LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN

HOMEWORK 4 – SOLUTION

Question 1:
Consider a supply chain of a fashion item as below cost-benefit details:
F=$100,000 ; c=$55 ; w=$80 ; s=$20 ; p=$125.
a. Calculate the supply chain’s marginal profit.
b. Calculate the supply chain’s marginal loss.
c. Provided that the optimal policy is to produce 14,000 units, calculate the total expected
supply chain’s profit under this demand’s scenario:
Demand, Probability,
D (units) Prob
8,000 0.11
10,000 0.11
12,000 0.28
14,000 0.22
16,000 0.18
18,000 0.1

SOLUTION
a. The supply chain’s marginal profit is:
Supply chain’s marginal profit (SCMP) = p - c = 125 – 55 = $70

b. The supply chain’s marginal loss is:

Supply chain’s marginal loss (SCML) = c – s = 55 – 20 = $35

c. Provided that the optimal policy is to produce 14,000 units, the expected supply
chain’s profit is:
𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑆𝐶𝑀𝑃 − 𝐹
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑆𝐶𝑀𝑃 − 𝐹 − (𝑄 − 𝐷) × 𝑆𝐶𝑀𝐿

D (units) Q SC's Profit

8,000 14,000 250,000
10,000 14,000 460,000
12,000 14,000 670,000
14,000 14,000 880,000
16,000 14,000 880,000
18,000 14,000 880,000

Total expected profit of the supply chain = 250,000 * 0.11 + 460,000 * 0.11 + 670,000 * 0.28
+ 880,000 * 0.22 + 880,000 * 0.18 + 880,000 * 0.10 = $705,700

Question 2:
Consider the following demand scenario for a 2-stage supply chain:
Demand Probability
2,000 26%
2,100 30%
2,200 29%

1
 2,300 15%
Suppose the manufacturer produces at a cost of c=$20/unit and sells to the retailer at w=$40/
unit. Then, the retailer sells to end users for p=$50/unit during season, they will sell unsold
units for s=$10/unit after season.
a. Calculate the retailer’s marginal profit and loss.
b. Calculate the manufacturer’s marginal profit.
c. Provided that the order policy of the retailer is 2,200 units, then what is the expected
profit for the retailer?
d. Then, what is the expected profit for the manufacturer if the retailer concludes an order
of 2,200 units?
e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, what type of the contract is this?

SOLUTION
c=$20 ; w=$40 ; p=$50 ; s=$10

a. The retailer’s marginal profit is:

Retailer’s marginal profit (RMP) = p – w = 50 – 40 = $10
The retailer’s marginal loss is:
Retailer’s marginal loss (RML) = w – s = 40 – 10 = $30

b. The manufacturer’s marginal profit:

Manufacturer’s marginal profit (MMP) = w – c = 40 – 20 = $20

c. If Q=2,200 units, the expected profit for the retailer is:

𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑅𝑀𝑃
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑅𝑀𝑃 − (𝑄 − 𝐷) × 𝑅𝑀𝐿

D Q R's profit
2,000 2,200 14,000
2,100 2,200 18,000
2,200 2,200 22,000
2,300 2,200 22,000

Total expected profit of the retailer = 14,000 * 0.26 + 18,000 * 0.30 + 22,000 * 0.29 + 22,000
* 0.15 = $18,720

d. If Q=2,200 units, the expected profit for the manufacturer is:

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹

Total expected profit of the manufacturer = Q*MMP – F = 2,200*20 – 0 = $44,000

e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, this type of the contract is: Sales Rebate
contract/Typical contract

