Case Study: Promotion Challenges at Gulmarg Ski

Should Gulmarg promote? If so, in which month? October or December? Run the excel solvers models to solve which month running the promotional is more profitable.

CASE STUDY Promotion Challenges at Gulmarg Skis Management at Gulmarg Skis was surprised in the previ- Gulmarg started October with an inventory of 2,000 ous season when a competitor, Kitz, discounted their pairs of skis and preferred to end in March with no skis by $50 in October. In a market in which discounting inventory to carry over. Any leftover inventory at the end was rare, this was an unusual move by Kitz. As a result, of March cost Gulmarg the equivalent of $500 a pair Gulmarg saw a significant drop in sales between October because of the discounting required to sell it. Customers and January. The company did not want to be caught were not willing to wait for skis, so Gulmarg lost all unprepared for the upcoming season and was planning sales that it could not meet in a month because of insuf- its response. Two alternatives being considered by ficient inventory and production. Gulmarg's skis were Gulmarg were to promote in October or December. normally priced at $800 a pair. Gulmarg could not precisely predict what Kitz would do Before making its production plans, Gulmarg had regarding promotions but felt that Kitz was likely to done market research to fully understand the impact of repeat its October promotion, given its success in the promotions on customer behavior. Dropping price from previous year. $800 to $750 attracted new customers, but also resulted Gulmarg and Kitz competed in high-performance in existing customers shifting the timing of their pur- skis and sold direct to end consumers. The companies chase to take advantage of the discount. Customer prided themselves on outstanding craftsmanship, using behavior was also affected by actions taken by the com- only the best materials. Both were known for the high petitor, Kitz. If only one of the two companies promoted quality of their skis and the fact that customers could in a given month, it saw a 40 percent increase in sales for design their own top sheet. Although each company had the month and a forward movement of 20 percent of a loyal following, there was a significant fraction of cus- demand from each of the three following months. In tomers who were happy to buy skis from either. It is this other words, If Gulmarg promoted in October but Kitz group that the two companies were competing for did not, Gulmarg observed a 40 percent increase in through price discounts. October demand and a shift of 20 percent of demand The sale of skis was highly seasonal, with all sales from November, December, and January to October. The occurring between October and March, as shown in competitor that did not promote experienced a 20 per- Table 9-9. Production capacity at the manufacturing cent drop in sales for the promotion month and a 10 per- plant was limited by the number of employees that Gul- cent drop in sales for each of the three following months. marg hired. Employees were paid $15/hour for regular If one of the companies promoted in October and the time and $23/hour for overtime. Each pair of skis other in December, changes in demand were cumulative, required 4 hours of work from an employee. The plant with the October promotion having the first impact, fol- worked 20 days a month, 8 hours a day on regular time. lowed by the December promotion. In other words, Overtime was restricted to a maximum of 40 hours per demand for each company shifted from that provided in employee per month. Gulmarg employed a total of Table 9-9 based on the October promotion. The Decem- 60 workers and felt that it could not let any of them go, ber promotion then affected the revised demand. For even in months when demand was below the