BoaziiUniversity

ETM 594 Supply Chain Management

Assignment 2
A famous high-end department store must decide on the quantity of a high-priced women's
handbag to procure in Italy for the upcoming holiday season. The unit cost of the handbag to the
store is $70 and the handbag will sell for $180. Any handbags not sold at the end of the season
are purchased by a discount firm for $20. In addition, the store accountants estimate that there is
a cost of $0.60 for each dollar tied up in inventory, as this dollar invested elsewhere could have
yielded a gross profit. Assume that this cost is attached to unsold bags only.
a) Suppose that the sales of bags are equally likely to be anywhere from 100 to 400 handbags
during the season. Based on this, how many bags should the store purchase? (Hint: this means
that the correct distribution of demand is uniform. You can use either a discrete or a continuous
uniform distribution).
b) A detailed analysis of past data shows that the number of bags sold is better described by a
normal distribution, with mean 250 and standard deviation 20. Now what is the optimal number of
bags to be purchased?
c) The expected demand was the same in parts (a) and (b), but the optimal order quantities
differed. What accounted for this difference?

For the rest of the assignment, assume that the demand is normally distributed with mean 250
and standard deviation 20. The manufacturing cost is $40 for the supplier.
d) The Italian bag supplier approaches the department store with the following deal: they will
charge $60 per bag instead of $70 and buy any bags left unsold at the end of the season for $25.
Should the store accept this deal? Why? What are the expected profits of the supplier and the
retail store?
e) What if the supplier offers to sell each bag for $50 to the store but wants a share of 35% of the
revenue generated from bags sold at the end of the season? Is this offer acceptable to the store?
What are the expected profits of the supplier and the retail store?
f) If you know that the Italian supplier produces each bag for $40, what is the centralized solution?
Submit a single zipped file which is no larger than 5MB that contains all of your
calculations and a well written report (as a separate pdf dile) that describes your answers.

In Assignment 2, you can take the manufacturing cost of the supplier as $40 for parts (d) & (e).
Also you are asked to compute expected profits. This requires you to generate demand values
from the Normal distribution with the given parameters (see the Newsboy simulator exercise).