Robert Michaels, vice president of
marketing, and Michael Roberts, EA’s new vice president of logistics, are
battling over how to set inventory targets for several key product lines
for the 2013 summer season. Orders must be placed in December 2012 to
ensure that products will be available in EA distribution centers by May
2013. Michaels claims that the cost of customer goodwill for stocking
out of any item should be set at two times the selling price of that item.
Further, he claims that because of this high cost of stocking out, the service
target for all items should be a 95% probability of not stocking out in
the season. Roberts says that these are overestimates and will cause EA
to carry too much inventory. Accordingly, Roberts asked the Finance and
Merchandising departments to provide some data to help him develop
service level targets more scientifically. One particular item, for example,
has a projected gross margin (per-unit profit margin divided by per-unit