Toy World

1.

1.e.

The service level in company-owned stores is better than that of franchisees. That’s why centralized decision-making for store level inventory will lead to higher overall profitability.

2.

Review period for cake mix = 7 days (given in the case)

Lead time for mixing cake = 3 days (given in the case)

Exposure period for cake mix inventory planning = Review Period + Lead Time = 10 days.

3.

a. Stock-out Cost:

In stock-out situation, JB employees have to drive to grocery stores

and the employee overtime cost = $20 / hour

Required employee over-time = 15 hours

So, total overtime cost = ($20 x 15) = $300

Extra cost per pallet = $300

So, total stock-out cost = $300 + $300 = $600

b. Holding Cost:

Annual holding cost is 12% of the total relevant cost of a pallet of cake mix, which is $1000.

So, annual holding cost = $1000 x 12% = $120.

c. Cost of Over-stocking through 1 Review Period:

Over-stocking cost for a year or for 52 weeks is $120.

Review Period = 1 week.

So, Cost of over-stocking through 1 review period = ($120/52) = $2.31

d. Best Service Level for Cake mix:

Best Service Level

= [Cost of Stock-out/ (Cost of Stock-out + Overstocking Cost)] for one period

= 600/ (600 + 2.31) = 0.996

4.

a. Target Stock-level for Vanilla Cake mix:

For order quantity of 5 pallets, the cumulative probability is 0.997.

The best service level for cake mix = 0.996

So, the target stock-level for vanilla cake mix = 5 pallets

b. If on next week’s review day, JB finds two pallets of vanilla cake mix on hand, it should order (5-2) = 3 pallets.