Case 16-1 Ingrid's Hallmark Shop II
Ingrid's Hallmark Shop is a retail store specializing in "social expression" products, such as greeting cards, stationery, albums, and party goods. The social expression industry is noted for its seasonal volatility- an average December day out selling an average August day by 10 to 1.
Christmas merchandise must be ordered many months in advance. It is impossible to reorder most items once the selling season begins. Consider Ingrid's decision regarding how many angel ornaments to order. She believes that there is equally likely demand for any quantity between 16 and 25 items, inclusive. Her cost (including freight) is $5.50, and the ornaments retail for $10. Unsold angels will be disposed of during the half-off sale after Christmas.
Everyday merchandise never goes on sale, so there is less concern about over-ordering. Hallmark Cards has a systematic program, where certain items are reordered automatically. This is achieved when a store employee pulls a "ticket" that is sent to Hallmark. It then takes two weeks for the requested merchandise to arrive. Tickets are to be pulled only when store stock for that item falls below the reorder point. The order quantities and reorder points have been established for retailers in various size categories. For example, a "Happy Birthday--Wife" counter card is assumed to have a lead-time demand in small stores of one card every two days-on the average-and total lead time demand is equally likely to fall between 6 and 10 cards, inclusively.
1. Determine the optimal number of angels for Ingrid to order.
2. Why isn't Ingrid concerned with the reorder point for angels?
In a 559 word solution plus an Excel spreadsheet, the questions are fully answered with calculations.