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Question 3 Please refer to the column titled Optimal Order Q in sheet Figure 2 of attached
Excel file.
Here are the steps we took to determine the optimal order quantity for each wine:
1. In Figure 1 (containing the prior years wines, forecasted, and actual demand), calculate the
A/F ratio for each wine by dividing Demand by Forecast (Column G / Column F).
2. Find the mean A/F ratio for the dataset (AVG Column H).
3. Find the standard deviation of the A/F ratio for the dataset (STDDEV Column H).
4. Move to Figure 2 (containing the current years wines and forecasted demand). Find the
clearance price by applying a 30% discount to reds and a 40% discount to whites. For the
purposes of this exercise, we classify Ross as whites. (IF(Column E="Rouge", 0.7*FColumn F,
ELSE 0.6*COLUMN F))
5. Calculate the procurement cost, 50% of retail. ( .5*Column F)
6. Calculate average months before clearance, 15 for reds and 8 for whites (IF(Column
E="Rouge", 15, ELSE 8))
7. Calculate per-month cost, which is the sum of opportunity cost of capital (1.25% of retail
price) and warehousing cost (.1 Euro) each month. (Column H*0.0125+0.1)
8. Calculate total holding cost, which is average number of months times per-month costs.
(Column I * Column J).
9. Transit cost is 1.25 Euro for all bottles. (Column L)
10. Underage cost is the lost profit the company missed out on by underestimating demand. It
equals the retail price minus procurement and transit costs (Column F - Column H - Column L).
11. Overage cost is cost the company incurs by overestimating demand. It equals the sum of
procurement, transit, and total holding costs, minus clearance price. (Column H + Column K +
Column L - Column G).
12. Calculate the critical ratio, overage cost divided by the sum of overage and underage costs
(Column M / (Column M + Column N).
13. Calculate the Expected Actual Demand by multiplying the prior years observed mean by
the current forecast. (F33 * Column P)
14. Calculate the SD of Expected Actual Demand by multiplying the prior years observed
standard deviation by the current forecast. (F34 * Column P)
15. Calculate the Optimal Order Q using the inverse normal distribution function, with mu =
Expected Actual Demand, sigma = SD of Expected Actual Demand, and P(z < Z) = the critical
ratio (NORM.INV(Column O, Column Q, Column R)).
We assume the A/F ratios for the prior year approximate a normal distribution because
the size of the dataset is at least 30 types of wine (n=30 being the minimum sample size
necessary to assume the population mean equals the sample mean.)
For the cartons of wine, we cannot calculate the optimal order quantity because the
overage and underage cost is a function of the types of wine in the carton. To include the wines
sold in cartons into the forecast, we would add each bottle into the individual forecast for its
type. For example, if the Carton Panache contained 6 bottles of Faugeres and 3200 cartons
were forecast, we would increase the forecast for individual bottles of Faugeres by 6*3200,
raising it from 12,000 to 31,200 individual bottles. This mitigates the challenge of calculating
the Overage and underage costs for entire cartons.