Indian Institute of Management Bangalore

Supply Chain Management

Case writeup submission

Will’s Lifestyle in India

Submitted To:

Prof. Jishnu Hazra

Indian Institute of Management, Bangalore

Group No. - 02

Roll No Name
2311207 Shreya
2311206 Madhulika Jadhav
2311007 Purva Belange
2311556 Vishakha Ghadi
2311400 Ashish Mohite
2311235 Prasad Nagarale
 For all analysis assume that the margin associated with internal production is 30% (of
cost) per style and the average cost of overstocking is 10% (of cost). Thus, a shirt will
have a retail price of Rs. 1300 if it has a cost of Rs. 1000 and a cost of overstocking of
Rs. 100.

Q1. Consider the case when LRBD sources from a third party (as was the case prior to
2003). The third party has a unit cost which is Rs. 50 per style lower than the cost
implied in Exhibit 7. The retailer has to place a single order (before the selling season,
obviously) and a minimum lot size of 2000 units per style. What would be the order
size for each of the style? Assume Wills Lifestyle will place orders for all style (it
cannot be zero for some style).

Inhouse Production Cost = Sales Price / (1+margin) = SP / 1.3

3rd Party Production Cost = (Sales Price / (1+margin))-50 = (SP / 1.3)-50

Co = (3rd Party Production Cost) * 10%

Cu = Sales Price – 3rd Party Production cost

Critical Ratio = Cu / (Cu + Co)

Q* = μ + σ * z ....... where z is the z-value calculated from the Z table for each style using
the Critical Ratio

Since Third Party Vendors do not take orders for quantity below 2000 for a particular style
and Q* is less than 2000 for ‘Regent Bias’ and ‘C Stretch’, Actual order quantity for those
will be 2000 (Min order qty).

Sale internal 3rd Party Optimum Actual

Styles Mean Std Dev Critical
Price production Production Cu Co Z value Order Order
(µ ) (σ ) Ratio
(R) Cost Cost Quantity (Q*) Quantity

Sun Orange 1400 3680 2097 1076.92 1026.92 373.08 102.69 0.7842 0.7865 5329 5329
SS Linen 1300 3551 2276 1000.00 950.00 350.00 95.00 0.7865 0.7943 5359 5359
Sunray Stripe 2000 1457 775 1538.46 1488.46 511.54 148.85 0.7746 0.7541 2041 2041
Regent Bias 2000 1065 610 1538.46 1488.46 511.54 148.85 0.7746 0.7541 1525 2000
Italian Dobby 1500 3441 1115 1153.85 1103.85 396.15 110.38 0.7821 0.7793 4310 4310
V Seamed 2000 1644 911 1538.46 1488.46 511.54 148.85 0.7746 0.7541 2331 2331
Delicate
1600 2316 697 1230.77 1180.77 419.23 118.08 0.7802 0.7729 2855 2855
Dobby
 C Stretch 1700 1528 338 1307.69 1257.69 442.31 125.77 0.7786 0.7675 1787 2000
Tue Purples 2000 1569 747 1538.46 1488.46 511.54 148.85 0.7746 0.7541 2132 2132
Pristine CD 1500 3795 1982 1153.85 1103.85 396.15 110.38 0.7821 0.7793 5340 5340

Then we have calculated z for a particular Q using z = (Q- μ)/ σ and used Loss function table
to calculate L(z)

Expected Lost Sales E(L) = σ * L(z)

Expected Sales E(S) = μ - E(L)

Expected Leftover Inventory E(I) = Q*- E(S)

Expected Profit E(P) = (Profit Margin* Expected Sales) - (Overstocking Cost*Expected

Leftover Inventory) = (R-W) * E(S) - (W-S) * E(l)

Sale Std Produ- Actual Z for Std Loss Exp. Exp. Leftover Expected
Styles Price Dev ction Order Expected Function Loss Sales Inventor Profit
(R) (σ ) Cost Quantit lost sales L(z) E(L) E(S) y E(I)
y
Sun Orange 1400 2097 1077 5329 0.786 0.123 258 3421 1907 1080744
SS Linen 1300 2276 1000 5359 0.794 0.121 276 3274 2084 948130
Sunray Stripe 2000 775 1538 2041 0.754 0.130 101 1356 685 591665
Regent Bias 2000 610 1538 2000 1.532 0.027 17 1048 476 465368
Italian Dobby 1500 1115 1153 4310 0.779 0.124 139 3302 1008 1196846
V Seamed 2000 911 1538 2331 0.754 0.130 119 1525 805 660360
Delicate Dobby 1600 697 1230 2855 0.772 0.126 88 2228 626 860120
C Stretch 1700 338 1307 2000 1.396 0.037 13 1515 272 636123
Tue Purples 2000 747 1538 2132 0.754 0.130 97 1472 661 654508
Pristine CD 1500 1982 1153 5340 0.779 0.124 247 3548 1792 1207758
Total 8301625

b) What happens if the supplier only offers a total capacity of 25,000 units but there is
no minimum lot size per style?

