Specialty Toys Case

November 10, 2010
Professor Chen
Katelyn Wilkins
Specialty Toys Managerial Report

Specialty Toys is faced with the decision of having to decide how many units of Weather Teddy should be purchased in order to meet the sales demand.   The company must decide on the best forecasted quantity so that market demand is able to be met without merchandise shortages but without purchasing too much of the product and risking excess inventory and consequently, reduced profits.   Management has recommended varying order quantities, or decision alternatives, of 15,000, 18,000, 24,000, and 28,000, indicating that there is a disagreement over what the market demand for Weather Teddy will be for the upcoming holiday season.   Each alternative needs to be measured against three possible scenarios for market demand; worst case of 10,000 units, most likely case of 20,000 units, and best case of 30,000 units.   Assuming a sales price of $24 and a cost of $16 for Weather Teddy, plus an inventory sales price of $5, profit under each scenario will be calculated for each decision alternative.   Specialty’s Senior Forecasted has predicted that the average demand will be 20,000 units and is 95% confident that demand will be between 10,000 and 30,000 units.
After completing analytics based on the above statistics provided by management and the Senior Forecaster, we have concluded the following:
  * Assuming an average (mean) demand of 20,000 units there is a demand variability of about +/-5,100 units from the average, given that there is a 95% chance that the demand will between 10,000 and 30,000 units.   Please refer to Appendix Chart #1 for a graphical representation of the demand probabilities.
  * The probability that a stock-out will occur for each of management’s recommended demand quantities logically decreases with the increasing quantities.   For instance, the chance that a stock-out will occur when the order quantity is 15,000 is 83.7% and the chance that a stock-out will occur...