TABLE 9-8 Costs for Mintendo/We “R” Toys

Sandra, concerned about controlling costs during the periods of surging demand over
the holidays, proposes to Bill that the price be lowered by $5 for the month of September.
This would likely increase September’s demand by 50 percent due to new customers being
attracted to Game Girl. In addition, 30 percent of each of the following two months of
demand would occur in September as forward buys. She believes strongly that this
leveling of demand will help the company.
Bill counters with the idea of offering the same promotion in November, during the
heart of the buying season. In this case, the promotion increases November’s demand by
50 percent, owing to new customers being attracted to Game Girl. Additionally, 30 percent
of December’s demand would occur in November as forward buying. Bill wants to
increase revenue and sees no better way to do this than to offer a promotion during the
peak season.

Questions

1. Which option delivers the maximum profit for the supply chain: Sandra’s plan, Bill’s plan, or
no promotion plan at all? Assume ending inventory of 0.
2. How does the answer change if a discount of $10 must be given to reach the same level of
impact that the $5 discount received?
3. Suppose Sandra’s fears about increasing outsourcing costs come to fruition and the cost rises
to $22/unit for subcontracting. Does this change the decision when the discount is $5?

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 CASE STUDY
Promotion Challenges at Gulmarg Skis
Management at Gulmarg Skis was surprised in the previous season when a competitor,
Kitz, discounted their skis by $50 in October. In a market in which discounting was rare,
this was an unusual move by Kitz. As a result, Gulmarg saw a significant drop in sales
between October and January. The company did not want to be caught unprepared for the
upcoming season and was planning its response. Two alternatives being considered by
Gulmarg were to promote in October or December. Gulmarg could not precisely predict
what Kitz would do regarding promotions but felt that Kitz was likely to repeat its October
promotion, given its success in the previous year.
Gulmarg and Kitz competed in high-performance skis and sold direct to end consumers.
The companies prided themselves on outstanding craftsmanship, using only the best
materials. Both were known for the high quality of their skis and the fact that customers
could design their own top sheet. Although each company had a loyal following, there
was a significant fraction of customers who were happy to buy skis from either. It is this
group that the two companies were competing for through price discounts.
The sale of skis was highly seasonal, with all sales occurring between October and
March, as shown in Table 9-9. Production capacity at the manufacturing plant was limited
by the number of employees that Gulmarg hired. Employees were paid $15/hour for
regular time and $23/hour for overtime. Each pair of skis required 4 hours of work from
an employee. The plant worked 20 days a month, 8 hours a day on regular time. Overtime
was restricted to a maximum of 40 hours per employee per month. Gulmarg employed a
total of 60 workers and felt that it could not let any of them go, even in months when
demand was below the capacity provided by 60 workers. Given the high skill
requirements, the company had difficulty finding suitable people and as a result could hire
only up to a maximum of 10 temporary employees. In other words, the number of
employees could fluctuate between 60 and 70. Hiring each temporary employee cost
$500, and letting each one go cost another $800.

TABLE 9-9 Demand Forecast for Gulmarg Skis

Each pair of skis used material worth $300, mostly in the form of expensive carbon
fiber, plastic, and alloys. Carrying a pair of skis in inventory from one month to the next
cost $10. Given the seasonal nature of demand, Gulmarg started October with an
inventory of 2,000 pairs of skis and preferred to end in March with no inventory to carry
over. Any leftover inventory at the end of March cost Gulmarg the equivalent of $500 a
pair because of the discounting required to sell it. Customers were not willing to wait for

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