In: Operations Management
Green Thumb, a manufacturer of lawn care equipment, has introduced a new product. The anticipated demand is normally distributed with a mean of m = 100 and a standard deviation of s = 40. Each unit costs $150 to manufacture and the introductory price is to be $200 to achieve this level of sales. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed off in a fire sale for $50 each. It costs $20 to hold a unit in inventory for the entire season. How many units should Green Thumb manufacture for sale? What is the expected profit from this policy? On average, how many customers does Green Thumb expect to turn away because of stocking out? Input the data from the problem into the Input section of the spreadsheet and respond to the three questions posed in the problem. Expand upon the solution by considering the following: Green Thumb has investigated ways to improve its profitability. Option 1: they have found an outlet that will pay them $60 per unit for overstocks. Option 2: they are exploring raising the price from $200 to $230 per unit. However, the mean demand is expected to drop from 100 to 70. Option 3 involves a retrofit to their manufacture process that would reduce unit cost from $150 to $130. However, the cost of the retrofit adds back $10 to each unit. By manipulating the input data, determine the Cu, Co, CSL, EO, EU and profit for each option individually and in any combination. Which would you choose and why? SHOW A SUMMARY TABLE OF YOUR STUDY IN THE EXCEL SPREADSHEET.
We will need critical fractile method or the newsvendor model to solve this. The setup on excel is shown below
Take the information and substitute for the first option and we get expected profit of 2818.4
Now use the second set of information (option 1: $60/unit for overstock) The expected profit becomes 2910.73
The next options 2: price increase from 200 to 230 and mean drop from 100 to 70. Profit becomes 2755.5
Option 3: cost of the unit becomes 130 + 10 = 140 per unit. It gives a profit of 3681.94
Overall, the option 3 is the best option since it has the highest expected profit.