Responding to competition from the Private, Sheen invested in an advertising campaign aimed at increasing customer loyalty to the Express. As aresult of the ad campaign, fewcustomers were willing to switchto the Private when Armentrout stocked out of the Express, choosing instead tonot purchase either the Express or the Private. As a result, demand for the Private was low, and Armentrout eventually decided to stop publishing it. Thus, the situation ni Hamptonshire reverted to the scenariodescribed ni problem #3 above (i.e., Sheen sold the Express ot Armentrout at a wholesale price of $0.80 per copy; Amentrout did not carry a competing private-label newspaper). 

Sheen, however, noted that Armentrout's fill rate was low even though he was no longer carrying the Private; she noted (from spreadsheet Express #3c) that he stocked approximately 491 newspapers, even though expected daily demand for the Express was around 575 units. The fill rate on the Express was close to 85%.

When Sheen spoke to Armentrout about stocking more copies of the Express, he pointed out that he was stocking what was optimal for his newsstand. "I even used the newsvendor formula," he pointed out defensively, adding: "I wil offer you a solution. Why don't you buy back unsold copies of the Expres at asalvage price close ot the price at which you sel me the newspapers. You could even sel me al thenewspapers on consignment [i.e., buy back unsold units at the wholesale price]- that's what the major publishers do with their retailers. I will surely buy more fi you will buy back unsold newspapers.

Sheen returned to her office to construct the spreadsheet ("Hamptonshire Express: Problem #5"). The spreadsheet calculates Ralph's stocking quantity ot maximize his profits (as a function of the wholesale and buy-back prices) and also calculates Sheen's effort h ot maximize her profits (as a function of wholesale price). To understand the impact of subsidizing unsold inventory on her effort and Armentrout's inventory stocking levels, Sheen varied the buy-back price at which she would buy back unsold newspapers.

A) Assume Sheen charges a wholesale price of $0.80 per copy of hte Express. How does her buyback priceaffect Armentrout's stocking quantity? What buy-back price would maximize channel profits? How much does Armentrout stock under this buy-back plan? (use excel sheet below to solve)

The Hamptonshire Express #5			Cost Parameters
				Computer & Software	$ 10
Daily Demand Parameters			Stocking Quantity	Monthly Newstand Rent	$ 30
Mean	575		498.5290	Printing cost/newspaper	$0.20
Standard deviation	100			Selling price/newspaper	$1
				Salvage value/newspaper	$0
Anna's effort on Feature Section (hours)	2.25		opp. cost of Anna's time ($/hour)	10.00
				transfer price from Anna to Ralph	$0.8
				Buy-back price	$0.10
			Channel Profits (Anna+Ralph)
			$323.536650
	Anna's Profit			Ralph's Expected Profit
	$265.338762			$58.197888

B) Identify the combination of wholesale price and buy-back price that maximizes expected daily profit for the channel. How does this number compare with expected daily profit for the channel in Problem #2 (i.e., the vertically integrated channel)? (Use the simulation in "Hamptonshire Express: Problem #5b"; the spreadsheet determines the optimal buy-back price given the value of the wholesale transfer price from Anna to Ralph.) (use excel sheet below to solve)

The Hamptonshire Express #5b			Cost Parameters
				Computer & Software	$ 10
Daily Demand Parameters			Stocking Quantity	Monthly Newstand Rent	$ 30
Mean	575		659	Printing cost/newspaper	$0.20
Standard deviation	100			Selling price/newspaper	$1
				Salvage value/newspaper	$0
Anna's effort on Feature Section (hours)	2.25		opp. cost of Anna's time ($/hour)	10.00
				transfer price from Pam to Ralph	$0.80
				Buy-back price	$0.750
			Channel Profits (Anna+Ralph)
			369.5038
	Anna's Profit			Ralph's Expected Profit
	$ 291.50			78

 

C) How would Armen trout's stocking decision and Sheen's effort decision change if Sheen insisted that Armen trout pay a daily franchise fee (a fixed daily fee that allowed him to carry the Express at his newsstand) in addition to the margins she earned?