capacity provided by 60 workers. Given the high skill require- ments, the company had difficulty finding suitable peo- TABLE 9-9 Demand Forecast for Gulmarg Skis ple and as a result could hire only up to a maximum of Month Demand Forecast 10 temporary employees. In other words, the number of October 1,600 employees could fluctuate between 60 and 70. Hiring each temporary employee cost $500, and letting each November 2,400 one go cost another $800. December 4,200 Each pair of skis used material worth $300, mostly January 3,800 in the form of expensive carbon fiber, plastic, and alloys. February 2,200 Carrying a pair of skis in inventory from one month to March 2,200 the next cost $10. Given the seasonal nature of demand, example, if Kitz promoted in October and Gulmarg chose to promote in December, Gulmarg would observe a 20 percent drop in demand in October and a 10 percent drop in demand in November, December, and January compared with the figures in Table 9-9. The December promotion would then increase demand in December by 40 percent of the reduced amount (because of the earlier Kitz promotion). Similarly, forward buying from Janu ary would also be based on the reduced amount because of the October promotion by Kitz. Forward buying from February and March would be based on demand not affected by the October promotion by Kitz. If both com- panies promoted in a given month, each experienced a growth of 10 percent for that month and forward buying equivalent to 20 percent of demand from each of the three following months. Should Gulmarg promote? If so, in which month should it promote? If not, why not? N E F G H J K M 1 Supply and Demand Planning for Gulmarg Skis Production Capacity 40 0.25 10 Costs CWCH CLCoCCsCp cc 640 300 800 40 105 300 500 O P Q ST Total Revenue = 13,574,000 Total Cost = Total Profit = 13,574,000 Total Total Cost = 18574.000 i Sales 8 Parameters Unit Price Discount $800 $50.00 Forward Buy 20% Consumption 50% Decline in Sales 20% Promotional Sales Increase 40% Additional Constraints 16 >= S6 500 Base Actual D. DE WAH 60.0 L, O B Si P C Cost 40.0 2000.0 0.0 11 Decision Variables Sales Promo Price 14 Montho 15 Month 1 1 $750 16 Month20 $800 11 Month30 $800 18 Month40 $800 19 Month5 $800 20 Month6 $800 1600 2400 4200 3800 2200 2200 3720 1920 3360 3800 2200 2200 0.00 0.00 0.00 0.00 0.00 0.00 = W-1 +H-Ft 60.0 22 Constraints 23 Workforce Balance W = 25 Month1 0.0 26 Month2 0.0 27 Month3 28 Month4 0.0 29 Month5 0.0 50 Month6 0.0 0.0 Inventory Balance T-S Month1 0.0 Month2 Month3 Month4 0.0 Month5 0.0 Month6 0.0 17-1-1+P +C;-D -1720.0 -1920.0 -3360.0 -3800.0 -2200.0 -2200.0 0.0 Labor cost $15/hour Overtime cost $23/hour Plant works 20 days /month Work day 8/hours Overtime restricted to 40 hours per month per employee Gulmarg employs 60 workers Temporary Worker cost to hire $500 /employee Temporary Worker cost tolayoff $800 /employee Material cost $300 /ski set Carrying Cost $10 month to month Starting Inventory 2,000 units March leftover inventory cost $500 / ski set Ski sale price $800 / ski set Considered sale discount price $750 /ski set Increase in sales 40% after running promotional Forward movement of 20% after running promotional Decrease in sales 20% after not running promotional Increase in sales 20% after running promotional same month as competitor Forward movement of 20% after running promotional same month as competitor 52 Production Capacity Overtime Capacity Pt KWW +KO O Kwo W = 500 SK$20 = 0 Change Delete Reset All Load/Save Make Unconstrained variables Non-Negative Select a Solving Method: Simplex LP Options Solving Method Select the GRG Nonlinear engine for Solver Problems that are smooth nonlinear. Select the LP Simplex engine for linear Solver Problems, and select the Evolutionary engine for Solver problems that are non-smooth. Help Solve Close G H I N E F 1 Supply and Demand Planning for Gulmarg Skis Production Capacity Ko 40 0.25 Costs O P Q R Total Revenue = 14,311,000 Total Cost = Total Profit = 14,311,000 Kwo 10 300 Cc 800 40 . 