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Quantitative Analsis of a Case Hightower Department Stores - Essay Example

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Quantitative Analsis of a Case Hightower Department Stores

1. EXECUTIVE SUMMARY There are three decision problems in this case. They are the number of pigs, bear, and raccoon to purchase for the 1993 Christmas season respectively. Analysis of the industry and the company shows that Hightower Department Store differentiates itself based on quality, large selection, image, and "grandmother" business to compete in an industry where competition is intense. The first decision alternative is to order based on the plot developed by Julia Brown. The second decision alternative is to order based on the results of regression analysis. The second decision alternative would result in a more accurate prediction and also a higher contribution margin after taking into account of the uploading cost due to unsold inventory. Therefore, it is recommended that 0 pig, 258 bears, and 740 raccoons should be ordered for the 1993 Christmas Season.

2. DECISION PROBLEM
There are three decision problems in this case. They are the number of pigs, bear, and raccoon to purchase for the 1993 Christmas season respectively. Too high a volume would result in the unloading of unsold inventory at 80 cents on the dollar in January to Fernstone's, a job-lot retailer. Too low a volume would not only result in foregone contribution of the stocked-out item, but also lost future sales due to customers being upset because a particular item was not available.

3. ANALYSIS OF THE INDUSTRY AND THE COMPANY
The intensity of rivalry was high in the industry. Toy departments were typically

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not so profitable as other store departments. Competition from general merchandise chains, mass merchandisers, variety stores, toy supermarkets, and toy specialty stores had lowered conventional department store toy sales to about 9 percent of the total market. The department stores' need for high margins made it difficult for them to compete in the toy business.
The strengths of Hightower chain were that it was associated with quality, large selection, and good value. The company envisioned itself as a fashion leader; it took special pride in its ability to respond quickly to changes in fashion and style. Management also emphasized that TV and newspaper advertising, point-of-sale presentations, and knowledgeable and friendly sales personnel had been important to the success of the chain. Moreover, it placed less attention to TV-promoted toys-the high-demand, lower margin toy category. It also excelled in areas that mass merchants could not, such as special events, displays, and demonstrations. Besides, it emphasized imported items and exclusive items not available elsewhere. It also varied the amount of floor space devoted to toys; in may department stores, toy floor space tripled during the Christmas season. Lastly, it developed the "grandmother" business-that is, stocking toys often purchased by grandmothers, who tended to shop in department stores and usually were not as concerned about price as other toy buyers.
The weakness of the Hightower chain was that whereas it looked for margins of 40 to 50 percent, specialty toy chains such as Toys R Us operated with only 30 percent margins for most merchandize.

4. POSSIBLE DECISION ALTERNATIVES
The number of pigs, bear, and raccoon can take on any non-negative integer.
The first alternative is to order 0 pig, 300 bears, and 750 raccoons. This is based on the plot of the first full year's unit sales versus the previous year's test sales and the 150 percent rule of thumb.
The second alternative is to order 0 pig, 258 bears, and 740 raccoons (see table 1). This is based on the results of the regression equation obtained through Excel as presented in figure 1. The pig should not be adopted because a domestic animal would bring in at least $1,150 contribution during the Christmas season, which is greater than the $648.48 brought in by the pig (see table 2).





FIGURE 1
SUMMARY OUTPUT









Regression Statistics








Multiple R
0.844936196







R Square
0.713917175







Adjusted R Square
0.698023685







Standard Error
66.7481151







Observations
20

















Coefficients
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
25.92754862
32.24584802
0.804058513
0.431854753
-41.81851662
93.67361386
-41.81851662
93.67361386
Test Sales (units)
14.62385125
2.181963522
6.702152032
2.76398E-06
10.03971245
19.20799005
10.03971245
19.20799005










TABLE 1
SALES POTENTIAL AND ORDER QUANTITY BASED ON REGRESSION ANALYSIS
Animal
Sales Potential
Order Quantity






Pigs
84.42295362
126.6344304






Bears
172.1660611
258.2490917






Raccoons
493.8907886
740.8361829








TABLE 2
CALCULATED GROSS MARGIN OF EACH ANIMAL BASED ON REGRESSION ANALYSIS
Animal
Projected Unit Sales
Gross Margin per Unit
Estimated Total Gross Margin
Pig
84
7.72
648.48
Bear
172
7.52
1293.44
Raccoon
493
7.53
3712.29

5. EVALUATION OF ALTERNATIVES

The second alternative based on regression analysis would result in the least squares, the minimal sum of the squared deviations of the observed data points about the regression surface (Daniel and Terrell, 1995). Also, from section 3, as the strengths of Hightower Department Store lie in its quality, large selection, and its appeal to "grandmother" where image matters, it should not mark the merchandise down for the year-end sale or store unsold animals until the next season. Unsold inventory should be unloaded to Fernstone's.
As could be seen from the tables below, the contribution margin net of unloading cost is higher for the order quantity based on regression analysis.

TABLE 3
CONTRIBUTION MARGIN AFTER LOSS FROM UPLOADING OF UNSOLD INVENTORY BASED ON PLOT
Animal
Bear
Raccoon
Order Quantity Potential Based on Plot
300
750
Predicted Sales Potential Based on Regression Analysis
172
493
Units Unloaded to Fernstone's
128
257
Landed Cost
5.43
6.42
Loss from Uploading of Inventory to Fernstone's per Unit
1.086
1.284
Loss from Uploading of Inventory to Fernstone's
139.008
329.988
Contribution Margin
1293.44
3712.29
Contribution Margin after Loss
1154.43
3382.3











TABLE 4
CONTRIBUTION MARGIN AFTER LOSS FROM UPLOADING OF UNSOLD INVENTORY BASED ON REGRESSION ANALYSIS
Animal
Bear
Raccoon
Order Quantity Based on Regression Analysis
258
740
Predicted Sales Potential Based on Regression Analysis
172
493
Units Unloaded to Fernstone's
86
247
Landed Cost
5.43
6.42
Loss from Uploading of Inventory to Fernstone's per Unit
1.086
1.284
Loss from Uploading of Inventory to Fernstone's
93.396
317.148
Contribution Margin
1293.44
3712.29
Contribution Margin after Loss
1200.04
3395.14

6. RECOMMENDATIONS
Hightower Department Stores should buy 0 pig, 258 bears, and 740 raccoons for the 1993 Christmas Season. This will bring in a total contribution margin of USD 5005.73 (1293.44 + 3712.29) and a contribution margin net of unloading cost of 4595.18 (1200 + 3395).






















REFERENCES

Daniel, W.W., & Terrell, J.C. (1995). Business statistics. U.S.A.: Houghton Mifflin Company.
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Summary

There are three decision problems in this case. They are the number of pigs, bear, and raccoon to purchase for the 1993 Christmas season respectively. Analysis of the industry and the company shows that Hightower Department Store differentiates itself based on quality, large selection…
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