4 are different.

6. You are the chief buyer for housewares at a large department store. You face stiff competition from specialty retailers and increasingly online retailers that carry imported cooking and dining articles. To meet the specialty store competition, you have reorganized your housewares department to create a “store within a store” that has the same ambiance as your competitors’ stores. To kick off you concept, you plan a one-month promotion that features on several special items, including a delightful imported Riviera Sky cakeware dish. (The Riviera Sky dish leaves a “sun” image on the sides of the cake.) These cakeware dishes must be ordered six months in advance. Any leftover inventory after the promotion will be sold a discount chain at a reduced price.

You have collected pricing and cost data in the table below, to help you decide how many of the Riviera Sun cakeware dishes to order. You expect total demand will be normally distributed with mean 860 and standard deviation of 320. The promotion price is $40. Any leftover cakeware dishes will be sold to the discount chain for $10.

Riviera Sun Cakeware Dish

Purchase Price $16.00

Shipping cost $3.00

Handling cost* $0.80
Warehouse surcharge** $1.10
Total Cost $20.90
*Estimate of variable cost for the receiving process for one dish (uncrating, cleaning, and staging in the housewares department)
**Allocation of fixed overhead expenses in the shipping and receiving department.

a) Suppose 1100 imported Riviera Sun cakeware dishes are ordered. What is the probability that the department store has enough cakeware dishes to meet all of the demand?

b) How many Riviera Sun cakeware dishes should you purchase?

c) You are concerned about customer service. In particular, you perceive there is a loss of goodwill of $8 for every customer who travels to the store to purchase the Riviera Sun cakeware dish but is unable to do so because of a stockout. Now how many Riviera Sun baking dishes should you purchase?