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
CUSTOMERS PROPORTION BALLOONS PER 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 fastselling 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

PROPORTION OF ORDER
LEAD TIME (DAYS) PROBABILITY 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?
Table 35 – 1 provides the historical frequency distributions
for balloon demands

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.
Objective:

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
 TABLE 1

Step 1 is to generate cumulative probability is the probability that a variable (demand) will be less than or equal to a particular value.

Step 2:Setting Random Number Intervals. Established a cumulative probability distribution for each variable included in the simulation by
assigning a set of numbers to represent each possible value or outcome. These are referred to as random number intervals
TABLE 2

Step 3: Generate Random Numbers. Assigned Random number on excel file using formula
= random between(1,100). Simulating the Experiment. We can simulate outcomes of an experiment by simply
selecting random numbers from Table 1. Beginning anywhere in the table, we note the interval in Table 1 into which
each number falls. For example, if the random number chosen is 52 and the interval 46 to 55 represents number of
customers per day, we input a simulated daily customer of 19 in Table 2.

Last step is simulating series of trials. As in this case we simulate 20 days trial as with the succeeding slide to
get the number of Customer, demand per customer and order filled.
Same step done from previous slides
Simulated 1 Sample customer for 20 days.
Using QM Software: Simulation of Leadtime
Using QM Software: Simulation of Demand per Customer