Drop shipping from wholesalers is a useful tool for inventory cost reduction and capacity augmentation. Amazon is considering expanding its drop shipping program to other product categories. However, some executives are skeptical, pointing out that wholesalers typically charge a higher markup than original producers or publishers. During your summer internship at Jeff Wilke's Department, your first project is to evaluate Amazon's plan to drop ship certain products which are currently being held in inventory at Amazon's DCs. You are to take both inventory holding cost and procurement cost in account. You choose two typical titles (Exhibit 11) held at Amazon DCs to help you get inspired before doing a comprehensive study. a. Using data from the case and Exhibit 11, estimate the unit procurement cost of books A and B. Write your answers in cell B26, B27, B32, and B33 of the spreadsheet template. b. Estimate total cost changes from drop shipping. Assume all orders are single-item orders, and Amazon pays suppliers upon order placement. Should Amazon drop ship orders of book A and/or B? Would your answers change if the price of the books changed? c. Does it make sense that the algorithm allocating volume among drop shippers and Amazon's U.S. DCs is based on the price of the item (see p. 6 of the case)? Hint: Think about other operational costs not considered in part (b). d. Briefly explain your opinion on the following questions. i. All other things equal, does it make more or less sense to drop ship expensive-to-stock items such as home electronics and appliances? (Hint: What contributes to high holding cost?) ii. How does demand volatility affect the decision to drop ship a product? iii. How does the wholesalers' service level affect the decision to drop ship a product? Step 1: Consider buying from publishers and stocking in Amazon's DC Step 1a: Fill in the parameters LT from publishers wks Amazon's review period wks Exposure period (EP) wks Amazon's service level Amazon's annual percentage holding cost Assume 1 year = 52 wks List price Prob (wkly demand = 0) Prob (wkly demand = 1) Prob (wkly demand = 2) Prob (wkly demand > 2) Avg wkly demand A: Last Minute Knitted Gifts B: Blink - The Power of Thinking Without Thinking) 7 8 Step 16: Use "EP Demand" worksheet to find the distribution of demand during EP, and copy the cumulative distribution here: Cum. dist. of EP demand 1 2 3 5 6 Product A Product B Target Stock Level Product A Product B Step 1c: Compute Amazon's procurement cost and inventory cost if buying from publishers Unit procurement Avg wkly Avg demand Safety stock Avg. pipeline demand cost during EP inventory ($ / unit) (units/wk) (units) (units) (units) Product A Avg. cycle inventory (Hint : include pipeline inventory only if Amazon owns it) Avg. wkly Avg. wkly Avg. total inventory inventory procurement Total Wkly cost holding cost cost (units) ($ /wk) ($ /wk) ($/wk) (units) Product B Step 2: Compute Amazon's cost if drop-shipping from wholesalers Unit Avg wkly Avg. Wkly procurement inventory demand cost holding cost ($ / unit) (units/wk) (/wk) Product A Product B Avg. wkly procurement Total Wkly cost cost Cost changes ($ /wk) (s/wk) ($ /wk) =F32-K26 |=F33-K27 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 D 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 O 00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 U 0 0 O 0 0 O 0 O 0 0 0 0 0 0 Two-week demand distribution is given in the blue cells, and the four-week demand distribution is given in the red cells Weekly Demand X=0 1 2 3 3 4 5 6 7 8 Weekly Demand Probability 0 0 0 O 0 0 0 0 X-0 a 0 0 0 0 0 0 1 ol 0 0 0 0 0 0 0 0 2 0 0 0 O 0 0 0 3 0 0 0 n O 0 0 0 0 4 0 0 0 0 0 0 5 ol 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 n 0 0 0 0 0 0 O 0 0 0 X + X: 0 1 2 3 4 5 6 7 10 11 12 13 14 15 16 17 17 Probability 0 0 0 0 0 0 0 0 0 0 . o 0 0 0 0 0 0 Cumulative 0 0 0 0 0 0 0 O 0 . 0 0 X, X- 1 2 3 4 5 6 7 8 9. 10 11 12 13 14 15 16 17 18 Probability 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 X, X, -0 0 0 O 0 0 0 0 0 0 0 0 0 0 1 ol 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 O 0 0 0 3 ol 0 0 0 O 0 0 0 0 0 0 0 0 0 O 0 0 0 O 0 0 0 O 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 7 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 ol O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 01 0 0 0 0 0 0 0 0 0 O O 0 O 0 12 0 O 0 0 O 0 0 0 O 0 0 0 0 0 0 0 0 13 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 14 ol O 0 0 0 O O 0 0 0 0 0 0 0 0 O 0 15 0 0 0 0 0 0 0 0 0 0 0 0 0 16 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 17 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 18 ol 0 0 0 0 0 0 0 0 0 0 0 0 E 0 O O 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 D 0 D 0 O 0 0 0 O O O 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 1 2 3 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 31 32 33 34 36 X. X. X, +X-0 X Probability Cumulative 0 0 o 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 o 0 0 0 0 0 