Kevin Rader

PROD 529

September 23, 2017

Hamptonshire Express Set II

Problem 3

a. With Sheen spend h=4 on the Profile Section, the quantity to maximize Armentrouts profits will
be 516. At this level, his profit will be $62.15.

b. Armentrouts optimal stocking quantity differs from Sheens in problem 2 due to the fact that
retailers assume more risk and lower profits and, therefore, would order less to minimize the
risk. His Co ($0.80) is higher than his Cu ($0.20) resulting in a smaller marginal profit and
higher risk of accumulating inventory.
c. Sheens optimal time to focus on the profile section to maximize profit would be 2.25 hours. If
she spends less than or more than 2.25 hours, her profit decreases. This effort will increase the
quality of the final product and, therefore, demand. Compared to problem 2, her optimal time
is lower due to the split supply chain. If shes splitting her profits with Armentrout, it doesnt
motivate spending more time on the profile section.

d. As the transfer price decreases, Armentrout would stock more papers due to the larger marginal
profit to be gained increasing the fill rate as well. Conversely, as the transfer price decreases,
Sheens efforts also decrease leading to lower expected demand and profits.
 e. Stocking Levels and effort are negatively related in a differentiated channel. As stocking levels
increase, effort decreases. They will both be lower than in an integrated channel due to
multiple parties involved in the supply chain that split profits.

Problem 4

a. Armentrouts optimal stocking quantity is 409. Any more or less results in a lower profit. As
opposed to problem 3a, this quantity is lower because of the alternative offering of
Armentrouts.

b. The stocking quantity is different because Cu has decreased for Armentrout. If he sells out of
the Express, he has an alternative to still drive profits. Problems 1 and 2, however, were an
integrated channel resulting in higher optimal stocking quantities. Problems 3 and 4 are
differentiated channels. Problem 3 has a higher risk for Armentrout, resulting in lower order
quantity fueled by imbalaced Co and Cu. Problem 4 lessens the risk for Armentrout by
introducing an alternative with a profit buffer. The alternative does not have the demand of the
Express, so he must still stock the Express to make a profit.
c. With the additional $0.03, Armentrouts Co and Cu would be further spread (higher Co and
lower Cu). This imbalance would create a lower Cr and, therefore, a lower optimal stocking
quantity.

Problem 5

a. The buy-back initiative leads to an increase in optimal stocking quantity for Armentrout through
lower Co, more papers sold for Sheen, and a win-win solution. A buy-back price of $0.75 would
maximize the channels profits at $369.79 with Armentrouts optimal stocking quantity being
659.

b. The wholesale transfer price that maximized daily channel profit is $1.02 and the buy-back price
is 1.025. The maximum profit for the channel is a result of high profit for Sheen and a negative
profit for Armentrout. With this combination of transfer price and buy-back, it seems as if
Armentrout does not factor into the calculations and the numbers look as if it is one, integrated
channel.