What is the difference in order quantity and profit achieved if George and The Jerk Store act independently versus if they behaved as a vertically integrated supply chain?
What will be an ideal response?
Answer: For The Jerk Store, the cost of understocking is $6.25 and the cost of overstocking is $2.50. The order size should be 2840 with an expected overstock of 446 units and an expected understock of 107 units. The Jerk Store's expected profit is $13,840 and George's expected profit is $2,840.
Contrast this with a supply chain overstock cost of $1.50 and understock cost of $7.25. The optimal order quantity for the supply chain is 3069 and the expected overstock and understock amounts are 624 units and 55 units respectively. The total supply chain expected profit is then $16,789, an increase of $109, more than enough for George to have a fine shrimp dinner with his share.
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