Reference no: EM13224678

The store manager - let's call her Stacy - buoyed by her streak of good ideas, comes up with another. She thinks back to the company motto- this is not a place where you find every product or brand on earth. She wants to see what the impact would be on store inventories and safety stocks. So she wants to bring down the selection of brands from 4 to 2. By now, each supplier has managed to make deliveries in 4 days (they don't like the price discounts).
She selects the two more popular brands and gives them each 50% of the market share.
The average consumer doesn't know much about printers, so they only want a good one at the cheapest price which Costco ensures, so the overall demand across the ink-jet printer category doesn't change.
1. What is the savings in safety stock with this new model, assuming that all 4 suppliers were delivering replenishment orders in 4 days before this new initiative?
2. Assuming the same holding cost per unit per week as before, and Stacy passes on the cost savings to the customers in the form of price reductions, by how much can Stacy reduce the price of the two products (in $) so she is no better or worse off than before with 4 suppliers delivering in 4 days each.
Due the arrival of a neighborhood Best Buy, Stacy observes the standard deviation of demand across the two printers is higher at 50 units per week. Costco still offers the best price, so average demand is unchanged.
3. But Stacy really (I mean really) dislikes inventory so she refuses to add any more safety stock (relative to II-1 above) to account for the higher standard deviation. She figures as long as she has sufficiently high service level on each printer, it is very unlikely that she will run out of both printers at the same time, so customers still have a good printer to buy. Will she regret her decision not to add any safety stock?
4. What is the lowest service level she can afford on each printer, so she can still enjoy 99% service level at the category level?