Mr. Dan Stockman is the procurement manager for Slicker Image (SI), an upscale retailer of novelty products. It is mid-August, and Mr. Stockman is wondering how many units of a new multi-function smart bracelet to order for the upcoming holiday season (November and December). The Malaysian manufacturer of this item, TechToys, requires orders to be placed in late August for delivery in late October, in time for holiday sales. Based on past experience with similar products, Mr. Stockman believes that the holiday demand (Nov-Dec) for the bracelet is Normally distributed with a mean of 3,000 units and standard deviation of 900. TechToys sells the item to SI at a unit price of $ 145 per unit, and SI has decided to set the retail price at $ 200 during the regular selling season (Nov-Dec). At the end of December, SI will mark down the price by 50% (i.e., sell the item for $ 100) to sell off any left-over items. TechToys incurs a cost of $ 105 per unit to manufacture this bracelet. For simplicity, ignore all supplier to SI (and vice versa) shipping costs.

Mr. Stockman realizes that SI can forecast demand for the item much more accurately in midOctober, compared to its demand forecast in August. So, he was lamenting to Ms. Tunku that he wished TechToys would permit SI to place a second order in mid-October. This conversation led Ms. Tunku to propose the following quick-ship option to SI. Under this option:

SI can place an initial (early) order in August, and pay TechToys $ 145 per unit (same as now);

SI can then place an additional quick-ship order in late October, but would need to pay $ 170 per unit for items in this order. TechToys assures fast and timely delivery of this quick ship order (before the selling season begins).

For quick-ship orders, since the lead time is much shorter, TechToys unit production cost increases to $ 125 per unit (versus $ 105 per unit for units shipped out in August).

Assume that SI can predict demand perfectly accurately (without any uncertainty) in late October, just before it places its quick-ship order. Mr. Stockman wants you to make a recommendation on whether and how SI can take advantage of this quick ship option.

i. What ordering strategy do you suggest to Mr. Stockman to maximize SIs expected profit under the quick-ship plan? Specifically, how much should he order early in August? What is SIs expected profit?

Hint: Since TechToys charges less per unit than the RS selling price, even for quick-shipped items, SI would want to use the quick-ship option to meet any demand that it cannot satisfy using the quantity it ordered in August.

ii. Will TechToys make a higher or lower expected profit when it offers the quick-ship option compared to its current purchase arrangement with SI (without buy-back or quick-ship)? .

iii. Comparing the expected profits for both SI and TechToys with and without quick-ship, intuitively explain (in managerial terms) which arrangement is better for each firm and why.