Exam 13: Determining the Optimal Level of Product Availability

Scenario 13.1 - Nefarious The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20. -What is the optimal quantity of boxes for the professor to bring back home to sell to his friends?

Scenario 13.1 - Nefarious The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20. -The professor's suitcase has room for 50 boxes of souvenirs. How many boxes does he expect to have left once his friends have bought what they want?

Scenario 13.1 - Nefarious The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20. -Naturally, the professor will purchase the optimal number of boxes. (He's had a course or two in supply chain management and knows this model well.) What is his expected profit from purchasing the optimal number of boxes?

The cost of understocking is denoted by C_U and is the margin lost by a firm for each lost sale because there is no inventory on hand.

Whether the optimal level of availability is high or low depends on where a particular company believes they can maximize profits.

A high level of product availability requires

Scenario 13.2 - Fish or Chicken The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos. -The taco stand manager decides to make exactly the same quantity of fish tacos as chicken tacos. If time and capacity are not an issue, and none of the other parameters in the scenario are changed, what would the retail price of chicken tacos need to be to make the optimal order quantities identical?

________ allows a firm to increase profits and better match supply and demand if the firm produces a large variety of products whose demand is unpredictable, not positively correlated, and is of about the same size.

A supply chain can use a high level of product availability to improve its responsiveness and attract customers.

The cost of overselling is denoted by C_O and is the loss incurred by a firm for each unsold unit at the end of the selling season.

A manufacturer of lawn care equipment has introduced a new product. The anticipated demand is normally distributed with a mean of α = 100 and a standard deviation of α = 50. Each unit costs $75 to manufacture and the introductory price is to be $125 to achieve this level of sales. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed of in a fire sale for $25 each. It costs $10 to hold a unit in inventory for the entire season. What is the cost of overstocking? What is the cost of understocking? What is the optimal cycle service level? How many units should be manufactured for sale?

In volume-based tailored sourcing,

Explain the relationship between product availability and supply chain profitability.

The costs of overstocking and understocking have a direct impact on

Scenario 13.2 - Fish or Chicken The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos. -Faced with a 3000 taco capacity constraint, what is the profit resulting from an optimal mix of fish and chicken tacos?

The margin lost from current as well as future sales if the customer does not return should be included in

A company that uses a more expensive short lead time supplier as a backup for a low cost, long lead time supplier is using

The costs of overstocking and understocking have a direct impact on both the optimal cycle service level and profitability.

As lead times decrease, supply chain managers are able to

If quick response allows multiple orders in the season, profits increase and the overstock quantity increases.