TNT: TACKLING NEWSBOY'S TEACHINGS

Howie Rogers sits in an isolated booth at his favorite coffee shop completely immersed in the classified ads of the local newspaper. He is searching for his next get-rich-quick venture. As he meticulously reviews each ad, he absent-mindedly sips his lemonade and wonders how he will be able to exploit each opportunity to his advantage. He is becoming quite disillusioned with his chosen vocation of being an entrepreneur looking for high-flying ventures. These past few years have not dealt him a lucky hand. Every project he has embarked upon has ended in utter disaster, and he is slowly coming to the realization that he just might have to find a real job. He reads the date at the top of the newspaper. June 18. Ohhhh. No need to look for a real job until the end of the summer. Each advertisement Howie reviews registers as only a minor blip on his radar screen until the word Corvette jumps out at him. He narrows his eyes and reads: WIN A NEW CORVETTE AND EARN CASH AT THE SAME TIME! Fourth of July is fast approaching, and we need YOU to sell firecrackers. Call 1-800-555-3426 to establish a firecracker stand in your neighborhood. Earn fast money AND win the car of your dreams! Well, certainly not a business that will make him a millionaire, but a worthwhile endeavor nonetheless! Howie tears the advertisement out of the newspaper and heads to the payphone in the back. A brief-but informative-conversation reveals the details of the operation. Leisure Limited, a large wholesaler that distributes holiday products-Christmas decorations, Easter decorations, firecrackers, etc.-to small independents for resale, is recruiting entrepreneurs to run local firecracker stands for the Fourth of July.

The wholesaler is offering to rent wooden shacks to entrepreneurs who will purchase firecrackers from Leisure Limited and will subsequently resell the firecrackers in these shacks on the side of the road to local customers for a higher price. The entrepreneurs will sell firecrackers until the Fourth of July, but after the holiday, customers will no longer want to purchase firecrackers until New Year's Eve. Therefore, the entrepreneurs will return any firecrackers not sold by the Fourth of July while keeping the revenues from all firecrackers sold. Leisure Limited will refund only part of the cost of the returned firecrackers, however, since returned firecrackers must be restocked and since they lose their explosiveness with age. And the Corvette? The individual who sells the greatest number of Leisure Limited firecrackers in the state will win a new Corvette. Before Howie hangs up the phone, the Leisure Limited representative reveals one hitch-once an entrepreneur places an order for firecrackers, 7 days are required for the delivery of the firecrackers. Howie realizes that he better get started quickly so that he will be able to sell firecrackers during the week preceding the Fourth of July when most of the demand occurs. People could call Howie many things, but "pokey" they could not. Howie springs to action by reserving a wooden shack and scheduling a delivery 7 days hence. He then places another quarter in the payphone to order firecracker sets, but as he starts dialing the phone, he realizes that he has no idea how many sets he should order. How should he solve this problem? If he orders too few firecracker sets, he will not have time to place and receive another order before the holiday and will therefore lose valuable sales (not to mention the chance to win the Corvette). If he orders too many firecracker sets, he will simply throw away money since he will not obtain a full refund for the cost of the surplus sets. Quite a dilemma! He hangs up the phone and bangs his head against the hard concrete wall. After several bangs, he stands up straight with a thought. Of course! His sister would help him. She had graduated from college several years ago with an industrial engineering degree, and he is sure that she will agree to help him. Howie calls Talia, his sister, at her work and explains his problem. Once she hears the problem, she is confident that she will be able to tell Howie how many sets he should order. Her dedicated operations research teacher in college had taught her well. Talia asks Howie to give her the number for Leisure Limited, and she would then have the answer for him the next day. Talia calls Leisure Limited and asks to speak to the manager on duty. Buddy Williams, the manager, takes her call, and Talia explains to him that she wants to run a firecracker stand. To decide the number of firecracker sets she should order, however, she needs some information from him. She persuades Buddy that he should not hesitate to give her the information since a more informed order is better for Leisure Limited-the wholesaler will not lose too many sales and will not have to deal with too many returns.

Talia receives the following information from Buddy. Entrepreneurs purchase firecracker sets from Leisure Limited at a cost of $3.00 per set. Entrepreneurs are able to sell the firecracker sets for any price that they deem reasonable. In addition to the wholesale price of the firecracker sets, entrepreneurs also have to pay administrative and delivery fees for each order they place. These fees average approximately $20.00 per order. After the Fourth of July, Leisure Limited returns only half of the wholesale cost for each firecracker set returned. To return the unsold firecracker sets, entrepreneurs also have to pay shipping costs that average $0.50 per firecracker set. Finally, Talia asks about the demand for firecracker sets. Buddy is not able to give her very specific information, but he is able to give her general information about last year's sales. Data compiled from last year's stand sales throughout the state indicate that stands sold between 120 and 420 firecracker sets. The stands operated any time between June 20 and July 4 and sold the firecracker sets for an average of $5.00 per set. Talia thanks Buddy, hangs up the phone, and begins making assumptions to help her overcome the lack of specific data. Even though Howie will operate his stand only during the week preceding the Fourth of July, she decides to use the demands quoted by Buddy for simplicity. She assumes that the demand follows a uniform distribution. She decides to use the average of $5.00 for the unit sale price.

(a) How many firecracker sets should Howie purchase from Leisure Limited to maximize his expected profit?

(b) How would Howie's order quantity change if Leisure Limited refunds 75 percent of the wholesale price for returned firecracker sets? How would it change if Leisure Limited refunds 25 percent of the wholesale price for returned firecracker sets?

(c) Howie is not happy with selling the firecracker sets for $5.00 per set. He needs to make some serious dough! Suppose Howie wants to sell the firecracker sets for $6.00 per set instead. What factors would Talia have to take into account when recalculating the optimal order quantity?

(d) What do you think of Talia's strategy for estimating demand?