Chasing The Hot MarketRakesh B. R.Anand S. Thokal*

Planning QuestionHow should Reebok plan and manage inventory to manage costs while providing the flexibility required to meet demand for NFL Replica jerseys? *

Outline of Case DiscussionDiscuss business context, nature of demand, the sales cycle, key success factors, failure modesDiscuss supply chain, planning cycle, planning challengesFrame as single-season planning problem; relate to newsvendor modelDevelop approach and key insights with NE Patriots exampleWrap up and summary of learning*

SituationLicensed Apparel BusinessImpactReebok received an NFL exclusive license in 2000Highly seasonal & very uncertain demand for player jerseysTeams are more predictable, but correlated with successHot-market players and teams emerge during seasonHigh margins, fashion itemDemand driven by availabilityUnsold jerseys can become instantly obsolete trades; design changesNo direct competition for product 100% market shareDemand is concentrated over five month periodIf product is not quickly available to meet demand the opportunity is lostLost sales cost more than inventory overstocks, but come with a high risk of obsolescence*

Nature of Consumer DemandSales are highest at start of season, August Sept.Hot market players and teams emerge over course of seasonIncrease at end of season for contending teams & stars: Christmas, playoffs and Super BowlOff season is slower, with demand spikes for big-name player movements*

Annual Sales CycleRetailers get discount to place pre-season orders for delivery in May Limited ordering by retailers to re-balance stocks; some short LT orders to respond to player movements Retailers order to position stock in their DCs and stores in anticipation of season, and expect 3 4 week delivery LTRetailers order to replenish stocks, chase the demand, and expect 1 2 week LT for Hot Market items

*

Outline of Case DiscussionDiscuss business context, nature of demand, the sales cycle, key success factors, failure modesDiscuss supply chain, planning cycle, planning challengesFrame as single-season planning problem; relate to newsvendor modelDevelop approach and key insights with NE Patriots example Wrap up and summary of learnings*

*

Supply Chain Overview

Raw Material Suppliers

Contract Manufacturers

Reebok Warehouse

Retail Distribution Centers

Retail Outlets

Consumers

2 - 16weeks

4 - 8weeks

3-12 weeks

1 week

1-2 weeks or less

1 week

Normal Demand

Hot Market Demand

Raw Materials sourced and supplied to contract manufacturers3 contract manufacturers in South America1 Central Warehouse in US to supply all of United StatesCustomers are either National or Regional Retail Chains, each with regional DCCustomer DCs supply product to retail outletsEnd consumers purchase single items at retail

Stephen C. Graves Copyright 2003. All Rights Reserved*

Internal Supply Chain

Fabric Inventory

Cut, sew, and assembly

Blank Inventory at supplier

FG Inventory

Shipping

2 - 16weeks

4weeks

4 weeks

Screen Printing

Screen Printing

Blank Goods Inventory

1 weeks

Contract Manufacturers (CM)

Reebok (Indianapolis)

Purchasing CycleReebok places orders on CMs for April delivery; primarily orders blanks (~20% of annual buy)Reebok places orders for dressed jerseys based on retailers advance orders & remaining inventory (~ 15 20%) Reebok orders dressed & blank jerseys, based on forecasts and inventory targetsLast purchase phase is most challenging*

Outline of Case DiscussionDiscuss business context, nature of demand, the sales cycle, key success factors, failure modesDiscuss supply chain, planning cycle, planning challengesFrame as single-season planning problem; relate to newsvendor modelDevelop approach and key insights with NE Patriots exampleWrap up and summary of learnings*

Single-Season Planning ProblemWhat volume and mix of jerseys to purchase during March to June?Planning framework:Given forecasts (and advanced orders) for team and playersDecide inventory targets for dressed and blank jerseys for seasonPlace orders guided by these targetsRevise forecasts (say) each month based on current information; update targets accordinglyHow should we set inventory targets? *

Outline of Case DiscussionDiscuss business context, nature of demand, the sales cycle, key success factors, failure modesDiscuss supply chain, planning cycle, planning challengesFrame as single-season planning problem; relate to newsvendor modelDevelop approach and key insights with NE Patriots exampleWrap up and summary of learnings*

Representative Numbers for Replica JerseySuggested Retail Price ---- more than $50Wholesale Price = $24.00Blank Cost = $9.50Cost to dress at CM = + $1.40Cost to dress at Reebok = + $2.40 Salvage Value for unsold Dressed Jersey = $7Holding Cost for unsold Blank Jersey = $1.04

