Matthew W Ford

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## A4: Ordering DVDs (Updated 10/19/2011 10:50 AM )

MGT 307

Note:  The following problem is fictitious but employs names of, and news from, real organizations.  The idea is to increase the reality of the situation, and to improve your awareness of various industries and organizations.

You are a purchasing agent of media products for a regional discount retailer.  You need to place an order for DVD inventory for the upcoming quarter.

With the holiday season approaching, one seasonal title you plan to stock up on is Holiday Inn.  Historically, storewide demand during a three month (November-January) season has been approximated by a normal distribution with a mean of 225 and a standard deviation of 70.  Wholesale cost is \$5.90 each.  Unsold copies at the end of January are sold back to the wholesaler for \$2.99 each.  Selling price at your retail stores will be \$9.99.

One popular title that you need to restock is The Shawshank Redemption.  Historically, storewide quarterly demand has been normally distributed with a mean of 440 and a standard deviation of 95.  Wholesale cost is \$6.40 each.  Unsold copies at the end of each quarter are kept on the shelves for future sales.  Selling price at your retail stores will be \$14.99.  The cost of keeping a DVD in inventory for an entire year is estimated at 20% of the unit cost.  The cost of a stock out (goodwill loss, expediting costs, etc) is estimated at \$5.00 per event.

How many of each title should be ordered?

Compared to the Shawshank base case, how would the reorder quantity change if the retailer were able to reduce stock out costs from \$5 to \$1 per event?