Reference no: EM132291918
Assignment for Class Discussion: Laurence & Ralph Revisited - Question (b)
Motivation: Laurence & Ralph’s Ordering Problem (CASE)
Laurence & Ralph (L&R) have successfully developed their European apparel business over the years. They started with a focus on high quality cotton shirts, but, encouraged by market success, added sweaters, pants, and coats to their collection of casual American-style men’s and women’s wear.
They typically rely for style on US fashion designers and, once the design is finalized, seek the most economical location for the manufacturing of the goods, subject to tight production constraints. The process is rather complex, for several reasons.
?? They have their own shops where they produce recurrent items in their collection, like shirts and sweaters.
?? However, new items and certain more volatile items, like high quality coats, are subcontracted to relatively smaller textile shops with a reputation for quality work. The number of such shops is limited, so that production orders have to be placed well in advance of the sales season.
Their problems are further complicated by the length of their design, production planning and manufacturing cycle. For example, the design and production planning and manufacturing cycle for a typical high-quality coat is as follows:
1. After a design for an item or family of items is finalized (this can take several months), they get a first reaction from a representative panel of retailers who help them predict the market demand for the item.
2. With this advanced demand information, they establish their production quantities for the season and go shopping for a manufacturer. The good shops being heavily booked,
Laurence & Ralph have to make fixed commitments on production quantities well in advance of the sales season.
3. Because of the fixed production commitments, all items will be manufactured before the start of the particular sales season (typically fall/winter for coats).
A large percentage of these finished goods are shipped to retailers at the start of the season for sale during the season. Goods not sold by the retailers are either returned to L&R or are sold by the retailers at a loss to L&R.
A smaller percentage is kept by L&R in their central warehouse for replenishing retailer’s orders during the season. Although retailers can ask for replenishment during the season, these replenishments must come from the stock that was ordered ahead of the season, when the original production commitments were made.
This type of problem is exemplary in capacity or inventory economics. It occurs every time a product needs to be ordered or a service capacity needs to be set when demand in the forthcoming sales or service period is uncertain. The inventory decision is, in essence, equivalent with a capacity decision, as inventory represents a capacity to sell product in the future.
When Laurence and Ralph assess the amounts to order of each item or family of items, they face conflicting interests: (i) the desire not to lose profit opportunities pushes their order quantity upward; while (ii) the countervailing consideration is not to order product that will remain unsold. The resolution of this trade-off between lost profit opportunities and the cost of unsold product or unused capacity is the key to the economics of their problem.
Assignment for Class Discussion: Laurence & Ralph Revisited
Question (a)
The assignment consists of the quantitative and qualitative analysis of the ordering decision faced by Laurence and Ralph concerning one of their high-quality coats for men, the L&R Barbour. The demand forecast for the winter season takes the form of a normal distribution with a standard deviation of 6,750 and a mean of 32,500 coats.
Barbour coats are manufactured in China with a delivery price to L&R of €250 per unit. L&R sell these coats for €325 wholesale to retailers. As explained at the beginning of the note, production has to be ordered from China before demand information is known. For simplicity, we first assume that any Barbours ordered by L&R from China, but unsold at the end of the sales season, are worthless.
Under this assumption, how much should L&R order from China? What are their expected lost sales? And what is their expected profit for the season?
Question (b) - Use same information and results as answer (a) factoring in the information below for (b).
Now assume, as is more realistic, that unsold Barbours at the end of the regular season can be sold at a discount of their original purchase price. In particular, assume that any Barbour coat can always be sold to discount retailers at €225 per coat. This represents a loss of 10% on the original delivery price to L&R.
How does this salvage possibility alter L&R’s order quantity from China? What is the amount of expected lost sales now? And expected profit?