Balancing Act

In reading over this weeks' readings, it seems as though a careful balancing act exists between just-in-time (JIT) supply chain management, such as that which UPS employs (http://pressroom.ups.com/pressroom/staticfiles/pdf/whitepaper/wp_just-in-time_supply_chain.pdf) and maintaining flexibility under conditions which may be uncertain, as the Glatzel, et al. article suggests.  Certainly there are numerous, immediate advantages to having a JIT supply chain, as UPS points out in this article the reduced costs from inventory, space, time, and labor needed to shift additional resources.  However, as our current supply chains become more and more efficient, we must use caution so as to not put our supply chains at great risk.  The more streamlined, simple, and monopolistic a supply chain is, the greater the chance that one aspect of the supply chain could grind production to a halt over an entire organization.

Large Giants Seek More Controls Over Suppliers

Walmart announced new policies for its massive suppliers last week in order to improve safety at supplier factories. The new policies are connected to a fire in Bangladesh last November, which killed more than 100 workers at a shoe factory.

The new policies aimed to ensure the safety and working conditions of Walmart’s major suppliers. Walmart explicitly mentioned in its new policies that Walmart doesn’t allow any supplier sub-contracting work to other vendors without its knowledge.¹

Large US and European retailers used to focus more on producing cost and qualities when choosing their major suppliers, but care less about safety and working conditions. They viewed that it’s more of the local government’s responsibility to ensure the factory’s safety and working condition. However, with more and more media exposure in recent years, some “bloody factories” in China and Southeast Asia have gotten worldwide attention in recent years. After Tim Cook’s visit to Foxconn last year, Apple promised to improve salaries and working conditions in their suppliers, and so do other retailer giants such as Walmart and Sears.

Some argue that more concerns about supplier may drive up production costs and have negative economic impacts, while others maintain that more control over their suppliers leads to more efficient supply chain system for companies like Walmart and Apple, and thus actually drive the product price down. It seems that supplier policies are way beyond just moral issues.

[1]. http://www.scdigest.com/ONTARGET/13-01-24-2.PHP?cid=6648&ctype=content

Meeting Customer Demand through Retail Inventory Management

Inventory management is a major concern for those in the retail and apparel business.  In today's retail market is imperative to get the right item at the right place at the right time.  Complications inherent within retail sales make this even more difficult. Stores with online capabilities basically must manage two separate supply chains as Rod Sides, the Retail and Distribution Practice Leader with Deloitte Consulting LLP notes, "Companies may have inventory problems because they operate these [two] channels as distinct business units, each with its own infrastructure and inventory. They are not using store inventory to fill online orders, and online inventory to fill merchandise gaps in their stores.” This practice of separate inventory management leads to separate forecasting models for online and physical stores.  Therefore, the observed demand and other input variables that determine projections will differ, making production, marketing, and finance decisions very difficult.  

Although most retailers have the software and the capabilities to maintain a more efficient and streamlined inventory management system, they often mismanage and fail to optimize inventory forecasts.  However, even with sound inventory practices and sophisticated supply chain management models, retailers still face the 80/20 dilemma. 80% of sales come from only 20% of products.  

And just because a retailer decides to implement new advanced analytics to help with inventory forecasting efficiency, it does not mean its the right tool for their organization.  Rod Sides recommends "If you want to be a price leader, you will look for technologies with strong analytic and pricing capabilities. If you are looking to provide a deeper assortment of merchandise, you would look for strong planning and optimization capabilities.” Its not just important to collect data but retailers must collect meaningful data that will ultimately allow them to make more informed inventory forecasts.  

Sources:

http://deloitte.wsj.com/cio/2013/01/22/getting-more-from-retail-inventory-management/

http://deloitte.wsj.com/cio/2013/01/25/retail-optimization-moving-beyond-8020/

Crowdsourcing Demand Forecasts

One industry that we discussed in class that has a particularly difficult process in terms of forecasting demand is the clothing and apparel business. Orders must be placed significantly earlier than clear customer preferences are determined and those preferences are subject to rapid and dramatic shifts that retailers must adjust to accordingly. Once a style or trend is no longer popular, retailers struggle to move merchandise off their shelves and minimize losses as much as possible.