2
 LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 5 – SOLUTION

Question 1:
Consider a supply chain with the manufacturer, the retailer and end-users, using a buy-back
contract, as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$30 ; w=$75 ; b=$50 ; p=$122 ; s=$15;
Demand 1,800 1,920 2,040 2,160
Probability 26% 27% 29% 18%
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 4 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize retailer’s
expected profit.
SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑅𝑀𝑃) = 𝑝 − 𝑤 = 122 − 75 = 47
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑅𝑀𝐿) = 𝑤 − 𝑏 = 75 − 50 = 25
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 75 − 30 = 45

b. Calculate the expected profit of the retailer and the manufacturer for 4 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Retailer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑅𝑀𝑃
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑅𝑀𝑃 − (𝑄 − 𝐷) × 𝑅𝑀𝐿
Q/D 1800 1920 2040 2160 Retailer’s profit
1800 84.60 84.60 84.60 84.60 84.60
1920 81.60 90.24 90.24 90.24 87.99
2040 78.60 87.24 95.88 95.88 89.05
2160 75.60 84.24 92.88 101.52 87.61
Thus, the retailer should order 2,040 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹 − (𝑄 − 𝐷) × (𝑏 − 𝑠)

1
 Q/D 1800 1920 2040 2160 Manufacturer’s profit
1800 -39.00 -39.00 -39.00 -39.00 -39.00
1920 -37.80 -33.60 -33.60 -33.60 -34.69
2040 -36.60 -32.40 -28.20 -28.20 -31.52
2160 -35.40 -31.20 -27.00 -22.80 -29.56
Thus, the manufacturer should produce 2,160 units to maximize the expected profit.

Question 2:
Consider a supply chain with the manufacturer, the retailer and end-users, using a revenue-
sharing contract with 12% of revenue-shared from the retailer to the supplier, as below cost-
benefit & demand forecasting details:
F=$120,000 ; c=$30 ; w=$55 ; b=$50 ; p=$122 ; s=$15 ;
Demand 1,800 1,920 2,040 2,160
Probability 26% 27% 29% 18%
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 4 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize retailer’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑅𝑀𝑃) = 𝑝 − 𝑤 = 122 − 55 = 67
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑅𝑀𝐿) = 𝑤 − 𝑠 = 55 − 15 = 40
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 55 − 30 = 25

b. Calculate the expected profit of the retailer and the manufacturer for 4 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Retailer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑝 × (1 − 0.12) − 𝑄 × 𝑤
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑝 × (1 − 0.12) − 𝐷 × 𝑤 − (𝑄 − 𝐷) × 𝑅𝑀𝐿
Q/D 1800 1920 2040 2160 Retailer’s profit
1800 94.25 94.25 94.25 94.25 94.25
1920 89.45 100.53 100.53 100.53 97.65
2040 84.65 95.73 106.81 106.81 98.06
2160 79.85 90.93 102.01 113.10 95.25

2
Thus, the retailer should order 2,040 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 + 𝑄 × 𝑃 × 0.12 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 + 𝐷 × 𝑃 × 0.12 − 𝐹
Q/D 1800 1920 2040 2160 Manufacturer’s profit
1800 -48.65 -48.65 -48.65 -48.65 -48.65
1920 -45.65 -43.89 -43.89 -43.89 -44.35
2040 -42.65 -40.89 -39.13 -39.13 -40.52
2160 -39.65 -37.89 -36.13 -34.38 -37.21
Thus, the manufacturer should produce 2,160 units to maximize the expected profit.

Question 3:
Consider a supply chain with the manufacturer, the distributor and the retailer, using a pay-
back contract, as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$50 ; w=$75 ; s=$15 ; v=$19 ; p=$120;
The demand forecasting can be found as below:
D (units) 9,000 9,450 9,923 10,419 10,940 11,487
Prob 0.14 0.09 0.26 0.21 0.18 0.12
a. Calculate the manufacturer’s marginal profit, manufacturer’s marginal loss,
distributor’s marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 6 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize distributor’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 75 − 50 = 25
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑀𝑀𝐿) = 𝑐 − 𝑠 − 𝑣 = 50 − 15 − 19 = 16
• 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑜𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝐷𝑀𝑃) = 𝑝 − 𝑤 = 120 − 75 = 45

b. Calculate the expected profit of the retailer and the manufacturer for 6 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Distributor:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝐷𝑀𝑃
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝐷𝑀𝑃 − (𝑄 − 𝐷) × 𝑣

