The Gap has started selling through its online channel along with its retail stores. Management has to decide which products to carry at the retail stores and which products to carry at a central warehouse to be sold only via the online channel. The Gap currently has 1000 retail stores in the United States. Weekly demand for size large khaki pants at each store is normally distributed with a mean of 800 and a standard deviation of 100. Each pair of pants costs $30. Weekly demand for purple cashmere sweaters at each store is normally distributed, with a mean of 30 and a standard deviation of 30. Each sweater costs $100. The Gap has a holding rate of 25 percent. The Gap manages all inventories using a continuous review policy, and the supply lead time for both products is four weeks. The targeted CSL is 95 percent. Required:
a. How much reduction in holding cost per unit sold can Gap expect on moving each of the two products from the stores to the online channel?
b. Which of the two products should Gap carry at the stores and which should it carry at the central warehouse for the online channel? Why? Assume demand from one week to the next to be independent.