Crowdsourcing -- "the practice of companies making an open call to a broad community to solve a problem, either through collaboration or competition"(1) -- is one way that some retailers are taking a dramatically different approach to forecasting demand and minimizing the impact of constantly shifting trends. Threadless.com, an online t-shirt retailer, is one such company that has had particular success with this practice. Instead of trying to predict what trends their consumers will be looking for and producing t-shirts accordingly, Threadless allows its online users to post new designs and ideas online and then has its customers vote and rank the submissions. The company than produces only the post popular t-shirts based upon exactly what their customers want. Threadless is basically able to completely remove the forecasting aspect from its business model and instead respond directly to actual customer demand. (2)

While this exact model is not feasible for all industries or even all clothing retailers, it is interesting to think about how this idea of crowdsourcing can be integrated into the demand forecasting process. With the rapid technological advancements in this arena, companies have relied more and more heavily on models, simulation and data. While these models and tools do often produce more accurate and sensitive forecasts, it's important to consider what role less sophisticated tools can play in the process. Are there ways that more traditional manufacturers can apply the principles and practices of crowdsourcing into their forecasting?



References:
(1) "What is Crowdsourcing?" Daily Inforgraphic. <http://dailyinfographic.com/what-is-crowdsourcing-infographic>. Accessed January 29, 2013.
(2) "Crowdsourcing Forecasts in the Apparel Market." All About B2B - GSX, Inc. <http://www.gxsblogs.com/keifers/2010/05/crowdsourcing-forecasts-in-the-apparel-market-2.html> Accessed January 29, 2013.

Reflection on Cradle-to-Cradle: A Closed Cycle

The essence of cradle-to-cradle is the notion of “a closed cycle”. Parts for a product come from the natural environment, and when the product reaches its end of life, its parts can be put back to the nature. Just as William McDonough mentioned in his TED talk, there is no finish line for cradle-to-cradle products, and all materials are infinitely usable. In this video he talks about the philosophy behind cradle-to-cradle design.

However, the benefits of cradle-to-cradle can only be maximized when equal attention has been paid to the end of the life cycle – recycle and reproduce – as to the start of the cycle. Unfortunately, for most companies this is not the case.

Manufacturing cradle-to-cradle or green products gives companies such as Herman Miller a great reputation for having a sense of environmental responsibility. But at the end of the day, it is customers to pay for the extra cost of producing green products. The Mirra Chair, which is mentioned in the case we read, is priced at $599. This gives companies a strong incentive to produce green product – they get a reputation, and extra costs are shouldered on the customers.

Then the question is, does merely producing green products makes the cycle complete? Obviously the answer is no. While we are cheering for those to create cradle-to-cradle products, we should see how much efforts are still needed to ensure proper recycling and reproducing. The cradle-to-cradle cycle has to be spinning to make real good.

USPS is actually putting great emphasis on achieving this closed cycle. They not only provide cradle-to-cradle packaging products (the eco-friendly boxes and envelopes), but also buy and use a substantial amount of recycled materials. About 220,000 tons of wastepaper, cardboard and other materials were recycled in 2008 through its recycling and waste prevention programs, and more than $200 million worth of products containing recycled materials are purchased by USPS every year.

Of course, it is easier for USPS to recycle and to get recycled materials. The question is, what strategies or policies can be used to ensure a closed cycle for products like the Mirra Chair?

Reference:

http://about.usps.com/what-we-are-doing/green/recycle.htm

http://about.usps.com/what-we-are-doing/green/eco.htm

http://www.ted.com/talks/william_mcdonough_on_cradle_to_cradle_design.html

Mervyn’s: Lessons in inventory management and information technology

Mervyn’s managed a chain of department stores across America from 1949 until 2008. In 1994, it was featured in the McKinsey Quarterly for its innovation in information technology – its Planned Store Inventory (PSI) system. Unfortunately, Mervyn’s has since filed for bankruptcy. However, the creation and use of its PSI lends much insight to other companies and their inventory management.

The pre-existing inventory system at Mervyn’s was ineffective; the system was wasteful, inadaptable, and rigid. Mervyn’s distributed inventory based on average sales, deciding the allocation of sizes, colors, and styles of each particular product based on clusters of 8 to 12 categories of stores. This inventory forecasting method caused many problems, however. Individual stores could be vastly different than the other stores grouped in their cluster, creating an inaccurate distribution of sizes and styles of products. Using averages also did not accommodate for changes in demand due to advertising, essentially wasting money when stores advertised and promoted items which they then did not have enough of in stock. Lastly, by basing the inventory system on past sales, Mervyn’s made it almost impossible for any store to break out of a rut. 

