Calculate the economic consequences of ordering

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Reference no: EM133672094

After graduating from HUJI, Sam has set up his own e-commerce venture called HUJI-BagZone. He sells genuine leather handbags handmade by Italian artisans in Italy. He has been able to streamline the manufacturing processes, thanks to the Operational skills he learnt in the operations course. His per unit cost of production (including manufacturing and labor costs) is $100. His venture is quite new and in a unique space. As such, there is very high uncertainty in the demand. Sam forecasts the demand to follow a Normal distribution with a mean of 50,000 units and a standard deviation of 15,000 units. He also decides to sell off any left-over inventories at a steeply discounted value of $50 in the local market. Sam decides to sell the bags at a unit price of $200. Now Sam is faced with a difficult question of manufacturing the right quantity of bags that maximizes the profit in face of uncertainty of demand.

1. What should be the quantity of the bags manufactured by Sam to maximize profits?

Disappointed by the profits and low production capacity, Sam decides to

• outsource the regular bags from other suppliers; and

• add a GPS unit to the bag to make it into a premium bag.

He contacts two manufacturers, one in China, to whom orders must be placed 3 months in advance, and the other, local. In case the demand realization is higher than the quantity ordered, he can source from the local manufacturer at a higher price. The overseas and local manufacturers charge $100 and $150 respectively, and only supply a regular version of the handbag without GPS unit included. The cost of manufacturing for both overseas and local manufacturers is $70. After receiving the bags, he spends another $50 to add the GPS unit and make it into the premium version. (This can be done just-in-time when the demand arrives). The retail price of the bag is $335, and any leftovers can be salvaged for a discounted price of '80% off' of the retail price. Demand of the premium bag is forecasted to be normally distributed with mean of 50,000 and standard deviation of 15,000.

1. Calculate the economic consequences of ordering one unit too few and one unit too much from China (underage and overage costs).

2. What quantity should HUJI-BagZone source locally on average?

3. Find the profits of HUJI-BagZone if they order the optimal quantity.

Reference no: EM133672094

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