Hamptonshire Express Case Study Summary

Problem#1
A. According to Anna Sheen, the daily demand of newspapers was to be estimated on a normal
standard distribution with daily demand having a mean of 500 newspapers per day and a standard
deviation of 100 newspapers per day.

There are two ways of finding the optimal ordering quantity. One was to use sensitivity analysis by
substituting numbers in the given model to understand the relationship between ordering quantity
and profit. As the daily demand is normally distributed, different numbers was entered for stocking
quantities from 200, with incrementing by 50 each time to understand the pattern of how profit
changes with respect to stocking quantities. The optimal ordering quantity was found to be in the
range 550-600. So each number was entered to find out the exact number which maximises the
expected profit, which was an optimal ordering quantity of 584 newspapers giving a maximum profit
of $331.44 per day with an expected fill rate of 98%.

Another method is to use the add-in Solver function provided in Excel. Any inventory ordered above
584 newspapers will yield a loss due to overstocking over the expected demand leading to imbalance
between gains and losses due to overage and underage costs.

Stocking Quantity Daily Expected Profit

578 newspapers 331.387
579 newspapers 331.403
580 newspapers 331.415
581 newspapers 331.425
582 newspapers 331.431
583 newspapers 331.435
584 newspapers 331.436
585 newspapers 331.435
586 newspapers 331.430
587 newspapers 331.423
588 newspapers 331.413
589 newspapers 331.400
590 newspapers 331.385

Calculations
Cr= Cu / (Cu+Co) where Cr= critical ratio.
Cu=1 - 0.2 = 0.8
Co=0.2
Cr= 0.8 / (0.8+0.2) = 0.8

The equivalent of 0.8 is 0.84 (z value) on the standard normal distribution function table.
To find the optimal stocking quantity that maximizes expected profit, mean and standard deviation is
used in formula shown:
Q = mean +z*(SD): 500+.84*100=584.

B. Using the Newsvendor Formula given, Q=+-1(Cu/Cu+Co ),

Where
Q=optimal quantity
= mean of expected demand
= standard distribution of expected demand
-1= inverse of the standard normal distribution function
Cu= underage costs = $1.00-$0.20
Co= overage costs = $0.20 - $0

The optimal stock quantity is estimated using the given model. The values input the z statistic, and
the overage/underage costs to derive the equation. Though the output of the Newsvendor model is
different from the excel function (due to rounding error), it is consistent with the optimal stocking
quantity found by the Excel model.

Q= 500+ Norminv(0.80/ 0.80 + 0.20) * 100 = 584.1621

Problem#2
A. The given simulation model is used to find the optimal number of hours per day to be invested
into creation of the profile section to maximize expected profits for the Hamptonshire Express. By
entering different numbers for H from 0 to 10, it is understood Anna Sheen can afford to spend 4
hours, where (H=4), to get a maximum profit of $371.33 and the optimal stocking quantity would be
685 newspapers.
Hours Spent (H) Optimal Expected Profit
2.00 $367.91
2.25 $368.84
2.50 $369.58
2.75 $370.17
3.00 $370.61
3.25 $370.94
3.50 $371.16
3.75 $371.29
4.00 $371.33
4.25 $371.29
4.50 $371.18
4.75 $371.01
5.00 $370.77

B. Anna Sheens choice of effort level, H, to be 4 hours was chosen to maximize profit. She would
need an effort level that made the marginal cost of her effort or spending extra time in developing
the profile section would be equal to the marginal benefit of developing the same i.e. the point at
which profit is maximum. The marginal cost of her effort i.e., her opportunity cost is $10/hr. The
optimal proift level is found out by equating marginal benefit to (0.8 *50)/(2*h). When equated to
each other, the optimal number of hours invested comes out to be 4.

It is also understood that if she spends the extra time to develop the profile section more than the
marginal cost equal to marginal benefit, she will not be able to create sufficient demand for her
newspaper. Also if she spends less time than where marginal cost equals marginal benefit, she will
not be able to produce quality newspaper and will lose out on additional sales (which yields
increased profits).

C. Differences between Problem#1 and Problem#2 are given below.

Stocking Quantity Daily Expected Profit

 584 331.44
685 371.33

The optimal profit in Problem 2 is $371.33 whereas the profit in Problem 1 is $331.43. There is a
positive relationship found between expected demand and hours invested in creation of profile
section. The demand, stocking quantity and expected optimal profits are higher in the second
scenario because of the extra time devoted to improve the quality of profile section. By doing so, it
has increased the overall quality of the newspaper, which will probably lead to an increase in the
demand for the newspaper around the area. This increase in average daily demand will raise the
stocking quantity and the daily expected profits associated with individual stocking quantity. Also,
as the fixed costs and variable costs remain the same, profit will increase.

Problem #3
A. By constraining the number of hours Anna Sheen spends in developing the profile section as 4
hours and maximising the stock quantity as outcome, Ralph Armentrouts optimal stocking quantity
is 516 with Ralphs optimal profit being $62.145 and Annas profit was $259.6. The channel profits
are $322.

Stocking Quantity Daily Expected Profit

513 62.131
514 62.139
515 62.143
516 62.145
517 62.144
518 62.140
519 62.133
520 62.124

B. Ralph Armentrouts optimal stocking quantity is lesser than that of Anna Sheens in Problem #2
due to the extension of the supply chain in retail. Armentrouts overage cost of $0.80 is higher than
that of his underage cost of $0.20. Due to this, he has less room for a profit margin making it a risk
for him to overstock inventory, ultimately affecting the fill rate of the supply chain.

C. The optimal profit Sheen will make in the combined supply chain is when she spends 2.25 hours
per day. Her profit rises with every 15 minute interval till 2 hours and 15 minutes is reached. The
additional time spent to improve the paper and its marginal benefit, will increase expected demand
of newspaper. Nevertheless, too much time spent increases the marginal costs associated with extra
time and will end up outweighing the associated marginal benefits. With more than 2.25 hours per
day spent on improvements, the demands are expected to be resistant.
As Sheens marginal benefit yielded due to the split differentiated supply chain, her optimal time -
amount of hours spent is lower. As sheen has to split percentage of the profits with Armentrout, it is
not worth for her to spend more time improving the newspaper. So she will try to put in less efforts
expectation of demand.

D.
Transfer Price Stocking Profit Ralphs Annas Annas Fill Rate
Quantity Profit Profit Efforts
.70 510 333 104 229.38 1.563 89%
.75 501 327 81 246.64 1.891 87%
.79 493 321 62 259.11 2.176 86%
.80 491 319 57 262.10 2.25 85%
.81 488 317 53 264.42 2.326 85%
.85 478 308 34 274.29 2.641 83%
.90 459 292 11 280.68 3.063 79%

If the transfer price decreases, from Sheen to Armentrout, Armentrout would ultimately gain a larger
marginal benefit out of the purchasing deal with Sheen. Increase in Armentrouts profit margin
would make him stock more newspapers, increasing the supply chains fill rate. This would cause
Sheens profits to decrease due to the deal and reduce her motivation to improve the newspaper. This
would lead to a decrease in expected demand and lead to loss of potential profits.

E. In a differentiated channel, efforts and stocking levels will be lower than that of an integrated firm
because of the multiple entities present in the supply chain. The multiple retailing and manufacturing
entities of the supply chain encourage the profits to be split by percentage rather than to be summed
to one firm who does both functions.