Retailer information improvement

Consider the case where the retailer realizes that if he or she could wait to place an order at ( L) closer to the start of the season, better information would be available. Assume that the demand levels are low, medium, or high. Suppose a low demand level implies that the realized demand takes values (uniformly) between 8 and 12 a medium demand level has values between 13 and 17 and a high demand level has values between 18 and 22. In addition, suppose the demand level is low, medium, or high with probability. Suppose the demand level is known to the retailer Zj 

How would permitting the retailer to order at affect manufacturer and retailer profits compared to the values under the wholesale price agreement in the earlier section If all costs remain the same as in the previous sections, the retailer would continue to choose an order, given the demand level, that generates a service level of 0.5. Thus, if the demand level is low, the retailer orders 10 units if medium, the retailer orders 15 units and if high, the retailer orders 20 units. 

If we calculate the expected order received by the manufacturer, it is ( X 10) + (j X 15) + ( X 30) =15 units. Thus the manufacturer s expected profit remains (2 — 0.5 0.6)15 = 13.5. Note that while the manufacturer s expected profit remains the same, the manufacturer does absorb more risk than before, because his order could be lower or higher than 15 with a probability of.  

The retailer adjusts his or her order with the known demand level. Calculating the expected profits for each demand level as shown in Table 5.11, we get the retailer profit under alow demand level of 17.6, under a medium demand level of 27.6, and under a high demand level of 37.6. 

The retailer s expected profit across all the possible demand realiza-17.6 + 27.6 + 37.6 

---

Table 5.11 Retailer expected profit calculations under information improvement. Low Demand Level r = 4, w = 2, c = 0.5, c = 0.6, K = 10, retailer optimal service level = 0.5...

The Administrator, in consultation with the Chairman of the Consumer Product Safety Commission, shall develop information to be distributed by retailers of home improvement products to provide consumers with practical information related to the hazards of renovation and remodeling where lead-based paint may be present. 

Often the difficulty of forecasting demand during a retail promotion means that the retailer may order too much or too little. In addition, if the retail pricing information is not communicated to the manufacturer, then a forecasting rule that adjusts orders based on shipments will result in the manufacturer carrying high inventories between retail promotions. Sharing planned retail promotion information decreases these costs and thus improves supply chain profits. 

---