Black Friday Inventory

This past Friday I joined my mom and my aunt as we made the obligatory Black Friday trip to the mall. The lure of the sale paper prices seemed to be irresistible this year. I usually try to avoid the stores on this day, however this year I was interested in how the economy was actually effecting holiday sales as well as store inventory. Our first stop was Belk. The store not only had less inventory there were also less people out shopping. The hustle and bustle was not quite the same as it had been in the past years. Usually there is so much packed in the store it is almost impossible to get around. The sales looked good in the papers, but they did not pan out quite as we expected. Most shoppers were checking out with only one or two items instead of the arm load that would have been in the past. Our next and final stop was Goody's. The difference there was the level of inventory. It was quite evident that they had ordered much of their Christmas inventory before the economy problems (possibly due to lead times???) or either their inventory managers had completely ignored sale projections for this holiday. They were overflowing with inventory though it seemed demand was not much more there than it had been at Belk. After a lackluster morning of shopping and looking for deals that weren't as great as we thought (it seemed as though they increased the prices before they "slashed" them) we gave up and went home. I think the results we see from who survives this holiday season will be dictated by who best manages their inventory.

Oprah's Favorite Things

Talk show super star Oprah Winfrey recently announced that she would not being having the always anticipated "Oprah's Favorite Things" show this year due the economic peril.  The show is famous for showering audience members with thousands of dollars of free gifts that Oprah has chosen to be her favorite holiday gifts of the season.  

It has become evident that whatever Oprah proclaims as a necessity soon becomes a necessity for an ever growing market in the U.S.   Oprah's book club choses become impossible to find in bookstores just as her "Favorite Things" become impossible to locate...anywhere.  The average consumer (or marketer) would revel in the free publicity and instant demand for the product but the operations managers of these companies have learned to be more hesitant.  

Oprah and her staff do not inform these companies that their products are about to experience a huge shift in demand.  While the companies might be pleased by increased demand, they will be less pleased about increased stock outs and angry customers.  While Orpah's favorite things surely become hot commodities, the short holiday season doesn't allow most companies to capitalize on this short term burst in demand.  Rather these companies risk being bombarded with unhappy customers for months to come.  

Best Buy - The Quest to Find Balance

I have been recently been ready about and conducting interviews about the supply chain management for a presentation. My team and I were able to conduct interviews with store level managers as well as corporate directors for supply chain management.

Our first question to the store manager was "What can your supply chain do better?" His response was that he would like more of everything. I someone arrogantly thought to myself "he must not understand the implications of holding cost. Especially in the quickly evolving world of technology where the risk of obsolesce is high."

We addressed this Q&A with the corporate level strategists. This managers said something that was quite remarkable to us. "We are constantly trying to find a balance between maximizing shareholder value and customer service." It occurred to me as we learn to the most cost efficient way to do things, we must also consider customer service and others factors that might increase bottom line cost in order to serve the customer's needs.

Avoiding WMS & ERP Selection Pitfalls

I recently read a magazine article that was about a book to help walk the reader through the purchase of warehouse management system software. The book focuses on following five major areas: functionality, key differentiators, identifying common deficiencies, whether or not to single source, and preparation of the request for proposal. This book is meant to provide information to help avoid missteps, pitfalls, and misleading directions. The author goes into detail in each of the key areas to help guide the reader through this important purchase as well as helping the reader avoid common mishaps. This book, called Selecting Warehouse Software, could be a useful tool because selecting the right system for your company is vital to inventory management.

Expected Cost vs. Expected Profit

In class today we discussed that minimizing expected cost is equal to maximizing expected profit. When reducing cost we expect that this will increase profit. Our group could not come up with a situation where minimization of expected costs did not result in maximization of expected profit.

"The World is Flat"

I recently watched a presentation by Thomas Friedman, the author of the book "The world is Flat."

Friedman described the 10 ways he believes the world has become flatter and how this will effect us in the coming years and decades. Friedman discusses how countries, the companies, and now individuals have gone global.

Friedman's ideas have been influential in the business community and shed light on new issues that companies must learn to face in order to remain successful in the "flatting world."

