Hamptonshire Express – Case Solution

Case study questions answered in the first solution:

1. a.) How many newspapers should Sheen stock (i.e., order from the printer)? What is the profit of this stocking quantity?
   b.) Verify that the value derived in part (a) is consistent with the optimal stocking quantity in the Newsvendor model.
2. a.) How many hours should Sheen invest daily in the creation of the profile section? Assume the opportunity cost of her time (based on other employment opportunities in Hamptonshire) is $10 per hour. Try different values for h in the spreadsheet “Hamptonshire Express: Problem #2.” (To make your life easier, the optimal stocking quantity, Q, is computed by the spreadsheet based on the newsvendor formula for your choice of h.)
   b.) What explains Sheen’s choice of effort level h? Do not spend more than 10 minutes thinking about this question. (Hint: The marginal cost of her effort is $10 per hour, and the opportunity cost of her time; the marginal benefit of her effort is 0 8 50 2 * h.)
   c.) Compare the optimal profit under this scenario with the optimal profit derived in Problem #1.
3. a.) Assuming h=4 (i.e., Sheen has spent four hours creating the profiles section), what would Armentrout’s stocking quantity be? To identify the stocking quantity that maximizes Armentrout’s profits, try varying Q while holding h=4 in the spreadsheet “Hamptonshire Express Problem #3.”
   b.) Why does the optimal stocking quantity differ from the optimal stocking quantity identified in Problem #2? Is the result here consistent with the newsvendor formula?
   c.) Now try varying h in the spreadsheet “Hamptonshire Express: Problem #3c”) to see what happens to Sheen’s profit. (Note: This spreadsheet calculates the optimal newsvendor calculation for differentiated channels to maximize Ralph’s profit.) Does her optimal effort in this question differ from the answer to question 2? Why or why not?
   d.) How would changing the transfer price from the current value of $0.80 per newspaper affect Sheen’s effort level and Armentrout’s stocking decision? Try changing the transfer price in the spreadsheet “Hamptonshire Express: Problem #3d.” (Embedded in this spreadsheet are formulas for h and Q.)
   e.) What conclusions can you draw about stocking and effort levels in a differentiated channel vis-àvis an integrated firm that manufactures and retails its product?
4. a.) If you were Armentrout, how many copies of the Express would you stock? Use the spreadsheet “Hamptonshire Express: Problem #4” to determine the optimal stocking quantity (the spreadsheet calculates h to maximize Sheen’s profits for the given wholesale price). Compare your stocking decision with the optimal decision in Problem #3a.
   b.) Why does the optimal stocking quantity differ from the answers given in Problems #1, #2, and #3? Is this answer consistent with the logic of the newsvendor model?
   c.) Armentrout’s newsstand was constrained for space as he continued to add new products. To get a better idea of the true profitability of each product, he decided to allocate the cost of real estate according to the space occupied by each product. If he figured daily real estate costs for each additional newspaper at approximately 3 cents, how would this affect his stocking decision? (Answer this question qualitatively.)
5. a.) Assume Sheen charges a wholesale price of $0.80 per copy of the Express. How does her buyback price affect Armentrout’s stocking quantity? What buy-back price would maximize channel profits? How much does Armentrout stock under this buy-back plan?
   b.) Identify the combination of wholesale price and buy-back price that maximizes expected daily profit for the channel. How does this number compare with the expected daily profit for the channel in Problem #2 (i.e., the vertically integrated channel)? (Use the simulation in “Hamptonshire Express: Problem #5b”; the spreadsheet determines the optimal buy-back price given the value of the wholesale transfer price from Anna to Ralph.)
   c.) How would Armentrout’s stocking decision and Sheen’s effort decision change if Sheen insisted that Armentrout pay a daily franchise fee (a fixed daily fee that allowed him to carry the Express at his newsstand) in addition to the margins she earned?

Case study questions answered in the second solution:

1. How many Hamptonshire Express newspapers should Sheen stock?
2. How many hours should Sheen invest?
3. How many newspapers should Armentrout stock, etc.?
4. Given the new “Private Eye,” how do Armentrout’s decisions change?
5. How does the buyback price change Armentrout’s stocking decision?
6. How would a VMI scheme influence Sheen and Armentrout’s decisions?