Question

1) Assume you sell 10 varieties of cell phone cases on Amazon.  Utilize the knowledge gained from your readings, videos and video lecture to answer the following questions.Given that you sell 10 different cell phone cases, how do you determine your A, B and C SKUs? 

2)  Your Chinese manufacturer produces in batches of 2,000 cell phone cases. Each time you place an order, there's a $10 processing fee. In addition, Amazon charges a holding fee of $1 per cell phone case. With a focus on minimizing ordering and holding costs, how do you determine the optimal number of units to order each time?

3)  Given that new cell phones cases are launched every 2-3 months and customers like to have the latest designs, what additional factors would you consider when deciding which cases you definitely don't want to overstock vs. those that are too important to run out of stock?

Answer 1

1.(a) Under ABC analysis, the SKUs are categorised in A, B or C category according to the revenues brought in by them and their sales proportion. For conducting the ABC analysis the usage of each item is multiplied by the cost per unit. Th commodities are tabulated in descending order and the total revenue is calculated. Revenue from each item is calculated as the fraction of total revenue. Categorisation is done in following manner

(a) A items are the top 20% of those items which bring in up to 70% of revenue.

(b) B items are those which constitute of 30% of total products and bring in 25% of revenue.

(c) C items are those which constitute 50% of the total items and bring in 5% of total revenue.

2.

Optimal order quantity = [ 2 x annual demand x ordering cost / cost of holding a unit per year]^1/2

= [ 2 x2000x10/1 ]^1/2 = 200

Hence th orders should be in quantity 200 each time.

3. The additional factor is popularity of the cases and stage of their life cycle. For example, case of a newly launched phone from a popular manufacturer is likely to sell liek hot cakes in next six - eight months before it fades off and a new phone replaces it in the market. Since the phones are launched every 2-3 months, the case seller needs to keep an eye on the trends in phone sales and order accordingly. Cases of a new phones should be ordered lighly higher than anticipated ales so as not to suffer stock out and lost sales. In the same manner, those of declining sets should be ordered less quantity so as to avoid the cost of obsoletion.