CASE 2

HALLMARK CARDS AND

RECYCLED PAPER PRODUCTS

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

Recycled paper products (RPP) has rapidly grown from an innovative alternative
greeting card company to a major player in the social expression industry. The company
supplies thousands of retailers of various types and sizes. Although there is little
evidence that RPP has emulated Hallmark Cards, the reverse is evident and may largely
be responsible for Hallmark creation of its Shoebox line of cards. But Hallmark does
have much to emulate. A management consultant for RPP decided to study whether or
not RPP should adopt certain of Hallmark’s dealer servicing and inventory management
procedures. Hallmark bundles cards in wholesale packet units--- each package
containing multiple copies of exactly the same card, but the number of cards varying
depending on the retail price of the card--- so that the packets all have a retail value of
about $12. Historically, RPP’s cards have not varied nearly as much in price as
Hallmark’s, although greater variation in the card line is contemplated.
Dan Hildebrandt is charged with the responsibility of developing a clone to the
Hallmark system for distribution of RPP cards, which he proposes should follow
Hallmark’s pattern of different prices, depending on the degree of elaborateness and
artistic quality. Working under the assumption that RPP will adopt that pattern, he
recommends that RPP distribute its cards in packets according to the quantities in Table
2-1.

TABLE 2-1 PACKET SIZES FOR

PROPOSED RPP CARDS

NUMBER OF CARDS
RETAIL PRICE IN WHOLESALE PACKET
(1) $1.00 12
(2) $1.50 8
(3) $2.00 6
(4) $2.50 5
(5) $3.00 4
(6) $4.00 3
(7) $5.00 3

Mr. Hildebrandt is analyzing the inventory decision from the retailer’s point of
view. He assumes that a typical retailer will achieve a rate of return of 15% on working
capital. Prior study has shown that retailers who use automated reordering experience
an ordering cost of about $25 per card design ordered. The data in Table 2-2 are
assumed to apply for a typical RPP dealer.
 Mr. Hildebrandt recommends that RPP advise its retailers that at any time 95% of
the display pockets should hold at least one of the proper cards assigned to that space,
with obsolete filler cards inserted into the other 5% until they can be restocked.
Customers will not backorder any card that is out of stock, taking the filler instead. Since
customers are ordinarily not fully satisfied with the filler. Mr. Hildebrandt believes that the
actual shortage penalty, experienced grows with the duration of the shortage. The
shortage causes some percentage of disappointed customers to shift their business
elsewhere, culminating in the retailer’s losing some percentage of future profits. Mr.
Hildebrandt believes that the amount and effect are similar to what might be experienced
in connection with stationery item of comparable value for which backordering would
make sense. Although the model is not literally correct, he assumes as a first
approximation that the traditional EOQ actual model with backordering applies.

TABLE 2-2 PACKETS SIZES FOR PROPOSED RPP CARDS

AVERAGE ANNUAL NUMBER OF

RETAIL PRICE DEMAND PER DESIGN DIFFERENT DESIGNS

(1) $1.00 150 150

(2) $1.50 200 245
(3) $2.00 75 330
(4) $2.50 50 178
(5) $3.00 25 56
(6) $4.00 10 85
(7) $5.00 10 36

Questions

1. EOQ models can only be used to approximate the retailer’s optimal ordering
decisions. Discuss some of the assumptions that may not strictly apply here.
Comment on the suitability of using the models inspite of their limitations.

2. Determine how many cards of a single design in each retail category a typical
store should order, and identify the corresponding reorder points, so as to
minimize total annual relevant inventory cost. Mr. Hildebrandt will recommend
that these amounts be adopted as the packet quantities.

3. Compute the retailer’s total annual relevant inventory cost for ordering each
design in each price category with the order quantities found in Question 2.

4. Compute the same costs as in Question 3, but assume that RPP only lets
retailers order exactly one, two, or three packets of the type in Table 2-1 for a
particular design, and assume further that the retailer in each case orders the
number of packets that yields an order quantity most closely matching the EOQ
found in Question 2. Then determine the net annual inventory cost savings per
design in each price category by instead using the true EOQ.
 TABLE 2-3 ANNUAL CARD DEMANDS AT CHARLOTTE'S WEB BOUTIQUE

(1) (2) (3) (4)

HUMOROUS ELEGANT FANCY
BIRTHDAY ANNIVERSARY SYMPATHY RETIREMENT

632 157 54 62

5. The preceding analysis was based on the assumption that each design has the
same annual demand as the average for that price category. Actual experience
shows that each card in a particular price category has its own demand,
independent of the rest. Comment on the validity of the EOQs computed in
Question 2.

6. Suppose that Charlotte’s Web Boutique experiences the annual demands for
selected S2 cards shown in Table 2-3
a. Determine Charlotte’s EOQ for each card in Table 2-3
b. If RPP accepts Mr. Hildebrandt’s recommendations, the company will
only accept orders for any number of the new-type packets of the size
found in Question 2. Determine for each of the designs in table 2-3 which
number of the new-type packets comes closest to achieving the optimal
order sizes found in part (a).