The Gap is trying to decide which products to carry at its 900 retail stores or
ID: 371318 • Letter: T
Question
The Gap is trying to decide which products to carry at its 900 retail stores or at its central warehouse to only be sold online. Weekly demand for large Khaki pants at each store is normally distributed with a mean of 800 and a standard deviation of 100. Each pair of pants cost $30. Weekly demand for purple cashmere sweaters at each store is normally distributed with a mean of 50 and a standard deviation of 50. Each sweater costs $100. The Gap has a holding cost of 25%. The Gap uses continuous review policy and the supply lead time for both products is 4 weeks. The Gap also expects a 95% service level.
How much reduction in holding cost per unit sold can The Gap expect from moving each product from its stores to its central warehouse?
Which of the two products would you move from the stores to online?
Explanation / Answer
Total Number of Outlets = 900
Service Level = 95%
Lead Time = 4 Weeks
Khaki Pants Weekly Demand = 800 Units
Standard Deviation = 100
Cost - $ 30 /Pair
Average Demand During Lead Time = 800*4= 3200
Safety Stock = 1.65*100*2=330
ROP = 3200 + 330 = 3500
Thus about 3500/800 = 4.4 weeks of supply at warehouse and in the pipeline
Weekly Inventory Holding Cost = 0.25
Thus Q = 3500*4.4= 15400
Order up to level thus equal= 3500+15400 = 18900
Sweater Weekly Demand = 50 Units
Standard Deviation = 50
Cost - $ 100
Average Demand During Lead Time = 50*4= 200
Safety Stock = 1.65*50*2=165
ROP = 200 + 165 = 365
Thus about 365/50 = 7.3 weeks of supply at warehouse and in the pipeline
Weekly Inventory Holding Cost = 0.25
Thus Q = 365*7.3= 2665
Order up to level thus equal= 2665+365 = 3030
Reduction in Holding cost by moving to warehouse per piece or pair
For Khaki Pants = (.25*30)/square root (900) = 0.25
Sweater= (.25*100)/square root (900) = 0.833
I will move sweater from retail store to Online as it has higher holding cost
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