Assignment for Operation Management – Le Club

1. Mean and Standard Deviation for each wine

From Exhibit 1, we can calculate the mean and standard deviation from the past data:
Mean = 0.8745
Standard Deviation =0.4796

For BOURGOGNE ALIGOTE,

Mean = 1100* 0.8745= 961.95
Standard Deviation = 1,100*0.4796= 527.56
For CÔTES DE BOURG,
Mean = 1300*0.8745= 1,136.85
Standard Deviation = 1,300*0.4796= 623.48

2. Overage & Underage cost for each wine

For BOURGOGNE ALIGOTE (white),
The overage cost (Co) = Purchase price – salvage value = 7.2*50% + 1.8 + 0.1*8 – 7.2*0.6= 6.2 –
4.32 = 1.88 (Demand < Ordering Amount)
Assumption:
Purchase price includes procurement cost (7.2*50%), shipping and handling cost (1.8),
warehousing cost for 8 months (assume any unsold bottle will stay for 8mth: 0.1*8)
When demand is more than ordering,
The underage cost(Cu) = Retail price – purchase cost = 7.2 – (7.2*50% + 1.8) = 1.8
(Demand > Ordering Amount)

For CÔTES DE BOURG (red),

The overage cost (Co) = 7.2*50% + 1.8 + 0.1*12 – 7.2*0.7= 1.56 (Demand < Ordering Amount)
The underage cost (Cu) = 7.2- (7.2*50% + 1.8)= 1.8 (Demand > Ordering Amount)

3. How many bottles of each wine would you recommend Zanella to order?
For BOURGOGNE ALIGOTE,
Critical Ratio=Cu/(Cu+Co)=1.8/(1.88+1.8)=0.4891
Q=norminv(0.4545, 961.95, 527.56 )=948

For CÔTES DE BOURG

Critical Ratio=Cu/(Cu+Co)=1.8/(1.8+1.56)= 0.5357
Q=norminv(0.5357, 1136.85, 623.48 )=1,193