The Catalog Company Problem1

The Catalog Company is a mail- and phone-order company that sells

generic brands of houseware items and clothing. Approximately 95% of
customer orders are received by phone; the remaining 5% are received
in the mail. Phone orders are accepted at Catalog Company's toll-free
800 number, 800-SAVE-NOW. The number is available 9 hours per day
(8 A.M. to 5 PM.), 5 days a week.
Sarah Walters, a recent graduate of Columbia Business School, has just
been hired by Catalog to improve its operations. Sarah would like to
impress her boss, Ben Gleason, a recent graduate of Stern Business
School and president of Catalog Company, with some ideas that would
quickly improve the company's bottom line. After spending a week
learning about Catalog's operations, Sarah feels that a substantial
impact can be made by a closer evaluation of the phone order system.
Currently, Catalog employs a single full-time operator to take orders
over the phone. Sarah wonders whether additional operators should be
hired to take phone orders. Ben feels that Sarah's time might be better
spent studying the catalog mailing lists. Ben reasons that the mailing
lists are where customers are generated, and improving the list will
bring in more revenue. And besides, Ben says, "Catalog's phone
operator (and recent graduate of Wharton Business School), Betty
Wrangle, seems to be doing nothing more than half of the time that I
walk by. Hiring more operators to do nothing will just waste more
money." Although Sarah knows the mailing lists are important, she
thinks that a study of the mailing lists will take far more time than a
quick evaluation of the phone order system.
Forging ahead, Sarah discovered the following information about the
phone order system. The phone operator, Betty Wrangle, is paid $9 per
hour in wages and benefits. The average cost to Catalog for a
completed 800 number call is $1.50. With only one phone line, any
incoming calls that arrive when Betty is on the phone to another
customer get a busy signal. The cost of the phone line is $40 per
month. The phone company can immediately add up to four additional
phone lines using the same 800 number, each at a cost of $40 per
month per line. Catalog's phone system is such that it cannot be
From Practical Management Science (2nd ed., Winston and Albright, 2001 Duxbury
Press, p. 821).
1

upgraded in the near future to allow incoming calls to be placed on

hold. The average profit on an order (not including the cost of the
operator or phone call) is 40% of the amount of the order. For example,
an order of $100 brings a profit of $40 to Catalog.
Sarah decided that additional information needed to be collected about
the frequency of incoming calls, the length of the calls, and so on. After
talking to the phone company, Sarah learned that she could borrow
equipment for one day that could detect when a call was coming in,
even when Betty was on the phone. The caller would still get a busy
signal and be lost, but Sarah would know that a call had been
attempted. Sarah collected almost nine hours of data the next day;
these data are presented in Table 1. Sarah believes that most of the
callers who receive a busy signal take their business elsewhere and are
totally lost to Catalog. Sarah does not feel that extending the hours of
operation of the 800 number would be beneficial because the hours of
operation are printed prominently in all of the catalogs.
The first call arrives 0.036 hour into the day. It takes Betty 0.054 hour
to process the call and record the order for $65.21 worth of
merchandise. Callers 5 and 6 get busy signals when they call, because
Betty was still processing caller 4. Because calls 5 and 6 were lost, no
call length information was available and no orders were placed. Data
collection was stopped at call number 80.
Call
Numbe
r
1
2
3
4
5
6
7
.
.
.
80
Table 1: Call Data for

B60.2350

Arrival
Time
(hours)
0.0359
0.1564
0.3066
0.3609
0.3610
0.3689
0.4094
.
.
.
8.4890
Catalog

Busy Signal?
(1 = busy, 0 =
not)
0
0
0
0
1
1
0
.
.
.
0
Case Study

Call
Length
(hours)

Order
Size
(dollars)

0.0544
0.0503
0.0191
0.0109
N/A
N/A
0.0877
.
.
.
0.0310

65.21
62.47
62.46
38.11
N/A
N/A
54.02
.
.
.
10.00

Prof. Juran

Questions
Use the complete information in the file CATALOG.XLS to answer the
following questions.
1.
Approximately what fraction of the time is Betty idle? Is
Ben's estimate correct?
2.
Approximately how many calls are lost in an average hour
due to a busy signal?
3.
Use the data to estimate the average arrival rate of all
attempted calls to Catalog. Give an approximate 95%
confidence interval for the estimate. Plot a frequency
histogram of Interarrival times. Does the distribution of
interarrival times appear to be exponential?
4.

5.

B60.2350

Use the data to estimate the average service rate of all

completed calls. Give an approximate 95% confidence
interval for the estimate. Plot a frequency histogram of
service times. Does the service time distribution appear to
be exponential? Give an approximate 95% confidence
interval for the average revenue per call.
Would you recommend that Catalog acquire additional
phone lines and operators? If so, how many? If not, why
not? Justify your answer in enough detail so that Ben
Gleason would be convinced of your recommendation.

Prof. Juran