The Omelet PAN Promotion: How Many Pans To Order? Marie Ford is the chief buyer

Question

The Omelet PAN Promotion: How Many Pans To Order?

Marie Ford is the chief buyer for housewares at Foslins, one of Denver’s leading retailers.   The chief buyer’s role is important in a retail organization like Foslins. Marie is responsible for designing the overall retailing strategy and operating procedures for her area. She also supervises a group of buyers who make specific purchased decisions.

Certain sections of the housewares department have just suffered their second consecutive bad year. Competing shops, such as Box and Barrel, which specialize in imported cooking and dining articles, have made serious inroads into Foslins’ once secure position. The gourmet cooking, glassware, stainless flatware, and contemporary dishes sections of Foslins are not generating enough revenue to justify the amount of floor space currently committed to them.

Marie plans to meet this challenge head-on. She has reorganized the sections that are in trouble to create a store within a store. To achieve the same ambiance as her competitors, she had adopted display techniques that feature natural wood and modern lighting. She has essentially created a specialty shop, like her competitors, within the housewares department. With these changes, plus the store’s reputation for quality and service, she feels that Foslins can effectively compete.

To introduce the new facility at Foslins, Marie decides to make the month of October “International Dining Month”. This promotion will feature a sale on five special articles, each from a different country. These articles will be especially made for Foslins and include a copper omelet pan from France, a set of 12 long-stem wine glasses from Spain, and so on. Each of the items has been selected by a buyer on Marie’s staff. The design and price are agreed on. The items have to be ordered at least 6 months in advance, and they will not become part of Foslins’ regular product line. Any items left at the end of October will be sold to a discount chain at a reduced price. In addition, Foslins has adopted the policy that if it runs out of the special sale items, a more expensive item from its regular line of merchandise will be substituted at the ale price. It is all part of the “once-in-a-lifetime promotion.

In the case of the omelet pans, Foslins will buy the special pans for $22 and will sell them for $35. Any pans left at the end of the sale will be sold to Clampton’s Discount Chain for $15 each. If Foslins runs out of the special pans, it will substitute one of its regular copper omelet pans and sell it for the sale price of $35. Regular pans, which normally sell for $65, cost $32 each.

Assume that demand is estimated to obey a Normal distribution with the mean of 150 pans and standard deviation of 30 pans. Marie not knowing the actual demand must decide how many of the special pans to order. Use Crystal Ball to calculate an estimated average profit for the problem. What is the probability that the profit is greater than $100? Use crystal ball to solve it.

Note that Marie’s calculations assume that using regular pans top satisfy promotional demand will not create any unsatisfied regular demand. Because of the location of her regular pan supplier, the supply is large enough that this complication need not be considered.

Explanation / Answer

Profit in case the sale is 120 special pan, i.e. 30 less than expected 150.

Special pan order

150

Sale

120

Then, Profit

Sale

120 special pans @35 each

4200

30 special pans @15 each

450

Cost of 150 pans @22 each

Thus, profit

1350

(Sale - Cost)

In case the sale is 30 extra, i.e. 180 pans.

Special pan order

150

Sale

180

Then, profit

Sale

150 special pans @35 each

5250

30 special pans @35 each

450

5700

Cost of 150 pans @22 each

3300

Cost of 30 pans @32 each

960

4260

Thus, profit

1440

(Sale - Cost)

In case the sale is exactly 150 pans.

Special pan order

150

Sale

150

Then, Profit

Sale

150 special pans @35 each

5250

5250

Cost of 150 pans @22 each

3300

Thus, profit

1950

(Sale - Cost)

Special pan order

150

Sale

120

Then, Profit

Sale

120 special pans @35 each

4200

30 special pans @15 each

450

Cost of 150 pans @22 each

Thus, profit

1350

(Sale - Cost)

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