Find the optimal order quantity and the average total cost

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Reference no: EM133595090

Problem

MARS Company, a small high-end retailer of fashion goods, has a store in Seattle and an on-line site. Demand for on-line store is currently satisfied from its own warehouse. Consider the replenishment/inventory management of a high-end women's handbags. New styles of handbags are introduced by the Italian Manufacturer in January and orders must be placed by April of every year for delivery in September. Due to long lead-times, MARS can only order once for the entire year. Since new styles are introduced every September, the leftover handbags from the current style are sold (salvaged) to an outlet store before the new arrivals. Below are the data for the new handbags at both the store and the on-line store.

Location	Mean Annual Demand	Standard deviation of Annual Demand	Unit Selling price($)	Unit replenishment cost($)	Unit shipping cost($)	Unit Salvage Price($)
On-line	500	100	200	100	10	50
Store	300	60	220	100	0	50

Assume that demand at both locations is normally distributed and independent of each other. Note that since demand at the store is filled in the store, then there is no shipping cost. However, for on-line orders filled by MARS, a shipping cost is incurred.

Question 1. Find the optimal order quantity, the average total cost and the average total profit associated with the handbags at each location. Then, calculate the average total overall profit for the new handbags.

Question 2. MARS is considering the OMNI-Channel fulfillment option. Under this, the handbags will be only stored at the store locations and both on-line and the store demands will be filled from the store inventory. However, there will be an additional fulfillment cost for filling on-line orders at the store under this option. Specifically, a $2 fulfillment cost per handbag is incurred for on-line orders. This is in addition to the $10 shipping charge that MARS incurs for shipping on-line orders to customers. All other data stays the same. Find the optimal order quantity and the average total profit associated with this option.

Reference no: EM133595090

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