A large fraction of Benetton’s sales are from knit garments in solid colors. Sta
ID: 461160 • Letter: A
Question
A large fraction of Benetton’s sales are from knit garments in solid colors. Starting with thread, there are two steps to completing the garment - dying and knitting. Traditionally, thread was dyed and then the garment was knitted (Option 1). Benetton, however, has developed a procedure where dying was postponed until after the garment was knitted (Option 2).
Benetton sells each garment at a retail price p=$50. Option 1 results in a manufacturing cost of $20, whereas option 2 results in a manufacturing cost of $22 per garment. Benetton disposes of any unsold garments at the end of the season in a clearance for $10 each. The knitting or manufacturing process takes a total of 20 weeks. Assume now that Benetton sells garments in four colors. Twenty weeks in advance, Benetton forecasts demand for each color to be normally distributed with a mean of =1000 and a standard deviation of =500. Demand for each color is independent.
With Option 1, Benetton makes the buying decision for each color 20 weeks before the sale period and holds separate inventories for each color. With Option 2, Benetton only forecasts the aggregate uncolored thread to purchase 20 weeks in advance. The inventory held is based on the aggregate demand across all four colors; they decide the quantity for individual colors after demand is known.
a) Evaluate the profitability of both Options for Benetton.
b) Assume now that demand for red sweaters at Benetton is forecast to be normally distributed with a mean red=1000 and a standard deviation of red =800. Demand for the other three colors is forecast to be normally distributed with a mean =300 and a standard deviation of =200.
Evaluate the profitability of both Options for Benetton, and explain how and why the results differ from those obtained in part a).
Would it be possible to tailor Option 2 to better take advantage of postponement under this scenario? If so, briefly explain, how (qualitatively).
Note: use the table below to calculate profits
Product Info cost $80 Cost of understocking $45 retail price $125 Cost of overstocking $60 salvage value $20 Optimal Service Level 0.43 Demand Info mean 350 standard deviation 150 Order Quantity Q* 322.998145 Order Quantity Profit $9,567.64Explanation / Answer
a)
CSL* = (p – c)/(p – s) = 30/40 = 0.75
O* = NORMINV (0.75; 1 000; 500) = 1 337
It is then optimal to produce 1 337 units for each color. The expected profit from each color is $23 644, the expected over- and under stocking for each color is 412 units and 75 units.
Option 2:
CSL* = (p – c)/(p – s) = 28/40 = 0.70
OA* = NORMINV (0.7; 4 000; 1 000) = 4 524
It is optimal for Benetton to produce 4 524 undyed sweaters to be dyed as demand by color is available, which results in an expected profit of $98 092, with an average of 715 sold on clearance at the end of the season and 190 customers turned away for stockout.
b)
O1* = NORMINV (0.75; 1 000; 800) = 1540 for red color
O2* = NORMINV (0.75; 300; 200) = 435 for each color other then red
Option 2:
OA* = NORMINV (0.7; 4 000; 1 000) = 4 524
Yes, In product-based tailored sourcing, low-volume products with uncertain demand are obtained from a flexible source while high-volume products with less demand uncertainty are obtained from efficient source.
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