3
 Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 405.00 405.00 405.00 405.00 405.00 405.00 405.00
9250 400.25 416.25 416.25 416.25 416.25 416.25 414.01
9500 395.50 424.30 427.50 427.50 427.50 427.50 422.73
9750 390.75 419.55 438.75 438.75 438.75 438.75 430.30
10000 386.00 414.80 445.07 450.00 450.00 450.00 436.59
10250 381.25 410.05 440.32 461.25 461.25 461.25 440.00
10500 376.50 405.30 435.57 467.32 472.50 472.50 442.32
10750 371.75 400.55 430.82 462.57 483.75 483.75 442.37
11000 367.00 395.80 426.07 457.82 491.16 495.00 441.73
11250 362.25 391.05 421.32 453.07 486.41 506.25 438.90
11500 357.50 386.30 416.57 448.32 481.66 516.67 435.97
We have:
10,419 < 𝟏𝟎, 𝟕𝟓𝟎 < 10,940
{ |𝟏𝟎, 𝟕𝟓𝟎 − 10,419| = 331 → 𝑄 ∗ = 10,940
|𝟏𝟎, 𝟕𝟓𝟎 − 10,940| = 190
Thus, the distributor should order 10,940 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑀𝑀𝑃 − 𝐹 − (𝑄 − 𝐷) × 𝑀𝑀𝐿
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 105.00 105.00 105.00 105.00 105.00 105.00 105.00
9250 101.00 111.25 111.25 111.25 111.25 111.25 109.82
9500 97.00 115.45 117.50 117.50 117.50 117.50 114.45
9750 93.00 111.45 123.75 123.75 123.75 123.75 118.34
10000 89.00 107.45 126.84 130.00 130.00 130.00 121.41
10250 85.00 103.45 122.84 136.25 136.25 136.25 122.64
10500 81.00 99.45 118.84 139.18 142.50 142.50 123.17
10750 77.00 95.45 114.84 135.18 148.75 148.75 122.24
11000 73.00 91.45 110.84 131.18 152.54 155.00 120.87
11250 69.00 87.45 106.84 127.18 148.54 161.25 118.10
11500 65.00 83.45 102.84 123.18 144.54 166.97 115.27
We have:
10,419 < 𝟏𝟎, 𝟓𝟎𝟎 < 10,940
{ |𝟏𝟎, 𝟓𝟎𝟎 − 10,419| = 81 → 𝑄 = 10,419
|𝟏𝟎, 𝟓𝟎𝟎 − 10,940| = 440
Thus, the manufacturer should produce 10,419 units to maximize the expected profit.

Question 4:

4
Consider a supply chain with the manufacturer, the distributor and the retailer, using a cost-
sharing contract with 32% payment of the manufacturer’s production cost from the distributor,
as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$50 ; w=$60 ; s=$15 ; p=$120;
The demand forecasting can be found as below:
D (units) 9,000 9,450 9,923 10,419 10,940 11,487
Prob 0.14 0.09 0.26 0.21 0.18 0.12
a. Calculate the manufacturer’s marginal profit, manufacturer’s marginal loss,
distributor’s marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 6 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize distributor’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 60 − 50 = 10
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑀𝑀𝐿) = 𝑐 − 𝑠 = 50 − 15 = 35
• 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑜𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝐷𝑀𝑃) = 𝑝 − 𝑤 = 120 − 60 = 60

b. Calculate the expected profit of the retailer and the manufacturer for 6 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Distributor:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝐷𝑀𝑃 − 𝑄 × 𝑐 × 0.32
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝐷𝑀𝑃 − 𝑄 × 𝑐 × 0.32
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 396.00 396.00 396.00 396.00 396.00 396.00 396.00
9250 392.00 407.00 407.00 407.00 407.00 407.00 404.90
9500 388.00 415.00 418.00 418.00 418.00 418.00 413.53
9750 384.00 411.00 429.00 429.00 429.00 429.00 421.08
10000 380.00 407.00 435.38 440.00 440.00 440.00 427.43
10250 376.00 403.00 431.38 451.00 451.00 451.00 431.08
10500 372.00 399.00 427.38 457.14 462.00 462.00 433.71
10750 368.00 395.00 423.38 453.14 473.00 473.00 434.21
11000 364.00 391.00 419.38 449.14 480.40 484.00 434.06
11250 360.00 387.00 415.38 445.14 476.40 495.00 431.86
11500 356.00 383.00 411.38 441.14 472.40 505.22 429.57
We have:

