BOSS recently introduced a new men's suit, which is sold at all BOSS and NORDSTROM

stores. The total manufacturing price of a suit is $300. Both companies sell the items at [almost]

similar price of $600. As part of their coordination, NORDSTROM is allowed to sell any unsold

items through NORDSTROM Rack, at a discounted price of $x. The gure below shows part of

this supply chain schematically.

(i) What should the discounted price be in order to NORDSTROM keeps a 20% stockout policy?

(ii) Assume that, on average, it costs $150 for BOSS to produce and ship an item either to

BOSS boutiques or NORDSTROM DC. Also, assume that the average [aggregated] demand of

BOSS products at NORDSTROM is 10,000 items a week, with standard deviation of 500, while

the average [aggregated] demand at all BOSS stores is 3,000 items a week with standard deviation

of 300. Because of the importance of NORDSTROM, BOSS is considering to oer a new contract.

SCM541: Exercises

3

The goal of this contract is diminish the stockout at NORDSTROM to 5%. Also, NORDSTROM

will return all unsold items to BOSS, instead of selling them at NORDSTROM Rack. What should

be the residual value in order to keep the stockout 5%? Is this deal benecial for both parties? [If

required, assume that demand is normally distributed.]

(iii) Recall, from part (ii), that the average [aggregated] demand of BOSS products at NORD-

STROM is 10,000 items a week, with standard deviation of 500. Also, remember that NORD-

STROM buys each item at $300 and sells it at $600. Let's make some assumptions: (a) NORD-

STROM is able to make a discount and sells all the unsold items at, on average, $250 at its own

stores. (b) NORDSTROM uses a xed-time period inventory model (as its inventory system deals

with too many items), and its' order interval is one week. (c) Lead-time to receive orders from

BOSS is xed and equals to one week. Determine NORDSTROM target inventory level for this

product. How would the target quantity change if the order interval changes to 3 weeks, everything

else being equal?

$600 $600 $x $300 NI NORDSTROM BOSS rack HUGO BOSS NORDSTROM $600 $600 $x $300 NI NORDSTROM BOSS rack HUGO BOSS NORDSTROM