CASE 35

BETTY’S BALLLOON BOUTIQUE

LAWRENCE L. LAPIN
SAN JOSE STATE UNIVERSITY

Betty Smidler is a former marketing manager for a cosmetics firm. Bored

and burned out, she accepted an early retirement package. But missing the
excitement of daily interaction with people at work, Betty explored various
possible new career paths, ultimately deciding on an entrepreneurial trajectory.
Since her savings and pension were large enough to support her in comfort,
Betty could afford to run any business requiring minimal capital. She did not need
the income, although a good return on her time and investment would be
preferable. What mattered to her were the human interaction and the satisfaction
of filling a real need.
Her search for a business began with restaurants. She soon learned that
prepared food was the riskiest segment of retailing, requiring huge investments.
Most new restaurants fail very rapidly, and even the successful ones require
huge time and energy commitments from their owners, who almost never take
days off, much less vacations. She found that small retail shops suffered from
similar ills, but a few did provide their owners with a good living. The successful
stores were heavy on service and generally were owner-operated, with few
employees.
Retailing fitted Betty’s background and personality. She needed to find a
low-risk situation where she could meet lots of people and fill an important niche.
She found a very small 500-square foot store space in a very heavily trafficked
retail area. The rent was low and the landlord was flexible, and she would only
need to repaint and install a sign. On impulse, Betty took the space—even
before deciding what to do with it. She finally decided that she would sell
balloons. These items require a very low inventory investment, with minimal need
for equipment and supplies. For $2,000, Betty started Betty’s Balloon Boutique.
TABLE 35-1 FREQUENCY DISTRIBUTION FOR
DAILY MYLAR BALLOON DEMAND

NUMBER OF BALLOONS PER

CUSTOMERS PROPORTION CUSTOMER PROPORTION
15 0.05 1 0.20
16 0.10 2 0.15
17 0.15 3 0.10
18 0.15 4 0.07
19 0.10 5 0.07
20 0.10 6 0.06
21 0.10 7 0.06
22 0.08 8 0.05
23 0.07 9 0.05
24 0.06 10 0.04
25 0.04 11 0.04
12 0.04
13 0.03
14 0.02
15 0.02

Her business was an instant success, and she immediately began

supplying balloons for special occasions. Most of Betty’s business consists of
balloon bouquets for birthdays, anniversaries, promotions, and similar occasions.
Betty has had trouble keeping enough stock on hand. She has been
making two or three trips each month to balloon wholesalers to get the fast-
selling Mylar balloons. During those trips, she has to close the shop, losing
whatever business might have been generated. Betty knows that she could do
better by ordering more balloons, but she wants to find the best combination of
reorder point and order quantity for those items.
Table 35-1 provides the historical frequency distributions for balloon
demands.
Betty pays $.50 for each Mylar balloon, and each sells for $1.25 when
inflated with helium (which, along with other supplies, costs $.25 per Mylar). Each
dollar tied up in inventory costs Betty $.001 per day. She incurs a cost of
approximately $10 to place, track. Process up her balloons in person and will rely
instead on UPS delivery. Table 35-2 shows the probability distributions assumed
for each order. The supplier is rarely able to fill the entire order, and shorted
items are not backordered from the supplier.
When Betty’s is out of Mylars, 70% of the customers settle for rubber
balloons, each bringing a markup of $.20. The remaining customers leave
without making a purchase. Additionally, Betty believes that the expected present
value of future profits lost due to being out of Mylars is $.30 per balloon.
 Betty knows that this situation, simple thought it seems, is too complicated
to be solved using traditional inventory models. She wants to conduct Monte
Carlo simulations, and you have been retained to help her.

TABLE 35-2 PROBABILITY DISTRIBUTIONS FOR MYLAR LEAD TIME AND

PROPORTION OF ORDER FILLED

LEAD TIME PROPORTION OF

(DAYS) PROBABILITY ORDER FILLED PROBABILITY
2 .10 0.75 0.10
3 .15 0.80 0.20
4 .22 0.85 0.25
5 .20 0.90 0.30
6 .15 0.95 0.10
7 .10 1.00 0.05
8 .10

QUESTIONS

1. Set up a schedule of random number assignments for number of customers.

Demand per customer, lead time, proportion of order filled and whether or not
a customer leaves without buying anything when the store is out of Mylar
stock.
2. Set up necessary simulation worksheets for determining the Mylar balloon
profit for several days of operation. (this can be greatly streamlined by using
electronic spreadsheets.)
3. Conduct a 20-day simulation using a reorder point of 200 Mylar balloons and
an order quantity of 500. Then , compute the total Mylar profit for the period.
Assume that Betty’s orders are placed at the beginning of the day, depending
on the opening inventory, andthat shipments arrive just before the store
opens on the date indicated by the lead time. Assume also that the Mylar
balloon customer who arrives just before stockout will accept any available
quantity and will fill his or her remaining demand with rubber balloons.
4. Betty’s son, who has an M.B.A., tells her that a 20 day simulation is too short
to be statistically significant and that a run of at least 100 days is needed.
a. Do a 100-day simulation, and compare the results with those of
Question 3. Are the results the same? Why?
b. Do another 100-day simulation but this time a reorder point of 100
balloons. Compare the results with those of Question 3. Are the
results the same? Why?
5. Repeat the simulation in Question 3 using 100 trials if practical, for different
reorder point and order quantity combinations until you are satisfied that you
have found the best combination. What do you recommend to Betty?