5
 10,419 < 𝟏𝟎, 𝟕𝟓𝟎 < 10,940
{ |𝟏𝟎, 𝟕𝟓𝟎 − 10,419| = 331 → 𝑄 ∗ = 10,940
|𝟏𝟎, 𝟕𝟓𝟎 − 10,940| = 190
Thus, the distributor should order 10,940 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑤 − 𝑄 × (1 − 0.32) × 𝑐 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑤 − 𝑄 × (1 − 0.32) × 𝑐 − 𝐹 + (𝑄 − 𝐷) × 𝑠
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 114.00 114.00 114.00 114.00 114.00 114.00 114.00
9250 109.25 120.50 120.50 120.50 120.50 120.50 118.93
9500 104.50 124.75 127.00 127.00 127.00 127.00 123.65
9750 99.75 120.00 133.50 133.50 133.50 133.50 127.56
10000 95.00 115.25 136.54 140.00 140.00 140.00 130.57
10250 90.25 110.50 131.79 146.50 146.50 146.50 131.56
10500 85.50 105.75 127.04 149.36 153.00 153.00 131.78
10750 80.75 101.00 122.29 144.61 159.50 159.50 130.41
11000 76.00 96.25 117.54 139.86 163.30 166.00 128.55
11250 71.25 91.50 112.79 135.11 158.55 172.50 125.15
11500 66.50 86.75 108.04 130.36 153.80 178.42 121.67
We have:
10,419 < 𝟏𝟎, 𝟓𝟎𝟎 < 10,940
{ |𝟏𝟎, 𝟓𝟎𝟎 − 10,419| = 81 → 𝑄 = 10,419
|𝟏𝟎, 𝟓𝟎𝟎 − 10,940| = 440
Thus, the manufacturer should produce 10,419 units to maximize the expected profit.

6
SOLUTION

LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN

QUIZ 2 – GROUP 1
Duration: 15 minutes

Question:

HappyWorking is a retail chain for stationery. The company currently has 100 stores
distributed across Vietnam. In addition, HappyWorking also operates an online channel. It is
considering introduction of a new inkjet cartridge and must decide whether to offer it at retail
stores or the online channel. Weekly demand for the inkjet cartridge has been forecast to be
normally distributed with N(100,802). The company also forecast that the demand at the online
channel would be the sum of demand across all 100 stores. It takes the supplier four weeks to
fulfill a replenishment order, whether placed separately by each store or by the online DC.
HappyWorking is targeting a CSL of 95 percent. Given that F-1(0.95) = 1.645.
a. How much safety inventory will HappyWorking carry if the ink cartridge is carried at
all 100 stores?
b. How much saving in safety inventory will HappyWorking expect if the ink cartridge is
carried online, and all stores have demand that is independent and identically
distributed?
c. How much saving in safety inventory will HappyWorking expect if the ink cartridge is
carried online and demand across stores has a correlation coefficient of ρ = 0.3?

Answer:
𝑘 = 100 ; 𝐷 = 100; 𝜎𝐷 = 80; 𝐿 = 4; 𝐶𝑆𝐿 = 0.95
a. How much safety inventory will HappyWorking carry if the ink cartridge is carried
at all 100 stores?
• 𝑠𝑠 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 100 × 𝐹𝑆−1 (0.95) × √4 × 80 = 26,320

b. How much saving in safety inventory will HappyWorking expect if the ink cartridge
is carried online, and all stores have demand that is independent and identically
distributed?
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √100 × 80 = 800
• 𝑠𝑠 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 800 = 2,632
• 𝑆𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 26,320 − 2,632 = 23,688

c. How much saving in safety inventory will HappyWorking expect if the ink cartridge
is carried online and demand across stores has a correlation coefficient of ρ = 0.3?
• 𝜎𝐷𝐶 = √𝑘𝜎 2 + 𝑘(𝑘 − 1)𝜌𝜎 2 = √100 × 802 + 100 × (100 − 1) × 0.3 × 802 = 4,433
• 𝑠𝑠 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 4,433 = 14,585
• 𝑆𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 26,320 − 14,585 = 11,735

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