These facts are relevant to inventory management because of the continued growing network of suppliers and customers all over the world. "Work in progress" and "finished goods" inventory are now located all over the world, in transit to the next location, and beings stored waiting on demand. Managers must be aware of this inventory, and control the risks associated with holding large amounts of inventory.

"Stockout Costs and Consequences"

I recently read an article in the APICS magazine entitled "Stockout Costs and Consequences, Irritated customers or idle inventory?" In the article John Van Vliet, P.H.D., Associate Professor at Shorter College in the School of Business Management, was interviewed. He is currently doing research to assign cost to potential stockouts as well as establishing the pros and cons associated with inventory holding costs opposed to the risk of a stockout. He says, "A stockout will generate a chain of costly events, and it's hard to assign costs to that chain and hard to know when to stop moving along the chain." A stockout can absolutely change customer demand resulting in the cost of lost sales as well as cost values resulting from halting production. Stockout costs can actually be much more tremendous than we actually give it credit. Dr. Vliet makes a valid point in the article when he says, "And when you think about all the time, money, and effort we spend trying to attract customers, isn't it silly to say we're going to fine-tune our inventory controls and accept a higher degree of risk of disappointing our customers in order to save a few hundred dollars here and there?" Instead of using the ABC analysis for usage rates, Dr. Vliet wants to know "Which items are the real showstoppers?" He wants to know which items have the potential to hurt the worst if a stockout occurred. Dr. Vliet says that based upon what you promise your customer and how your customer views an item, even typical C items can turn out to be very critical. For important items reorder points should be adjusted higher to ensure that a stockout will be avoided. Dr. Vliet feels that by properly quantifying stockout costs and implementing an EOQ that incorporates stockout costs, purchasers would be able to do a better job of ordering the optimal quantities to help keep the right balance between keeping on hand inventory and the risk of a stockout.

The Holiday Season

Retail outlets are facing a glooming economy as the holiday season rapidly approaches. Stores such as Macy's, Sacks, and JCPenny have all announced declining sales and expect an exceptionally slow holiday season. Consumers are being forced to spend more of their income on fuel and other essentials are left with less to spend on luxury goods.

Decreasing sales forces these retails to focus on minimization of cost. Macy's said this week that it was able to maintain cash flow that was "stronger than it expected at the start of the year, because of cost cutting and inventory management."

Other retailers must follow suit by cutting cost to try to salvage what is left of this years holiday surge.

Thoughts

“Traditional inventory management techniques may underemphasize the costs of maintaining large inventories. JIT may under-emphasize the costs of not maintaining inventories, particularly since such costs are often difficult to identify and measure”

“Most manufacturers ignore some relevant and important costs associated with carrying inventory, and thus do not calculate EOQ lot sizes correctly. He argues that correct usage of the EOQ model will result in lot sizes that closely approximate JIT lot sizes”

The two quotes above stood out to me as I read the article comparing the costs of EOQ to JIT purchasing. EOQ purchasing means optimizing inventory levels based on minimizing costs even if that results in having a lot of inventories on hand. Using EOQ we assume that the holding cost we use to find the optimal order quantity will keep a natural balance since we are trying to minimize our costs. JIT purchasing is of the idea that the minimal amount of inventory necessary is the optimal quantity and of course minimal inventory will reduce costs. The article is of the idea that if costs are calculated correctly for the EOQ model then it will find the lowest amount of inventory to be the optimal order quantity which is an overlap of the EOQ model and JIT.

The article also states that the amount of annual demand has a significant effect on the total cost associated with the purchasing models when used separately. I found the graph below (similar to the graph in the article) which shows how annual demand is influenced by the difference between total cost for EOQ and JIT. The consensus is that for lower annual demand JIT would be best and for higher annual demand the EOQ model does the best to minimize costs. I think the main point of the article is that for the EOQ model to be most effective the calculations of holding and setup costs should be extremely thorough and if done correctly it will return the lowest optimal order quantity (imitating JIT) for the lowest total cost.

Source for the graph: http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050310203.html