Part A. The shoe department buyer at Feets has determined that Feets should buy 98,000 pairs of athletic shoes from their vendor, Adidke. The shoes are shipped and packed 10 pairs to a shipping box. Each shipping box has a value of $517. The buyer estimates that about $59 is spent on the ordering and sourcing decisions per shipping box. The annual percentage holding cost is 35%. Does that forecast pass the reasonability test? Include with your answer:
What is the optimal number of boxes to order each time an order is placed?
What is the total annual ordering cost?
Part B. The shoe department buyer at Feets must now choose between shipping vendors from the port of entry (Oakland, CA) to the warehouse in Sacramento, CA. There are two viable alternatives from two different vendors: 2-day freight and 5-day flat rate freight. The rates for 2-day freight are $13.562 per shipping box; and for 5-day freight, there is a flat $1,500 per order for any size order up to 123 boxes. The annual percentage holding cost is 35%.
Which alternative would you recommend, and why?
What is the total annual shipping cost?
Here is the Feets scenario.
Feets is a chain of retail athletic wear stores. The company headquarters is located in Sacramento, California, near the western warehouse. There are seven geographically dispersed warehouses to serve the needs of Feets’ 400 stores. Tedra Grav, supply chain vice president, had this to say about the Fashion Squared store, a new location in Sacramento.
“The product mix in the Fashion Squared store is new to Feets. There are many new products and many new vendors. Our western distribution center is set up to serve the set of stores in California. It was not set up for all these new products and new vendors. This has caused us problems because of the small quantities of some of these new products, which are not used in any other store. All of this may cause us problems in the upcoming summer sports season. I have informed the rest of the management team of the nature of these problems.”
Feets uses third-party logistics firms to move the goods from warehouse to store. With the exception of the Fashion Squared store’s daily shipments, the stores receive orders twice weekly. Feets uses a small package carrier to make transshipments between stores.
Tedra feels efficiency as opposed to responsiveness in the Feets supply chain is important. As is common in retailing, buyers forecast trends, determine how those trends affect demand at the stores, and order from vendors accordingly. Efficiency is important, so vendors ship large quantities to the Feets warehouse relatively infrequently. The warehouse has a computer program to help team members determine where to store these large quantities of goods as they are received.
A buyer specializes in one or more departments depending upon volume, allowing the buyer to be familiar with the products. This allows for better identification of customer demand and utilization of supplier’s manufacturing practice knowledge.
Feets’ business is very fashion oriented. Each year, 80% percent of the product that comes into the distribution center is new. Even if the product is very similar to one ordered last year, it is considered new. Customers demand new colors and styles; product is normally not replenished. Instead, a particular item is purchased, distributed to the retail stores, and sold. As a result, determining the amount to be purchased can be difficult. The buyers can look at how a similar product sold last year. However, that may be misleading due to changes in taste.
The normal lead time quoted by a supplier is 6 months even though it only takes 2 to 3 months for the company to produce the product. The buyer is faced with anticipating what will be in demand 6 to 12 months into the future. These difficulties are compounded by the life of a new style being less than 6 months.
The buyers determine the order quantity from forecasts of demand done at the store level. The historical distribution of sizes sold at each store is part of the calculation and then adjusted by projections made by each store. The supplier collects orders for all stores at one time. If too many items are ordered, then the result is to discount the item at an outlet store for discontinued styles. If too few items are ordered, there is no chance to reorder.
When orders arrive from the supplier, the majority of product is immediately shipped to the store. The amount distributed is calculated from the original order with adjustments made for store closings and new openings. The remaining order, about 40%, is stored in the warehouse to be used for replenishment.
Feets has an automated replenishment ordering system. The way this works is that the computer at the distribution center collects data from each store about what was sold that day. There are two systems for collecting the data. Some stores have a high-speed Internet connection and transmit sales data in near real time. Other stores have only dial-up connections and transmit their data once per day. Once the data have been collected, the computer calculates the amount of inventory in each store by SKU. That inventory level is compared against predetermined minimums, and any replenishment is placed in an order.
Because the buyers place just one order for any particular style during the course of a season, available stock for replenishment is limited. Consequently, when inventory on that item is exhausted, no more replacements can be done. At this point, transshipments between stores help Feets meet the demands of its customers.
Feets has a few stores that are outlet stores. These stores do not sell the full Feets line. At the end of a SKU’s life (where there are very few items left in inventory), the inventory is sent to these stores to be sold at substantial discounts.
The Need for Inventory Accuracy
In general, inventory records need to be accurate. In the Feets distribution chain, inaccurate inventories would cause stockouts. That is, if the central computer had an inventory record for a particular SKU that was too high, it would not order replenishment.
In the warehouse, a stock picker will pick up an order for a store, pick the items on the order, put those items in cartons, and put the cartons on a pallet. Human error plays a role in what a store receives for each shipment. Sometimes the wrong items are put in the carton, sometimes the wrong cartons are put on a pallet, and sometimes the wrong pallet is put on the truck. Therefore, those stocking the store must carefully check orders.
The Feets auditor requires the company to take a complete physical inventory including the stores and the distribution center twice a year. A company specializing in inventory auditing performs store inventory. The same outside company also counts the distribution center quarterly.
In retail companies, the two most useful metrics are inventory turns and stockouts. The Feets inventory turn ratio currently runs at about two. Feets uses its centralized computer to calculate stockouts. Tedra feels that the current stockout level of 5% is a little high but