Salvage Value for unsold Blank Jersey = $9.50 - 1.04 = $8.46*

2003 Forecast As of March 1, 2003CMs have minimum order quantities of 1728What should inventory target be for dressed jerseys for each player? And blank jerseys for team?*

*From:- Q = Mean (k * SD)Probable Orders Given The Total Mean Quantity is 60,000 JerseysHere k = 0.52

StyleMeanSDQtyBT307631384323564.64LTY1056947568095.88Btroy815936716250.08VA727043625001.76Btedy552633163801.68SA211812171485.16Other232751047417828.52Total66027.72

Outline of Case DiscussionDiscuss business context, nature of demand, the sales cycle, key success factors, failure modesDiscuss supply chain, planning cycle, planning challengesFrame as single-season planning problem; relate to newsvendor modelDevelop approach and key insights with NE Patriots exampleWrap up and summary of learning

*

Conclusion Context fashion items, seasonal, high uncertainty in demand Newsvendor with Risk Pooling provides way to plan for and exploit postponement options Results in higher profits, 95% service level, better mix of end-of-year inventory. Results in much different inventory plan greater use of blanks and local finishing Project resulted in planning tool and new insights for planning for Reebok, and a thesis! A second project focused on forecasting*

THANK YOU*

***What are the characteristics of this business? Distinctive elements? How could Reebok lose its license?*This reflects sales at retailers*This is Reeboks sales cycle sales by Reebok to retailers.**Reebok warehouse in IndyContract manufacturers Asia, but more and more are being moved to central America and Caribbean (Honduras, El Salvador, DR)Many contract manufacturers why?Most sales through large sports retailers, and thru distributors.*Indy has capability to do screen printing for NFL roughly 30000 jerseys per week. Case does not tell us enough about whether or not this is constraining.but does indicate there are options to outsource locally at 10% premium. Its more expensive to screen print in Indy than at CMReebok has postponement opportunity -- but it costs more to dress in Indy than at CM, and there can be capacity and/or QR considerations too.*Note ordering in July 2005 for 2006 season!

During season (Sept. Nov.) Reebok can expedite jerseys from CMs by pulling forward the supply; that is in 2005 season, they can pull forward jerseys that have been ordered for 2006 season. This is expensive (air freight, special handling ,etc.) so Reebok does not plan on this but will do to avoid shortages and lost sales.**Focus discussion on March to June time window.Framework how we wish to frame the problem for purposes of building a model?Given framework, how do we set inventory targets? Suggest using newsvendor model, as we have a single period problem, i.e., effectively a single purchase opportunity.

This is key to have students think about how they would plan and manage procurement and inventories with lots of SKUs; multiple CMs with constraints on what they can do; time delays due to shipping; and forecast dynamics as season gets closer in time.

Simple approach view as a single period planning problem; create inventory targets for each player and for each team; place orders to build pipeline of stock, with objective to build to these targets; revise targets as get better forecasts.**Representative but not actual numbers; the salvage numbers are for Reebok, not for the retailer. In general, quite difficult to develop estimates for these salvage values.Salvage value of blank jersey is cost of a blank, net of cost to hold in inventory for a year. ($9.50 1.04 = 8.46) --- if I have leftover blanks, Reebok will use next season, assuming no changes in design; but Reebok will incur a holding cost for having the jersey in stock for about one year.

For dressed it can reflect what a jersey could be sold at discount for and/or cost of jersey net of risk-adjusted holding cost (to capture chance of becoming obsolete). The $7 reflects an estimate of what a discounter would pay Reebok to take the leftover dressed jersey. Dressed have lower savage value because of risk that player retires, gets traded, stinks, etc.

Note that at retailer end of season mark down is about $35; and they cant return to Reebok.*Note that these 6 players could be manufactured to stock, and have quantities that exceed minimum order quantity of 1738

These questions occur for each team and each team has similar numbers, 5 6 players that have significant demand, and then all the others.

Developing such a forecast is most difficult largely judgmental, with some history of past sales; estimates of standard deviations are best guesses of the forecast error, again based on past years.

For analysis will assume a normal distribution which would be a typical, reasonable assumption. Ideally, one would look at forecast errors from prior years and see if this is a good fit.**