1) Assume that consumers reactions to a stockout are as described in the article (use the percentages

in the picture on page 2 of the Corsten and Gruen paper). Modify the spreadsheet to see the impact on
net profit and on the choice of the best orderupto level.
In doing so, make the following extra assumptions:
The (average) profit margin earned on the products of the same brand that consumers would
substitute to is $1 (same as the current product);
The (average) profit margin earned on the products of another brand that consumers would substitute
to is $0.5;
Customers who delay their purchase come back the following week;
Customers who buy the item to a different store also make some of their other purchases there,
leading to an (average) loss of $5 per customer.
Answer the following questions:
a) What is the net profit if the firm uses an orderupto point model with an orderupto level of 57
(which is the value that achieved the highest net profit in the analysis from homework 2)?
$ 1516.36
b) What is the value of the orderupto level which achieves the highest net profit when accounting for
consumers reactions to stockouts?
72 gives a profit of $ 1451.79
c) By comparing the net profit values in parts a) and b), calculate the percentage profit loss incurred by
the firm for not taking into account consumers reactions to stockouts.
4.45% is the actual profit loss for not taking into consideration customers reactions.
Stor
e
orde
r-upto

Instoc
k
rate

Fill
rate

Poin
t

62%

85.5
%

$
258.34

0%

0.0
%

$
-

Invent
ory
Costs

Net
profits

Net
Profits
account
ing
custom
ers
reaction

Average
profit by
substitut
ion in
same
brand

average
profit by
substitut
ion to
different
brand

$
1,462.6
6
$
-

$
1,122.1
9

$
55.29

$
37.83

$(2,354.
04)

avera
ge
loss
by
not
buyin
g or
buyin
g
from
anoth
er
store
$
451.0
5

average
loss
when
custom
er do
purchas
e at all

Averag
e profit
when
custom
ers
delay
their
purcha
se

$
26.19

43.65

0%

2%

4%

4%

6%

6%

6%

2.5
%

$
0.25

$
49.75

5.0
%

$
1.00

$
99.00

7.4
%

$
2.20

$
146.80

9.8
%

$
3.76

$
193.24

12.2
%

$
5.66

$
239.34

14.5
%

$
7.86

$
284.14

16.8
%

$
10.36

$
328.64

$(2,245.
79)
$(2,138.
04)
$(2,032.
91)
$(1,930.
31)
$(1,828.
05)
$(1,728.
26)
$(1,628.
77)

2) Suppose the inventory manager from Paper and More is using the (s,S) model with s=30 and S=132 to
replenish the inventory of the paper product we discussed in Session 3. This product is a nonperishable
product, unsatisfied demand is lost and the supplier lead time is zero periods. What the inventory
manager does not know is that an employee from the warehouse is stealing a certain number of units of
the product every period. The numbers the employee wishes to steal from the warehouse is listed in the
table below (the actual number he steals is equal to the minimum of that quantity and the leftover on
hand inventory at the end of a period) along with the actual value of demand.
Because the inventory manager does not carry out inventory audits or counting, she is unaware of the
inventory shrinkage due to theft and places her orders based on the on hand inventory value she
calculates. She is also unable to observe actual demand and only observes sales. Calculate how the on
hand inventory of the product varies in over the 15 periods and describe what happens.
Perio
d
1
2
3
4
5
6
7
8
9

Dema
nd
37
37
75
73
53
47
44
41
37

Qty to
steal
6
6
0
1
1
3
5
4
7

BI

EI

132
95
58
132
59
126
85
41
132

95
58
0
59
6
85
41
0
95

Actual
Stolen
6
6
0
1
1
3
5
0
7

New
BI
132
89
46
132
58
128
82
99
58

New
EI
89
46
0
58
4
82
33
58
14

Diff in OnHand
6
12
0
1
2
3
8
-58
81

S
132
s
30

10
11
12
13
14
15

35
25
15
12
43
72

2
3
10
7
3
3

95
60
35
112
120
77
1359

60
35
20
120
77
5
756

2
3
10
7
3
3

118
95
67
42
109
86
1341

95
67
42
23
86
11
708

-35
-32
-22
97
-9
-6

The On-Hand inventory of the product shrinks by 48 units. Cause of theft in some periods for example
period 9 the ending inventory without theft is 95 but because of undetected theft in the previous
periods an order is triggered. Overall the impact of theft may not be profound but it certainly causes
some percentage of the demand to be lost.