Best Buys's Case

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Best Buy Integrative Case

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[OPERATIONAL MANAGEMENT MODULE]

QUESTION 7

a) Best Buy should stock 2000, 1100, 484 and 229 units of Consumer Electronics, Computing &

Mobile, Entertainment, Appliances and Consumer Electronics respectively.

When MR equals to MC, the expected profit is maximized.

Then, F(Q) = Cu / (Co+Cu)

Standard deviation is given by dividing CV by average demand.

σ = CV / µ

Z = (Q - µ) / σ

Q = µ + Z*σ

Consumer

Electronics

Computing &

Mobile

Entertainment

Appliances

CV

0.32

0.09

0.24

0.17

average demand

2000

1100

500

200

SD (σ)

640

99

120

34

price

260

500

80

130

cost

190

400

60

90

salvaging cost

120

300

35

80

Co

70

100

25

10

Cu

70

100

20

40

Cu/(Co+Cu)

0.5

0.5

0.44444

0.8

Z

0

0

-0.13

0.85

Q

2000

1100

484.4

228.9

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b) [10 points] Compute the expected profit and the supply-demand mismatch cost. Are there any

categories that make more sense for Best Buy to focus on (and perhaps drop the others)?

Expected profit = [(Price – Cost)*Expected sales] –[ (Cost – Salvage value)*Expected leftover

inventory]

Mismatch cost = (Co*Expected leftover inventory) + (Cu*Expected lost sales)

Expected profit and mismatch cost of each category are shown in the table below. Regarding

Computing & Mobile and Appliance, the mismatch % of expected profit is low. They are

categories that make more sense for Best Buy to focus on.

Consumer

Electronics

Computing &

Mobile

Entertainment

Appliances

L(z)*

0.3989

0.3989

0.4673

0.11

expected loss sales

255.296

39.4911

56.076

3.74

expected sales

1744.704

1060.5089

443.924

196.26

expected leftover

inventory

255.296

39.4911

40.476

32.64

expected profit

104258.56

102101.78

7866.58

7524

mismatch cost

35741.44

7898.22

2133.42

476...