This is an optimization problem as follows:

Decision Variables:

Q1: Quantity for Sun Orange style

Q2: Quantity for SS Linen

…………..
Q10: Quantity for Pristine CD

Objective Function:

Max (Total expected profit) = Max å (Ri-Wi) * E(Si) - (Wi-Si) * E(li)

Constraints:

E(l)i >= 0, where i = 1 to 10, numbers refer to the styles

å Qi <= 25000

Optimal Expected Expected

Style Expected Cost
Quantity Revenue Profit

C Stretch 1486 2524704 1869041.46 655662.4

Delicate Dobby 2229 3565124 2632028.76 933095.5
Italian Dobby 3303 4953041 3646111.23 1306930
Pristine CD 3549 5322040 3917657.42 1404383
Regent Bias 986 1971557 1467656.07 503900.6
SS Linen 3275 4257092 3111279.82 1145812
Sun Orange 3423 4790836 3515257.77 1275578
Sunray Stripe 1357 2712386 2019962.46 692423.1
Tue Purples 1472 2943731 2191035.43 752695.2
V Seamed 1526 3050709 2271488.39 779220.5
Total 22606 9449700

Inference:

When we put a restriction on total order quantity < 25000 and removed style-wise
minimum order quantity, overall profit increased to 9,449,700 from 8,301,625.

This means that it is better to have some underutilized styles for better profit as exceeding
the optimal order values found in 1b causes the overstocking cost for some styles to
increase which decreases the overall profit.

Even though we are putting restriction on total order quantity, profit is increasing due to
reduction in cost of overstocking. Cost of overstocking is reduced due removal of
minimum order (2000) restriction for two styles and also optimized order quantity.
 Q2. Now consider the process post-2003. LRBD divides the sales period or season (for
example, summer selling season) into six sub-periods and arranges for multiple
replenishments after bringing in an initial order quantity. Assume that each sub-
period averages about one-sixth of the season’s demand. What initial order quantity
(for each style) should LRBD place?

Period 1
Optimum
Standard Quantity Lost Expected Leftover
Sale Price Mean Order
Deviation Ordered Sales Sales Inv
Quantity
Sun Orange 1400 613 856 1255 1255 46 567 688
SS Linen 1300 592 929 1289 1289 50 542 747
Sunray Stripe 2000 243 316 480 800 17 226 574
Regent Bias 2000 178 249 364 800 13 164 636
Italian Dobby 1500 574 455 915 915 24 549 366
V Seamed 2000 274 372 553 800 20 254 546
Delicate Dobby 1600 386 285 599 800 15 371 429
C Stretch 1700 255 138 358 800 7 247 553
Tue Purples 2000 262 305 490 800 16 245 555
Pristine CD 1500 633 809 1239 1239 43 589 650

How would you (qualitatively) decide on the replenishment in the second, third, …,
and sixth sub-period? The minimum lot size is 800 units per style.

The problem solved for six sub periods indicates that each period is an individual
newsvendor problem. When the demand is divided into 6 sub periods, then optimal order
quantity for each period should be decided such that it results in minimum excess
inventory. This could be achieved by using the closing inventory of previous period as
opening inventory for subsequent period, considering the constraint on minimum order
size of 800, every time the requirement is less than 800, we have to order 800 but if that is
excess it would be carried over to the next period thereby satisfying the demand in next
period and minimizing holding cost. Moreover, if the demand is greater than 800 (after
excluding opening inventory), then it would exactly satisfy the demand resulting in 0
leftover.

Period 2
 Expected Opening Quantity Closing
Sales Inv Ordered Inventory
Sun Orange 501 688 0 187
SS Linen 470 747 0 277
Sunray Stripe 201 574 0 373
Regent Bias 145 636 0 491
Italian Dobby 514 366 800 652
V Seamed 225 546 0 321
Delicate Dobby 349 429 0 81
C Stretch 237 553 0 316
Tue Purples 221 555 0 333
Pristine CD 526 650 0 124

Period 3
Expected Opening Quantity Closing
Sales Inv Ordered inventory
Sun Orange 501 187 800 486
SS Linen 470 277 800 607
Sunray Stripe 201 373 0 171
Regent Bias 145 491 0 346
Italian Dobby 514 652 0 138
V Seamed 225 321 0 95
Delicate Dobby 349 81 800 532
C Stretch 237 316 0 80
Tue Purples 221 333 0 112
Pristine CD 526 124 800 397

Period 4
Expected Opening Quantity Closing
Sales Inv Ordered inventory
Sun Orange 501 486 800 785
SS Linen 470 607 0 137
Sunray Stripe 201 171 800 770
Regent Bias 145 346 0 201
Italian Dobby 514 138 800 424
V Seamed 225 95 800 670
Delicate Dobby 349 532 0 183
C Stretch 237 80 800 643
Tue Purples 221 112 800 690
Pristine CD 526 397 800 671
 Period 5
Expected Opening Quantity Closing
Sales Inv Ordered inventory
Sun Orange 501 785 0 284
SS Linen 470 137 800 467
Sunray Stripe 201 770 0 569
Regent Bias 145 201 0 56
Italian Dobby 514 424 800 711
V Seamed 225 670 0 445
Delicate Dobby 349 183 800 635
C Stretch 237 643 0 406
Tue Purples 221 690 0 469
Pristine CD 526 671 0 145

Period 6
Expected Opening Quantity Closing
Sales Inv Ordered inventory
Sun Orange 501 284 800 583
SS Linen 470 467 800 797
Sunray Stripe 201 569 0 367
Regent Bias 145 56 800 712
Italian Dobby 514 711 0 197
V Seamed 225 445 0 220
Delicate Dobby 349 635 0 286
C Stretch 237 406 0 170
Tue Purples 221 469 0 247
Pristine CD 526 145 800 418

As shown in table above for every period replenishment can follow this trend
Appendix:

1. Worksheet: Group 3 Final Worksheet_Will’s Lifestyle

Sheet 1: Problem 1-a

Sheet 2: Problem 1-b; Solver integrated to arrive at optimized quantities
Sheet 3: Report of the optimum solution identified by the solver
Sheet 4: Problem 2; using Internal production cost
Sheet 5: Problem 2; using Third party vendor cost