INVENTORY MANAGEMENT OF SEASONAL GOODS AT DILLARD’S

INVENTORY MANAGEMENT OF SEASONAL GOODS AT DILLARD’S
One of the most important considerations in retail operations is the amount of inventory carried for seasonal products. Matching supply with demand is not easy because some of the seasonal products are manufactured overseas and have to be ordered with a long lead time. Consider the following: The length of the season to sell a fashion apparel or shoe is less than 3 months. In contrast, the manufacturers require that orders be given at least 6 months in advance to guarantee availability of products at the beginning of a sales season. This puts Dillard’s in a difficult situation; order too few and you lose sales, and order too much and you have unsold merchandise at the end of the season.

You must analyze the following situation and make recommendations to Dillard’s:

One group of seasonal merchandise sold by Dillard’s is children’s shoes. The company gathers regional sales forecasts for the upcoming year and orders shoes from the manufacturers well ahead of the sales season. Dillard’s categorizes children’s shoes into 10 different product categories. Description of 10 items as well as purchasing cost per unit, sales price per unit, salvage value per unit at the end of the season, mean demand, and standard deviation of demand for each item are provided inTA#5-Data and Templates.xlsx in the sheet “Info on Child Shoes”. For many years, Dillard’s has been aiming a 90% service level for all the items in the children’s shoes, i.e., the order quantity for each item has been determined to avoid stock-outs for 90% of the time. Dillard’s has asked you to analyze their inventory management practices. Should they change the service levels for next year? Is it possible to reduce order quantities (hence inventory levels) while maintaining the same level of profits?

PART 1: (40 points) ANALYSIS OF ORDER QUANTITIES

In this section you must complete Table 1and Table 2which are given in the last page of this document and corresponding templates are given in TA#5-Data and Templates.xlsx in the sheets Table 1 and Table 2. respectively. Before giving the instructions how to do so, first we define the safety stock below:
“Safety stock is used as a buffer to protect organizations from stock-outs due to supply and demand mismatches. Safety stock is defined as the amount of inventory ordered and carried in excess of mean demand. Then the safety stock level is Q – ? and, in the newsvendor model with normally distributed demand, Q – ? = ?*z-value”
Instructions for filling in Table 1 and 2

i. (20 points) Fill in the missing values in Table-1 as follows: Findorder quantity, safety stock, expected lost sales, expected leftover inventory, expected sales, expected total profit, and fill rate as well as in-stock and out-of stock probabilities for each item in order to avoid stock-outs 90% of the time, e.g., in-stock probability must be 90%.To find the expected lost sales use the formula below in Excel
E[Lost Sales] =s *(NORMDIST(z-value,0,1,0)- z-value*(1-NORMSDIST(z-value)))
wherez-value=NORMSINV(service level)

To find the order quantity, use the formula below:
Q=? + ?*z-value where z-value=NORMSINV(service level) in Excel or
Q=NORMINV(service level, mean, standard deviation)

After you are done filling Table 1 in Excel, copy and paste it as a “picture” to your report. For formulas to compute other performance measures please refer to the lecture notes.

ii. (20 points) Fill in the missing values in Table-2 as follows: Use the newsvendor model and determine thecost of overage, the cost of underage and the optimal order quantity for each item. Compute the corresponding safety stock level, expected lost sales, expected leftover inventory, expected sales, expected profit and fill rate as well as in-stock and out-of stock probabilities. To find the optimal order quantity, use the formula below in Excel:
Q=? + ?*z-value where z-value=NORMSINV(critical ratio) or
Q=NORMINV(critical ratio, mean, standard deviation)

To find the expected lost sales use the formula below in Excel
E[Lost Sales] = s *(NORMDIST(z-value,0,1,0)- z-value*(1-NORMSDIST(z-value)))
wherez-value=NORMSINV(critical ratio)

After you are done filling Table 2 in Excel, copy and paste it as a “picture” to your report. For formulas to compute other performance measures please refer to the lecture notes.

 

 

 

PART – II: (60 points) RECOMMENDATIONS

Answer the following questions:
o (10 points) Should the manager use the same optimal service level (critical ratio) for all products? Why or why not?
o (15 points) Make a suggestion to the manager on how he/she should change the order quantities for next season. Which items should be ordered more and which ones less compared to last year during which the service level was set at 90%?
o (10 points) Based on your analysis, is it possible to order fewer products and carry lower levels of safety stock without compromising revenues and profits?
o (5 points) When is it appropriate to use the newsvendor model?
o (10 points) What are the limitations of the newsvendor model?
o (10 points) Can you think of reasons why the manager might want to deviate from the newsvendor quantities?

 
Table-1. Order quantities and inventory performance with current service level of 90%

 
Table-2. Order quantities and inventory performance when the newsvendor model is used.
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