Case Report: Amazon.com

This is a REQUIRED case report. You can work individually or with a group of no more than 3 members (including you, from the same section). Fill in your names and section number in the header. No discussion with anyone outside your team is allowed. Below, write your answers to Questions 1-3. If you need to make additional assumptions to answer a question, clearly state them, logically defend them, and then proceed to answer the question accordingly.

Submit TWO Files per group, as follows:
One Excel workbook matching posted template, with values and formulas filled in. Worksheets are titled Drop Ship, EDN, and Ring will be graded. Please retain the original worksheet formatting so graders can grade easily.
One Word file per group (using this template), with answers to Questions 1, 2, and 3. Limit 5 pages. No need to write formulas or calculation details in this Word document.

Before you start, please review the Safety Stock lectures and in-class exercises before doing the case.
In class, we used z=2 for 98% service level. This is an approximation. When doing the case, please use NORMSINV function in Excel.

The case is due midnight of Mar 22 (Sunday). We will discuss the answers on Mar 23. Please print out your answers for your own reference during the class discussion.

Please leave rest of this page blank. No answer should appear on this cover page.
Case Report: Amazon.com

Q1 (a) Fill in the spreadsheet (2 points)
Hint: Procurement cost per book refers to the unit purchase cost of the book to Amazon. The publisher’s list price is the price that an end-customer sees on the back of the book. The publisher discounts this list price when selling to Amazon.

Q1 (b) Complete the spreadsheet. (12 points)
Based on the spreadsheet calculation, write your decisions on dropping (1 point).
Answer if your decision will change if the prices change? Briefly justify. (1 point)

Given the changes in costs from switching to drop shipping, we have decided to implement drop shipping for Product A, Last Minute Knitted Gifts, and continue to buy Product B, Blink from the publishers. This is because the cost of Product A decreases by $.12 with drop shipping and Product B increases by $.941 with drop shipping.

Q1 (c) (2 points)

Q1 (d) (3 points)

Q2 Complete the spreadsheet (14 points)
Hints:
In Step 1 of the “EDN” worksheet, please keep in mind that we consider stocking in both the DCs and customers are served only from their local DCs. That is, there are NO cross-country shipments in this scenario.
The average shipping cost per item column in the excel template refers to the incremental average shipping cost per item. Footnote 4 in the problem set tells you how to calculate the average incremental shipping cost for an item using data in Exhibit 14.
Based on your spreadsheet calculation, write your decisions on where to hold each product. Then, explain your decisions intuitively. Intuitive explanation means that you should not refer to any calculated numbers; use only raw data to explain your decisions. (Hint: For each product, please compare demand levels, demand variability, holding costs, shipping costs to justify your warehousing strategy.) (4 points)

DVDS:
From looking at the different costs from pooling DVDs vs. having stock in both DCs, it would be more beneficial for Amazon to stock DVDs in both DCs because the overall weekly cost is lower than if Amazon were to pool stock at one location. That being said, there is a tradeoff between inventory costs and shipping costs when both DCs are used. To start, although total weekly demand is the same regardless if inventory is pooled, there is greater variability around the mean when both DCs are used. This impacts safety stock because when there is greater variability, more safety stock is required to meet demand. In addition, holding costs are higher when both DCs are used because more inventory is required than if inventory was pooled.