When dealing with a market segment that has high variable demand, it is important to analyze not only your current inventory levels, but also generate future demand forecasts. This is because an inventory shortage can cause the company to lose future profits and lost goodwill. In the case of Reebok, the former NFL licensed jersey producer, many key decisions must be made to reduce inventory costs in periods of low demand while maximizing profits in periods of high demand for player specific jerseys. Using the newsvendor model to determine the optimal order quantity and leftover inventory, we will present a possible approach to inventory planning with uncertain demand. Uncertain Demand:
Within the replica jersey industry, seasonality plays a vital part in keeping sufficient inventory to cover customer demand. Seasonality is regular periodic fluctuations, usually within a 12 month period whereas trend is an overall, persistent, long-term movement. For instance, “the NFL season drives much of the demand” with sales highest in August/September in anticipation of the upcoming NFL season. “Later in the season, consumer demand is driven by holiday presents and the anticipation of the playoffs”. After the season is over, sales decline rapidly until the start of the next season. From a supply chain perspective, however, it is maximizing revenues from “lumpy” hot-market items as much as limiting obsolesce costs. Postponement:
Reebok must order must it’s ordering decision at the start of a period, though it is concerned with inventory at the end of the period. Postponment allows Reebok to extend the life cycle of its jerseys as well as capture lumpy “dressed” product demand. “Blank jerseys are shipped directly to the Reebok distribution center with no player name or number”. However, teams often change the style or color of their uniforms between seasons. Further, the consumer may want the latest and most up-to-date “dressed jersey” for each individual player that they are a fan. Given “player demand changes so much from year to year” along with the fact that “player movements” occur during the off season (February to April), holding “dressed jerseys” at end-of-season is most risky. Indeed, “Reebok’s general practice is to sell leftover dressed jerseys at $7 but hold blank jerseys for next season”. End-of-season inventory:
Reebok uses “blank” jerseys during the off-season to meet immediate demand for [popular] player movements, using its Indianapolis capacity to print (dress) up to 10,000 units per day. Given a lead time for all jerseys from contract manufacturers of 30 days, these “blanks” must already be on hand as end-of-season inventory to catch any player movement value during February, March and April. The 30 day lead time along with the 60 sea-shipping means ordering CM “dressed” jerseys can be delayed as late as May to meet the August rush, assuming CM’s have the blanks on hand. (CM’s carry 4 weeks inventory of blanks. Figure 5-11). In reality, the sequence by which inventory is added or subtracted does not matter. Jump-start ordering:
In January/February, retailers are offered discounts so that 20% of their annual order arrives 8-12 weeks later, in May. This is a key strategy that Reebok needs to continually employ because it shifts inventory holding costs to retailers. It also allows Reebok to place orders with CM’s given a known demand. Then, throughout the rest of the year, retailers place up-to-level orders on a weekly basis. However, “we cannot be sure of inventory levels at any other point within a period (because of random demand)” MSD pg. 290. Reebok’s Management Focus:
It takes 4-8 weeks on average for the Reebok contract manufacturers to deliver the jerseys to the warehouses from the beginning to end. While this is happening, the demand is changing before the jerseys even reach the warehouse. Thus it is critical that Reebok provide flexible contracts with the distribution centers to get their orders fulfilled...
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