0 0 0 0 0 0 Drop shipping from wholesalers is a useful tool for inventory cost reduction and capacity augmentation. Amazon is considering expanding its drop shipping program to other product categories. However, some executives are skeptical, pointing out that wholesalers typically charge a higher markup than original producers or publishers. During your summer internship at Jeff Wilke's Department, your first project is to evaluate Amazon's plan to drop ship certain products which are currently being held in inventory at Amazon's DCs. You are to take both inventory holding cost and procurement cost in account. You choose two typical titles (Exhibit 11) held at Amazon DCs to help you get inspired before doing a comprehensive study. a. Using data from the case and Exhibit 11, estimate the unit procurement cost of books A and B. Write your answers in cell B26, B27, B32, and B33 of the spreadsheet template. b. Estimate total cost changes from drop shipping. Assume all orders are single-item orders, and Amazon pays suppliers upon order placement. Should Amazon drop ship orders of book A and/or B? Would your answers change if the price of the books changed? c. Does it make sense that the algorithm allocating volume among drop shippers and Amazon's U.S. DCs is based on the price of the item (see p. 6 of the case)? Hint: Think about other operational costs not considered in part (b). d. Briefly explain your opinion on the following questions. i. All other things equal, does it make more or less sense to drop ship expensive-to-stock items such as home electronics and appliances? (Hint: What contributes to high holding cost?) ii. How does demand volatility affect the decision to drop ship a product? iii. How does the wholesalers' service level affect the decision to drop ship a product? Step 1: Consider buying from publishers and stocking in Amazon's DC Step 1a: Fill in the parameters LT from publishers wks Amazon's review period wks Exposure period (EP) wks Amazon's service level Amazon's annual percentage holding cost Assume 1 year = 52 wks List price Prob (wkly demand = 0) Prob (wkly demand = 1) Prob (wkly demand = 2) Prob (wkly demand > 2) Avg wkly demand A: Last Minute Knitted Gifts B: Blink - The Power of Thinking Without Thinking) 7 8 Step 16: Use "EP Demand" worksheet to find the distribution of demand during EP, and copy the cumulative distribution here: Cum. dist. of EP demand 1 2 3 5 6 Product A Product B Target Stock Level Product A Product B Step 1c: Compute Amazon's procurement cost and inventory cost if buying from publishers Unit procurement Avg wkly Avg demand Safety stock Avg. pipeline demand cost during EP inventory ($ / unit) (units/wk) (units) (units) (units) Product A Avg. cycle inventory (Hint : include pipeline inventory only if Amazon owns it) Avg. wkly Avg. wkly Avg. total inventory inventory procurement Total Wkly cost holding cost cost (units) ($ /wk) ($ /wk) ($/wk) (units) Product B Step 2: Compute Amazon's cost if drop-shipping from wholesalers Unit Avg wkly Avg. Wkly procurement inventory demand cost holding cost ($ / unit) (units/wk) (/wk) Product A Product B Avg. wkly procurement Total Wkly cost cost Cost changes ($ /wk) (s/wk) ($ /wk) =F32-K26 |=F33-K27 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 D 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 O 00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 U 0 0 O 0 0 O 0 O 0 0 0 0 0 0 Two-week demand distribution is given in the blue cells, and the four-week demand distribution is given in the red cells Weekly Demand X=0 1 2 3 3 4 5 6 7 8 Weekly Demand Probability 0 0 0 O 0 0 0 0 X-0 a 0 0 0 0 0 0 1 ol 0 0 0 0 0 0 0 0 2 0 0 0 O 0 0 0 3 0 0 0 n O 0 0 0 0 4 0 0 0 0 0 0 5 ol 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 n 0 0 0 0 0 0 O 0 0 0 X + X: 0 1 2 3 4 5 6 7 10 11 12 13 14 15 16 17 17 Probability 0 0 0 0 0 0 0 0 0 0 . o 0 0 0 0 0 0 Cumulative 0 0 0 0 0 0 0 O 0 . 0 0 X, X- 1 2 3 4 5 6 7 8 9. 10 11 12 13 14 15 16 17 18 Probability 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 X, X, -0 0 0 O 0 0 0 0 0 0 0 0 0 0 1 ol 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 O 0 0 0 3 ol 0 0 0 O 0 0 0 0 0 0 0 0 0 O 0 0 0 O 0 0 0 O 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 7 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 ol O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 01 0 0 0 0 0 0 0 0 0 O O 0 O 0 12 0 O 0 0 O 0 0 0 O 0 0 0 0 0 0 0 0 13 ol 0 0 0 0 0 0 0 0 0 0 0 0 0 14 ol O 0 0 0 O O 0 0 0 0 0 0 0 0 O 0 15 0 0 0 0 0 0 0 0 0 0 0 0 0 16 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 17 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 18 ol 0 0 0 0 0 0 0 0 0 0 0 0 E 0 O O 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 D 0 D 0 O 0 0 0 O O O 0 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 1 2 3 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 31 32 33 34 36 X. X. X, +X-0 X Probability Cumulative 0 0 o 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 o 0 0 0 0 0 0 0 0 0 0 0