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 the 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 the inventory at the end of the period. Postponement 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 the 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 days 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 the 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 on time. Reebok must work with their contract manufacturers to always make sure they have the appropriate resources and materials to deliver the quantities needed, as well as continuously maintain some level of inventory ready for customization and super-fast delivery; even air transport is available. Reebok should also continue to give the option of early order discount jerseys so that the retail distribution centers can have their own inventory prior to the season.
By working with both ends of the supply chain, Reebok can deliver up to date forecasting that will help all parties to virtualize inventory and respond quickly to demand, despite the uncertainty.
Quantity with postponement to determine the Expected Profit-Maximizing Order Quantity for NFL replica jerseys given two options for finished goods, we must use two steps that give us two critical fractals; first, the probability of not stocking out and second, the following information is given.
Retailer wholesale price = $24
Discount price of unsold dressed Jersey = 7.
Contract manufacturers’ price includes delivery to Reebok’s Distribution Center in India polis Cost of Blanked jersey, = $9. 50*
Cost of dressed jersey from contract manufacturers = $10. 90*
Blank jerseys can also be finished in Indianapolis for an additional cost of $2. 40
Cost of dressed jersey from Indianapolis= $9. 50 + $2. 40 = $11. 90
Holding costs are incurred for any jersey held-over to the following season, reducing the value of the unsold blanked jersey; this requires the assumption that the jersey would have been re-purchased at the initial purchase cost.
Holding cost for unsold blank Jersey = $1. 045 Value of unsold blanked jersey = $8. 46
Step 1: Probability that demand for blank jerseys is less than Q: No stockout
Co: Cost of overage = cost of blanked jersey – value of unsold blanked jersey = 9. 5 – 8. 46 = 1. 04
Cu: Cost of underage = retailer wholesale price – cost of dressed jersey from Indianapolis = 24 – 11. 9 = 12. 1
Step 2: Determining cost of finish jerseys from CM and finished jerseys from Indianapolis.
Cost of overage = Cost of dressed jersey from CM – Discount price of unsold dressed Jersey = 10. 9 – 7. 0 = 3. 9
Cost of underage (blank is available) = Cost of dressed jersey from Indianapolis – Cost of dressed jersey from contract manufacturers = 11. 9-10. 9 = 1. 0
Cost of underage (blank is unavailable) = retailer wholesale price – Cost of dressed jersey from CM = 24 – 10. 9 = 13. 1
As we know from step 1, the blank jersey has a 92% probability of not stocking out. Here is the cost of underage based on critical fractile of 0. 2 and using the costs from step 2. Cost of underage = 92% * cost of underage (blank is available) + (1 – 92%) * cost of underage (blank is unavailable) 0. 92*1+0. 08*13. 1 = 1. 97
Demand Forecast for NFL Team, New England Patriots The following table was provided showing the forecast for the New England Patriots: The Expected Profit-maximizing Order Quantity use NORMINV(critical fractile,m ,s) in Excel The following example is calculating the quantity of dressed jersey of Tom Brady: Quantity of dressed jersey = NORMINV(0. 3,30763,13843) = 24673
Mean(blank jersey) = Mean(dressed jersey) – Quantity(Dressed jersey) = 30763-24673 = 6090
Quantity of blank jersey(New England Patriots) = NORMINV(0. 92,Mean(blank jersey), Stdev of demand) = NORMINV(0. 92,37009,19211) = 64001
Revenue = retailer wholesale price * Total Demand = 24 * 87680 = 2104320 Cost = dressed jersey cost + blank jersey cost + decorate cost – inventory value = 10. 9 * 50671 + 9. 5 * 64001 + 2. 4 * 37009 – 8. 46 * (64001-37009) = 1020193
Profit = 2104320 – 1020193 = 1083527
Leftover inventory expected to be Blank Jersey Leftover Quantity: 64001-37009 = 26992
Referring to the newsvendor model, it is my recommendation that Reebok should use the newsvendor model to plan their purchasing. The purchasing cycle starts 14 months prior to the regular NFL season. Due to unpredictable demand, it is difficult to generate a reliable forecast. The purchasing plan should be to purchase the jerseys that have the highest probability to be the hot-market item. The second purchasing plan goes into much more detail than the first plan.
The planning manager can use the newsvendor model to forecast the optimal quantity for the dressed jersey and the blank jersey. The most important thing in the NFL season is updating player’s and team’s performance and status of a draft. The newsvendor model provides a statistical and quantitative analysis solution. Reducing cycle time will improve responsiveness and reduce inventory requirements. Also reducing order fulfillment time is better for responding to the customer needs which improves the overall customer service level.
Inventory planning of NFL replica jersey is based on many factors.
The complexity of the market needs Reebok to respond quickly to the changes in customer demand. It is impossible for Reebok to generate accurate forecasts, but they can reduce supply and order lead time and properly assess the salvage value of the leftover blank jerseys. Reebok should not only improve its customer service to meet the NFL licensing agreement, but also to maximize the profit. this analysis was to maximize the profit. The solution here is Reebok should hold relatively more blank jersey than a dressed jersey, and postpone the decoration step until the demand is known.