Just Baked – Assignment Solutions

1. Best Service Level at each Just Baked store.

a. Cost of Understocking Cu. Compute the understocking cost Cu for franchisees and for
company owned stores.

Sol:
For Franchise: The understocking cost Cu is equal to the difference between their cost of $1.25 and the
selling price of $2.75

Cu = $ 2.75 - $ 1.25
= $ 1.50

For company-owned stores: The understocking cost Cu is equal to the difference between their
variable cost of $0.50 and the selling price of $2.75.

Cu = $ 2.75 - $ 0.50
= $ 2.25

b. Cost of Overstocking Co. Compute the overstocking cost Co for franchisees and for
company owned stores.

For Franchise: Difference between the price they pay and the credit from JB corporate

Co = $ 1.25 - $ 0.75
= $ 0.50

For company-owned stores: Only the JB variable cost

Co = $0.50

c. Franchisee Best Service Level Computation. Compute the Best Service Level SL* for
cupcake stocking at franchisee stores.

SL* = Cu / (Cu + Co)

=$ 1.50/ ( $ 1.50 + $ 0.50 )

= $ 0.75

d. Company-owned store Best Service Level Computation. Compute the Best Service Level
SL* for cupcake stocking at company-owned stores.

SL* = Cu / (Cu + Co)

=$ 2.25/ ( $ 2.25 + $ 0.50 )

= $ 0.82
 e. Based on your answers to parts 1c and 1d, why does centralized decision-making for store
level inventory lead to higher overall profitability for the entire Just Baked supply chain than the
alternative model of allowing franchisees to do their own ordering?

Based on the computation results, Company Owned stores result in a critical fractile of 82%
which means that the demand is met 82% of the time for the stock. And Franchisees owned
stores lead to a critical fractile of 75% which means that the demand is met 75% of the time for
the stock. Hence centralized decision-making for store level inventory lead to higher overall
profitability as the demand met is higher compared to the alternative model.

2. Exposure Period, Cake Mix for Baking.

a. Review Period. Compute the Review Period for cake mix in days.
Sol: 7 days ( 1 week )

b. Lead Time. Compute Lead Time for cake mix in days.

Sol: 3 days

c. Exposure Period. Compute the Exposure Period for cake mix inventory planning.
Sol: = 7 + 3 (Exposure Period = Review Period + Lead Time)
= 10 days

3. Stockout and Holding Costs, Cake Mix for Baking.

a. Stockout Costs. Compute the cost of a Stockout of cake mix.

Stockout Cost = extra labor + extra cake mix cost.

= $ 20 * 15 hours + $ 300
= $ 600.00

b. Holding Costs. Compute the annual Holding Cost of a pallet of cake mix.
Annual Holding Cost H = i C
= 12% of $ 1000
= $ 120

c. Cost of Overstocking through 1 Review Period. Compute the weekly holding cost per pallet of cake mix.
= $ 120 /52
= $ 2.31

d. Best Service Level for Cake Mix. Compute the Best Service Level SL* for pallets of cake mix.
SL* = Cu / (Cu + Co)
= $ 300 / ($ 300 + $ 120)
= $ 0.71

4. Target Stock and Ordering Decisions, Cake Mix for Baking.

 a. Target Stock Level Computation. Compute the Target Stock Level for vanilla cake mix, using
information from the table below.

Cumulativ
Pallets of Cake Mix Probabilit Cumulative e≥ Target Stock Level
Demanded y Probability SL*( 0.71)? ID (OUTL)*
Fewer than 2 0.10 0.10 FALSE
2 0.30 0.40 FALSE
3 0.55 0.95 TRUE
4 0.04 0.99 TRUE
5 0.007 0.997 TRUE
6 0.003 1.00 TRUE
Sum: 1.00

The target stock level for vanilla cake mix is 3 pallets.

b. Order Quantity Computation. Q* = OUTL – on-hand inventory

=3–2
=1

5. Ordering Eggs.

a. Economic Order Quantity Computation. Compute the Economic Order Quantity Q* for eggs.
Q* = SQRT ( 2DS/H )
= SQRT ( 2 * 1600 * 40/0.02 )
= 2529.82

b. Safety Stock Computation.

Hint: The z-value associated with SL = 99.87 is 3.00.
Safety Stock = zσ
= 3 * 400
= 1200

c. Reorder Point Computation.

Hint: ROP = expected demand in Lead Time + Safety Stock.
= 400 + 1200
= 1600

d. Days of Supply expression of ROP. Hint: answer from 5c / daily demand

= 1600 / 400
= 3.00

e. Average Eggs on Hand. Hint: Iavg = Q/2 + SS. To express in Days of Supply, divide by daily demand.
= 1264.91 + 1200
= 2464.91

f. *Days of Supply CV (challenge question). Hint: SS = zSLσ

= 2464.91/400
= 6.16