Case: Foslins Housewares (A)

Mary Ford is the person in charge of purchasing housewares in Foslins, one of the

main retail sellers in Denver. The role of Mary is quite important for the company. Mary is

responsible for designing the strategies for retail sales and the operation procedures in her

department. She also supervises a group of buyers that make specific choices of purchase.

Some sections of the department of housewares have suffered a negative

performance for a second consecutive year. The competitors, such as Box and Barrel,

which specialize on imported articles for kitchens and dinners, have opened important gaps

in the position that was once secure for Foslins. The sections of gourmet cooking,

glassware, kitchen articles of stainless steel and modern crockery of Foslins do not

generate sufficient revenues to justify the space of plant currently assigned to them.

Mary faces a challenge. She has reorganized the problematic sections to create a

store within the store. To achieve the same environment as her competitors, she has

adopted exhibition techniques with a natural fashion and modern lighting. Basically, she

has created a store of special articles, as the competitors of Foslins, within the department

of housewares. With these changes, together with the reputation of the store in quality and

service, she thinks that she can compete effectively.

To inaugurate the new installation of Foslins, Mary decides to convert the month of

October into the “Month of the International Cuisine”. The campaign consists of selling

five special articles, each one of a different country. These articles will be manufactured

especially for Foslins and include a frying pan of copper for omelettes from France, a

Spanish set of glasses for wine, and so on. Each article has been selected by a purchaser

from the team of Mary. There is already an agreement about the design and price. The

article needs to be ordered with at least six months of anticipation, and will not form part
of the normal line of products of Foslins. All inventories not sold at the end of October will

be sold out to a discount store at a lower price. Also, Foslins has adopted the policy that if

sales are high and the company is left with no inventories of a particular article, it will be

replaced by an article of higher cost of the normal line of products, at the same price.

Everything is part of the campaign “Once in a lifetime”.

In the case of frying pans for omelette, Foslins will purchase the special pans at US$

22 and will sell them at US$ 35. If some pans are not sold at the end of the campaign, they

will be sold to the discount store Clampton by US$ 15 each. If Foslins sells all special

pans, Foslins can purchase common pans for omelette, which will be sold at the price of

US$ 35. Those common pans, which are normally sold at US$ 65, cost US$ 32 each. In

addition, Mary knows that she needs to make at least 11,000 dollars of profits to cover

fixed costs.

The problem of Mary is that she has to decide how many special frying pans to

order in advance, without knowing the exact demand. For example, assume that she orders

1,000 frying pans and the demand ends up being 1,110. Then, she will have to purchase

100 pans at the price of US$ 32 each, after purchasing 1,000 pans at the cost of US$ 22 per

unit, and would sell 1,100 pans at US$ 35. Then, her profits would be 35 x 1,100 – 32 x

100 – 22 x 1,000 = 13,300.

Observe that the calculations of Mary assume that relying on common pans (bought

at US$ 32) to satisfy the demand will not create an unsatisfied demand. Due to the location

of the provider respect to common pans, the provision of pans is large enough as to not

take into account such complication.

 Mary Ford thinks that the demand for frying pans may be between 900 and 1,300.

She makes these projections based on some preliminary analysis (market trends and

surveys to potential customers).

Mary is considering three options: ordering 900 pans, 1,100 pans or 1,300 pans. If

the demand is finally 900 pans, Mary Ford would have been better off by ordering 900

pans than 1,100 or 1,300 pans. But by how much?

If the demand is 1,100 pans, Mary would have been better off by ordering 1,100, but

by how much?

What if the demand is finally 1,300 pans?

Is there risk of losing money in any of the three possible choices?

Mary needs to answer these questions to determine how many pans to have in stock.