Mervyn’s realized that a new inventory management system would be required in order to remain competitive. They approached the problem in a very creative and collaborate way. Ideas were shared in an informal manner and changes were made using judgment and reasoning, similar to the methods described in this week’s reading “Managing Inventories – Reorder Point Systems.” Mervyn’s also had a philosophy of “build it, use it, fix it.” Any changes to the system were suggested, then tested and evaluated. For instance, the prototype went live in October 1, 1992, but changes were continually made from November 1992 until January 1993. This allowed for a transfer of expertise in the change process; suggestions for improvements continued to arise from employees throughout the company, and the system would be re-released with these modifications.

With the new PSI system, which distributed a mix of products and sizes matched to a particular store, Mervyn’s was able to sell more products with less inventory. At the same time, the company was able to reduce the sales lost because of out-of-stock goods. It exemplifies an information technology system built on collaboration, flexibility, and reason. Using shared experiences in the company and trial-and-error modifications based in judgment and intuition, the PSI system allowed Mervyn’s to tailor its inventory and distribution to each particular store thus adding millions of dollars to its profits. 

Questions to consider:

1. In what ways can Mervyn’s approach to inventory management be adopted by other companies? Are there any ways in which its approach was unique to Mervyn’s? 
2. The McKinsey Quarterly article was published in 1994. Mervyn’s has since gone out of business and much has changed in the fields of information technology and inventory management. How do you predict an article would be written today as a reflection of not only Mervyn’s status over the past 19 years but also as an update on inventory management information technology systems?

References

Dvorak, Robert, Derek Dean, and Marc Singer. “Accelerating IT innovation.” The McKinsey Quarterly 4 (1994): 123-135. http://www.mckinseyquarterly.com/Accelerating_IT_innovation_60.

Freeland, Landel, and Weiss. “Managing Inventories—Reorder Point Systems.” Darden Business Publishing, 2000.

Apple's Secret Recipe For Success: Inventory Management

If asked, what has made Apple an iconic brand that it is, the answers that one would expect are its innovations and sleek design. Almost everyone would overlook another important factor that has helped in catapulting Apple right to the top, which is, it’s properly managed inventory. Steve Jobs, the visionary that he is, knew from the beginning that designing cool products with cutting edge technology would only create news.  It’s getting those products in the hands of the consumers quickly, which is going to help make money. It wasn’t a surprise that he appointed Tim Cook, Apple’s most influential inventory manager as the Chief Operating Officer. He was later named as Apple’s CEO. Cook's first action plan was to do a total overhaul of Apples’ old supply chain and make it more lean and efficient. This helped the company to reduce inventory levels and increase its margins by many folds.

Looking at the recent Google Nexus 4 fiasco where the manufacturers couldn’t keep up with the demands, how Apple was able to meet the demands, every time for its iconic product becomes all the more important. There were reports about people queuing up in large numbers at Apple stores even from before the launch day and yet could walk out with an iPhone or an iPad in hand. All this could be achieved because of it well planned and managed inventories. 

How well an inventory is being managed is generally gauged by analysts by looking at two factors, ‘Inventory Turnover’ and ‘Days of Inventory’. Inventory Turnover is a measure of how quickly a company’s inventory could be sold and replaced.  Days of Inventory is a measure of how long would it take for a company to sell its entire inventory. A higher inventory turnover and a lower day of inventory is what companies aim for. When compared to its competitors Apple is far ahead in the game and leads the pack by a large margin.  Looking closely at the data we can clearly observe that Apple's inventory turnover figure is close to 5, meaning that every item in the Apple Store stays for only about five days before getting sold.

This amazing feat didn’t go unnoticed and was further proven in a report '2012 Supply Chain Top 25' published by the technology research firm Gartner. Apple was right on top with a composite score of 9.69 out of 10. Others could manage only a measly 5.4 and less.  Thus by reducing inventory holding costs and moving product more quickly from suppliers to consumers, Apple has been able to manage its inventory efficiently, all of which has contributed directly in keeping costs low and margins high. Now the only questions left to think are, till how long Apple would continue to have a fairy tale run in the market before it becomes complacent  like Dell  and loses its edge and can Google, after learning from its current mistake give Apple a run for its money from its next Nexus series and act as a true iPhone/iPad killer.

Source: http://www.gartner.com/newsroom/id/2023116

References: 

1. Niu, Evan. "Apple Lesson of the Day: Inventory Is Evil." (AAPL). N.p., 23 Mar. 2012. Web. 28 Jan. 2013. 
2. "Newsroom." Gartner Announces Rankings of Its 2012 Supply Chain Top 25. N.p., 22 May 2012. Web. 28 Jan. 2013.