In 2000, Amy Holland started a small mountaineering gear retail store in Northern Colorado. The store rapidly became known as Holland Gear. Ten years later, Amy had opened four additional retail stores that we covering the major regions in the US. The main product line was a family of in-house designed high-tech jackets that we fully waterproof while being breathable and lightweight. These versatile jackets sold throughout the entire year and their demand was not materially affected by the time of the year. The jackets were highly valuable products that were account for approximately 78% of total sales. Annual jackets revenues for each store were of similar size and amounted to roughly $1,000,000 per store.
After some years of operation, Holland Gear had decided to focus on its core competencies of design and retail and to outsource production to a textile contract manufacturer in Northern Mexico. Holland jackets sold at an average retail price of $325, which represented a mark-up of 30% above what Holland paid the manufacturer.
The current supply chain operated as follows. Each store made its own inventory decisions. Stores were supplied directly from the contract manufacturer by truck. The manufacturer as part of long-term contract that not only stipulated a variable unit sourcing cost, but also transportation characteristics offered the following transportation package. A shipment of up to a full truckload, which was more than 3000 jackets, was charged a flat fee of $2,200 and was guaranteed to reach the store in two weeks after order placement. (While the stores were located at slightly different distances from the manufacturer, a uniform average flat fee was agreed upon to offer uniform service to each store.) Typically, stores placed roughly two orders per year, each of about 1500 jackets.
Looking into the future, Amy was contemplating a new initiative for Holland Gear. The plan would be to transform the brick-and-mortar retail business into an Internet store. This would involve closing down the five retail stores and opening up one fulfillment center to serve the entire market. Amy felt that consolidated inventory management should provide considerable savings over the current setup.
[Adopted from Palu Gear case study by J. A. Van Mieghem, Kellogg Business School]
For the Questions a) and b) assume that demand is steady and predictable.
a) What is the current inventory policy used by Holland at each store? Calculate the total cost of the current inventory policy for each store and the total.
b) In reality, demand fluctuates from week to week. In fact, past weekly demand at each store exhibited a standard deviation of about 30 jackets. How should the inventory policy be adjusted if each Holland store wants its non-stockout probability be equal to 95%? Would you recommend to use Q or P review system? (Explain). Calculate the total cost of a new inventory policy for each store and the total. Assume the backorder cost is $75 per unit.
c) What are the supply chain inventory savings from adopting the Internet initiative?