10 300 500 i Sales 8 Parameters Unit Price Discount $800 $50.00 Forward Buy 20% Decline in Sales 20% Consumption 50% Promotional Sales Increase 40% Additional Constraints >= 500 S6 D P C Cost 11 Decision Variables Sales Promo Price 14 Montho 15 Month10 $800 16 Month20 $800 17 Month30 $800 18 Month4 1 $750 19 Month5 $800 20 Month 6 $800 Actual D WHL Oil Si 60.0 40.0 2000.0 0.0 1600 1600 2400 2400 4200 4200 3800 6580 2200 1760 2200 1760 0.00 0.00 0.00 0.00 0.00 0.00 W-1 +H-Ft = +C-D 0.0 0.0 Inventory Balance T-S Month1 Month2 Month3 Month4 Month5 0.0 Month 6 0.0 17-1--1 +P 400.0 -2400.0 -4200.0 -6580.0 -1760.0 -1760.0 22 Constraints 23 Workforce Balance W = 25 Month1 0.0 26 Month2 0.0 27 Month3 0.0 28 Month4 29 Month5 0.0 50 Month6 0.0 31 32 Production Capacity 33 Pt 34 Month1 0.0 35 Month2 0.0 36 Month3 31 Month4 0.0 58 Month5 0.0 = S6 500 Base Actual D. DE WAH 60.0 L, O B Si P C Cost 40.0 2000.0 0.0 11 Decision Variables Sales Promo Price 14 Montho 15 Month 1 1 $750 16 Month20 $800 11 Month30 $800 18 Month40 $800 19 Month5 $800 20 Month6 $800 1600 2400 4200 3800 2200 2200 3720 1920 3360 3800 2200 2200 0.00 0.00 0.00 0.00 0.00 0.00 = W-1 +H-Ft 60.0 22 Constraints 23 Workforce Balance W = 25 Month1 0.0 26 Month2 0.0 27 Month3 28 Month4 0.0 29 Month5 0.0 50 Month6 0.0 0.0 Inventory Balance T-S Month1 0.0 Month2 Month3 Month4 0.0 Month5 0.0 Month6 0.0 17-1-1+P +C;-D -1720.0 -1920.0 -3360.0 -3800.0 -2200.0 -2200.0 0.0 Labor cost $15/hour Overtime cost $23/hour Plant works 20 days /month Work day 8/hours Overtime restricted to 40 hours per month per employee Gulmarg employs 60 workers Temporary Worker cost to hire $500 /employee Temporary Worker cost tolayoff $800 /employee Material cost $300 /ski set Carrying Cost $10 month to month Starting Inventory 2,000 units March leftover inventory cost $500 / ski set Ski sale price $800 / ski set Considered sale discount price $750 /ski set Increase in sales 40% after running promotional Forward movement of 20% after running promotional Decrease in sales 20% after not running promotional Increase in sales 20% after running promotional same month as competitor Forward movement of 20% after running promotional same month as competitor 52 Production Capacity Overtime Capacity Pt KWW +KO O Kwo W = 500 SK$20 = 0 Change Delete Reset All Load/Save Make Unconstrained variables Non-Negative Select a Solving Method: Simplex LP Options Solving Method Select the GRG Nonlinear engine for Solver Problems that are smooth nonlinear. Select the LP Simplex engine for linear Solver Problems, and select the Evolutionary engine for Solver problems that are non-smooth. Help Solve Close G H I N E F 1 Supply and Demand Planning for Gulmarg Skis Production Capacity Ko 40 0.25 Costs O P Q R Total Revenue = 14,311,000 Total Cost = Total Profit = 14,311,000 Kwo 10 300 Cc 800 40 . 10 300 500 i Sales 8 Parameters Unit Price Discount $800 $50.00 Forward Buy 20% Decline in Sales 20% Consumption 50% Promotional Sales Increase 40% Additional Constraints >= 500 S6 D P C Cost 11 Decision Variables Sales Promo Price 14 Montho 15 Month10 $800 16 Month20 $800 17 Month30 $800 18 Month4 1 $750 19 Month5 $800 20 Month 6 $800 Actual D WHL Oil Si 60.0 40.0 2000.0 0.0 1600 1600 2400 2400 4200 4200 3800 6580 2200 1760 2200 1760 0.00 0.00 0.00 0.00 0.00 0.00 W-1 +H-Ft = +C-D 0.0 0.0 Inventory Balance T-S Month1 Month2 Month3 Month4 Month5 0.0 Month 6 0.0 17-1--1 +P 400.0 -2400.0 -4200.0 -6580.0 -1760.0 -1760.0 22 Constraints 23 Workforce Balance W = 25 Month1 0.0 26 Month2 0.0 27 Month3 0.0 28 Month4 29 Month5 0.0 50 Month6 0.0 31 32 Production Capacity 33 Pt 34 Month1 0.0 35 Month2 0.0 36 Month3 31 Month4 0.0 58 Month5 0.0