Module $8($Chapter $6)$ Case Study

Fisher$-$Price Toys

Fisher$-$Price Toys Company sells a variety of new and innovative children$$s toys. Management Learned that the

preholiday season is the best time to introduce a new toy, because many families use this time to look for new

ideas for December holiday gifts. When Fisher$-$Price discovers a new toy with good market potential, it chooses

on October market entry date.

In order to get toys in its stores by October, Fisher$-$Price places one$-$time orders with its manufacturers in June

or July of each year. Demand for children$$s toys can be highly volatile. If a new toy catches on$,$ a sense of

shortage in the marketplace often increases the demand to high levels and large profits can be realized. However,

new toys can also flop, leaving Fisher$-$Price stuck with high levels of inventory that must be sold at reduced

process. The most important question that company faces is deciding how many units of a new toy should be

purchased to meet anticipated sales demand. If too few are purchased, sales will be lost; if too many are

purchased, profits will be reduced because of low prices realized in clearance sales.

For the coming season, Fisher$-$Price plans to introduce a new product called Weather Teddy. This variation of a

talking teddy bear is made by a company in Taiwan. When a child pressed Teddy$$s hand, the bear begins to

talk. A built$-$in barometer selects one of five responses that predict the conditions. The responses range from $$It

looks to be a very nice day! Have Fun$$ to $$I think it may rain today. Don$$t forget your umbrella.$$ Tests with the

product show that, even though it is not a perfect weather predictor, its predictions are surprisingly good. Several

of Fisher$-$Price$$s managers claimed Teddy gave predictions of the weather that were as good as many local

television weather forecasters.

As with other products, Fisher$-$Price faces the decision of how many Weather Teddy units to order for the coming

holiday season. Members of the management team suggested order quantities of $15,000,18,000,24,000,$ or

$28,000$ units. The wide range of order quantities suggested indicates considerable disagreement concerning the

market potential. The product management team asks you for an analysis of the stock$-$out probabilities for

various order quantities, an estimate of the profit potential, and to help make an order quantity recommendation.

Fisher$-$Price expects to sell Weather Teddy for $$24$ based on a cost of $$16$ per unit. If inventory remains after

the holiday season, Fisher$-$Price will sell all surplus inventory for $$5$ per unit. After reviewing the sales history

of similar products, Fisher$-$Price$$s senior sales forecaster predicted an expected demand of $20,000$ units with a

$\mathrm{.}95$ probability that demand would be between $10,000$ units and $30,000$ units.

Managerial Report

Prepare a managerial report that addresses the following issues and recommends an order quantity for the

Weather Teddy product:

$1.$ Use the sales forecaster$$s prediction to describe a normal probability distribution that can be used to

approximate the demand distribution. Sketch the distribution and show its mean and standard deviation.

$2.$ Compute the probability of a stock$-$out for the order quantities suggested by members of the management

team.

$3.$ Compute the projected profit for the order quantities suggested by the management team under three

scenarios: worst case in which sales $=10,000$ units, most likely case in which sales $=20,000$ units, and best

case in which sales $=30,000$ units.

$4.$ One of Fisher$-$Price$$s managers felt that the profit potential was so great that the order quantity should have

a $70\%$ chance of meeting demand and only a $30\%$ chance of any stock$-$outs. What quantity would be ordered

under this policy, and what is the projected profit under the three sales scenarios?

$5.$ Provide your own recommendation for an order quantity and note the associated profit projections. Provide

a rational for your recommendations.