Case: Specialty Toys
Specialty toys, Inc., 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 Specialty discovers a new toy with good market potential, it chooses an October market entry date.
In order to get toys in its stores by October, Specialty places one time order 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 market place often increases the demand to high levels and large profits can be realized. However, new toys can also flop, leaving specialty stuck with high levels of inventory that must be sold at reduced prices. The most ...view middle of the document...
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 Specialty’s managers claimed Teddy gave predictions of the weather that were as good as many local television weather forecasters.
As usual, Specialty faces the decision of how many Weather Teddy units to order for the coming holiday season. Members of the management team suggested order quantity of 15000, 18000, 24000, or 28,000 units. The wide range of order quantities suggested indicate 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. Specialty expects to sell Weather Teddy for $ 24 based on a cost of $ 16 per unit. After reviewing the sales history of similar products, Specialty’s senior sales forecaster predicted an expected demand of 20, 000 units with a .95 probability that demand would be between 10, 000 units and 30, 000 units.
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. One of the specialty’s managers felt that the profit potential was so great that the order quantity should have a 70% chance of meeting demand and only 30% chance of any stock outs. What quantity would be ordered under this policy ?