It is late June, and Sandra, head of operations at Mintendo, and Bill, head of sales of We ‘R’ Toys, are about to get together to discuss production and marketing plans for the next six months. Mintendo is the manufacturer of the popular Game Girl handheld electronic game that is sold exclusively through We ‘R’ Toys retail stores. The second half of the year is critical to Game Girl’s success because a majority of their sales occur during the holiday shopping period.

Sandra is worried about the impact that the upcoming holiday surge in demand will have on her production line. Costs to subcontract assembly of the Game Girls are expected to increase and she has been trying to keep costs down given that her bonus depends on the level of production costs.

Bill is worried about competing toy stores gaining share during the Christmas buying season. He has seen many companies lose their share by failing to keep prices in line with the performance of their products. He would like to maximize the Game Girl market share.

Both Sandra and Bill’s teams produce a joint forecast of demand over the next six months, as shown in Table below:

We ‘R’ Toys sells Game Girls for Rs. 50 a piece. At the end of June, the company has an inventory of 50,000 Game Girls. Capacity of the production facility is set purely by the number of workers assembling the Game Girls. At the end of June, the company has a work force of 300 employees each of whom work eight hours of non-overtime at Rs. 15/hour for twenty days each month. Work rules require that no employee work more than forty hours of over-time a month. The various costs are shown in Table 2.

Table 1

Demand for Game Girls

Month
Demand Forecast
July
1,00,000
August
1,10,000
September
1,30,000
October
1,80,000
November
2,50,000
December
3,00,000

Table 2

Costs for Mintendo/We ‘R’ Toys

Item
Cost ($)
Material cost
12 / unit
Inventory Holding cost
4 / unit / month
Marginal cost of a stock-out
10 / unit / month
Hiring and training costs
3000 / worker
Layoff cost
5000 / worker
Labor hours required
.25 / unit
Regular time cost
15.00 / hour
Over time cost
22.50 / hour
Cost of Subcontracting
18 / unit

Sandra, concerned about controlling costs during the periods of surging demand over the holidays proposes to Bill that the price be lowered by Rs. 5 for the month of September. This would likely increase September’s demand by 50 percent due to new customers attracted to Game Girl. Additionally, 30 percent of each of the following two months of demand would occur in September as forward buys. She strongly believes that this leveling of demand will help the company.

Bill counters with the idea of offering the same promotion in November, during the heart of the buying season. In this case, the promotion increases November’s demand by 50 percent due to new customers attracted to Game Girl. Additionally, 30 percent of December’s demand would occur in November as forward buying. Bill wants to increase revenue and sees no better way to do this than to offer a promotion during the peak season.

Questions:

1) Which option delivers the maximum profit for the supply chain: Sandra’s plan, Bill’s plan, or no promotion plan at all?

2) How does the answer change if a discount of Rs. 10 must be given to reach the same level of impact that the Rs. 5 discount received?

3) Suppose Sandra’s fears about increasing out-sourcing costs come to fruition and the cost rises to Rs. 22/unit for subcontracting. Does this change the decision when the discount is Rs. 5?