Supply Chain Management – Term III

Assignment – 1

Question
Green Thumb, a manufacturer of lawn care equipment, has introduced a new product. The anticipated
demand is normally distributed with a mean of = 100 and a standard deviation of = 40. Each unit costs
$150 to manufacture and the introductory price is to be $200 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
$50 each. It costs $20 to hold a unit in inventory for the entire season. How many units should Green
Thumb manufacture for sale? What is the expected profit from this policy? please show equation and
values for the expected profit from this policy? On average, how many customers does Green Thumb
expect to turn away because of the stockout?

Solution
Given Data

Cost W $150
Retail Price R $200
Expected Demand µ $100
Standard Deviation of demand σ 40
Salvage Value S $50-$20 = $30

Cost of Understocking Cu = R-W = 200 – 150 = 50

Cost of Overstocking C0 = W-S = 150 – 30 = 120

𝐶𝑢 50
P(D ≤ Q) = 𝐶𝑢+𝐶𝑜 = 50+120 = 0.2941

P(D ≤ Q) = 0.2941. Hence Green Thumb expects to turn away (1-0.2941)*100% = 70.59% of the
customers as P(D ≤ Q) = 0.2941 refers to the cycle service level and 1- P(D ≤ Q) gives the percentage
of the cycles that have stockout thereby turning away of the customers.

Order Quantity
𝐶𝑢 50
P(D ≤ Q) = 𝐶𝑢+𝐶𝑜 = 50+120 = 0.2941  Z = NORM.INV(0.2941,0,1) = - 0.54 (using the Z table,
taking mid value between -0.52 and -0.56)

Order Quantity = µ + z σ = 100-0.54*40 = 78.4 units

Order Quantity = 78.4 units

Thus, Green Thumb should manufacture 78.4 units (approximately) for sale.

Expected Profits

E(Profit) = (R-W) E(D) – [(R-W) E(Lost-Sales) + (W-S) E(Leftover Inventory)]

E(Lost – Sales) = 𝜎𝐿(𝑧) = 40 *L(-0.54) = 40*0.726 (from Loss function table, mid value of 0.740 and
0.712)
E(Lost – Sales) = 29.04

E(Demand) = E(Sales) + E(Lost – Sales)  E(Sales) = E(Demand) – E(Lost – Sales)

E(Sales) = 100 - 29.04 = 70.96

Order Quantity = E(Sales) + E(Inventory Leftover)  E(Inventory Leftover) = Order Quantity - E(Sales)

E(Inventory Leftover) = 78.4 – 70.96 = 7.44

From Eqn I,

E(Profit) = (R-W) E(D) – [(R-W) E(Lost-Sales) + (W-S) E(Leftover Inventory)]

= 50*100 – 50*29.04 - 120 *7.44

E(Profit) = 2655.2

Thus, the expected profits from the policy is $2655.2

Fill Rate

Fill Rate = Expected Sales / Expected demand = 70.96/100

Fill Rate = 70.96%