Case Study 2: Specialty Toys
Specialty Toys, Inc. sells a variety of new and innovate children’s toys. Management learns that the pre-
holiday season is the best time to introduce a new toy, because many families use this time to look for new
ideas for December holiday gifts. When Specialty discovers a new toy with market potential, it chooses an
October market entry date.
In order to get toys in its stores by Oct, Specialty places one-time orders with its manufactures in June or
July of each year. Demand for children’s toys can be highly volatile. If a new toy catches on, a sense of
shortage in the market place often increases the demand to high levels and large profits can be realized.
However, new toys can also flop, leaving Specialty stuck with high levels of inventory that must be sold at
reduced prices. The most important question the company faces is deciding how many units of a new toy
should be purchased to meet anticipated sales demand. If too few are purchased, sales will be lost; if too
many are purchased, profits will be reduced because of low prices realized in clearance sales.
For the coming season, Specialty plans to introduce the new product called Weather Teddy. This variation
of a talking teddy bear is made by a company in Taiwan. When a child presses Teddy’s hand, the bear
begins to talk. A build-in barometer selects one of five responses that predict the weather conditions. The
responses range from “It looks to be very nice day! Have fun” to “I think it may rain today. Don’t forget
your umbrella.” Tests with the product show that, even though it is not a perfect weather predictor, its
predictions are surprisingly good. Several of Specialty’s managers claimed Teddy gave predictions of the
weather that were as good as many local television weather forecasters. As with other products, Specialty
faces the decision of how many Weather Teddy units to order for the coming holiday season. Members of
management team suggested order quantity of 15000, 18000, 24000 or 28000 units. The wide range of
order quantities suggested indicates considerable disagreement concerning market potential. The product
management team asks you for an analysis of the stock-out probabilities for the various order quantities, an
estimate of profit potential, and to help make an order quantity recommendation. Specialty expects to sell
Weather Teddy for $24 based on a cost of $16 per unit. If the inventory remains after the holiday season,
Specialty will sell all surplus inventory for $5 per unit. After reviewing the sales history of similar
products, Specialty’s senior sales forecasters predicted as expected demand of 20000 units with a 0.9
probability that demand would be between 10000 units and 30000 units.
Managerial Report:
Prepare a managerial report that addresses the following issues and recommends an order quantity for the
Weather Teddy product.
1. Use the sales forecaster’s prediction to describe a normal probability distribution that can be used to
approximate the demand distribution. Sketch the distribution and show its mean and standard
deviation.
2. Compute the probability of stock-out for the order quantities suggested by members of management
team.
3. Compute the projected profit for the order quantities suggested by management team under three
scenarios: Worst case in which sales =10000 units, most likely case in which sales =20000 units
and best case in which sales =30000 units.
4. One of Specialty’s managers felt that the profit potential was so great that the order quantity should
have a 70% chance of meeting demand and only a 30% chance of any stock-outs. What quantity
should be order under this policy, and what is the projected profit under the three sales scenarios.
5. Provide your own recommendation for an order quantity and note the associated profit projections.
Provide the rationale for your recommendation
