Reebok Memo
MEMO
To:Tony
Reebok; NFL Jersey Inventory Manager
From:Reebok; Inventory Planning Assistant
Date:October 9, 2014
Re:Reebok’s NFL Jersey Inventory Solution
The purpose of this memo is to address the uncertainty associated with the demand for NFL replica jerseys. Because of uncontrollable factors (unpredictable popularity and success of both teams and specific players), demand fluctuates and is variable.
In order for Reebok to have successful and efficient inventory planning, Reebok should reach an optimal order quantity that would balance both overage and underage cost. The ultimate goal for Reebok should be to maximize profit, which will be achieved through balancing out these costs. Reebok should also try to meet high service level if the underage cost associated is high.
As you can see from Exhibit 2, the mean demand for blank jerseys 23,275 but the optimal quantity is 24,178. Because both underage and overage costs are relatively high, we don’t want to have surplus inventory or not be able to meet demand. However, underage cost exceeds overage cost by $1.55/unit. Therefore, we should order a slightly larger number of blank jerseys than the mean demand. Since the underage cost is slightly higher, this results in a service level of 53.43%, demonstrating the number of periods that our optimal order quantity will meet or exceed demand.
For dress jerseys, our overage cost is significantly less than underage cost (by $9.20/unit). Currently the mean demand is 64,405 but the optimal quantity is 87,532. To avoid incurring the high underage cost for dress jerseys, we should increase inventory for these units. For dressed jerseys, critical fractile or service level is 77.06%. This is higher than that of blank jerseys because overage costs associated with dressed jerseys are significantly less. For optimal order quantity for each player, please refer to exhibit 2.
Exhibit 1: Assumptions
Demand distribution is known and correct
One period model
To:Tony
Reebok; NFL Jersey Inventory Manager
From:Reebok; Inventory Planning Assistant
Date:October 9, 2014
Re:Reebok’s NFL Jersey Inventory Solution
The purpose of this memo is to address the uncertainty associated with the demand for NFL replica jerseys. Because of uncontrollable factors (unpredictable popularity and success of both teams and specific players), demand fluctuates and is variable.
In order for Reebok to have successful and efficient inventory planning, Reebok should reach an optimal order quantity that would balance both overage and underage cost. The ultimate goal for Reebok should be to maximize profit, which will be achieved through balancing out these costs. Reebok should also try to meet high service level if the underage cost associated is high.
As you can see from Exhibit 2, the mean demand for blank jerseys 23,275 but the optimal quantity is 24,178. Because both underage and overage costs are relatively high, we don’t want to have surplus inventory or not be able to meet demand. However, underage cost exceeds overage cost by $1.55/unit. Therefore, we should order a slightly larger number of blank jerseys than the mean demand. Since the underage cost is slightly higher, this results in a service level of 53.43%, demonstrating the number of periods that our optimal order quantity will meet or exceed demand.
For dress jerseys, our overage cost is significantly less than underage cost (by $9.20/unit). Currently the mean demand is 64,405 but the optimal quantity is 87,532. To avoid incurring the high underage cost for dress jerseys, we should increase inventory for these units. For dressed jerseys, critical fractile or service level is 77.06%. This is higher than that of blank jerseys because overage costs associated with dressed jerseys are significantly less. For optimal order quantity for each player, please refer to exhibit 2.
Exhibit 1: Assumptions
Demand distribution is known and correct
One period model