The Pampered Puss is a company with headquarters in Melbourne, Australia and operates 35 retail shops. These shops are spread throughout the metropolitan area and were established primarily to sell fashion clothes for cats. Coats make up approximately 50% of the retail outlets' business, with collars, leads, gourmet food, etc making up the remaining 40%. All products bear international global brand names.
The Pampered Puss see themselves as being primarily in the fashion business, with coats as the basic product group. Customers have come to expect that the latest fabrics, colours and styles, as seen on the catwalks in Europe and America, will be available and so up to 50% of all products that come into their central warehouse, from the suppliers, is new.
The Pampered Puss operates a large, central distribution centre, located on the western edge of Melbourne's suburbs. All suppliers, who have to export to Australia, send their product to this facility, where it is receipted and then stored in a pre-determined location within the distribution centre. For the fashion products, primarily coats, 50% of the product that is thus received is then, almost immediately, distributed to the retail stores. The remaining 50% of fashion product remains stored and is used to replenish the retail outlets as needed.
A single transport firm is contracted to deliver product to the retail outlets. Each outlet receives a delivery every second day and are open 7 days a weeks. Products can also be transferred between retail outlets, and this is done by the transport firm as part of their regular deliveries.
Management information system
As product is received from suppliers it is assigned storage locations that have been pre-determined to maximise space usage in the distribution centre. A perpetual inventory is kept for every SKU (stock-keeping unit), at every retail outlet and at the central distribution centre. There are approximately 1500 SKUs. An SKU is a unique item; for example, an SKU is a specific brand of coat in a specific fabric, style, colour and size.
A complete inventory of items, in the outlets, in transit between the outlets and the distribution centre, is maintained. All cash registers are linked to the main computer and real-time records are made of each customer sale, returns from customers, receipts from the distribution centre and transfers between retail outlets.
Each night, the system sorts this data and calculates a list of SKUs that are required at each retail outlet. The lists are sorted by the computer to enable efficient picking and assembly of the replenishment items by outlet.
The system can be queried at any time as to the location of any SKU. This enables the retail outlets to request transfers from other outlets. These requests are fed into the regular delivery schedules undertaken by the transport firm.
Within The Pampered Puss, the role of buyer is considered to be of utmost importance. Each SKU is assigned to a product group such as full coats, half coats, winter coats, etc. Items such as collars, leads and gourmet food are also assigned to product groups. A buyer specialises in a number of product groups and thus becomes very experienced in terms of understanding the characteristics of both the suppliers and customer demand within their particular field. In retail language, buyers perform very similar roles to product managers in other industries.
Whilst coats make up the majority of items sold, demand is highly seasonal. For example, in winter there is a much higher demand for full winter coats than there is at other times, while in summer, there is a much stronger demand for lightweight half coats. There is however, demand for all types of coats all year-round. Note that only a small portion of all coats is related to summer or winter seasonality. Seasonality in the fashion business relates to the fact that a product is only "in season" for a short period of time before it is replaced by the next "new" fashion. Suppliers are constantly changing styles, not just in time for winter and summer. In the lead-up to Christmas, collars, bells and other branded staple items are in strong demand.
With the exception of staple items like food, collars, leads and bells, the fashion-related products are not replenished by the suppliers. Most suppliers of coats, all of whom are based overseas, have normal lead times of six months and it is critical that buyers place their orders on time, as there is no opportunity to revise orders once they have been placed. Late orders are not accepted. Most suppliers are continually adding new styles to their range as old styles are sold out.
Buyers build up an order quantity from forecasts of demand done at retail outlet level. This is done at SKU level, so that the actual distribution of styles, by fabric, colour and size actually sold at each retail outlet, is part of the calculation. These forecasts are then adjusted for any upward or downward trend at each retail outlet. While most of the products are new, the "newness" relates to fabric, colour and style and so past sales histories can be a useful guide to future demand, at least in respect of product group, and coat size within product group. Note that it is the buyers who do all this work. Retail outlet sales managers, whose job is to manage the retail outlet, do not participate in this process.
Replenishment of retail outlets
For each SKU at each retail outlet, a maximum and a minimum inventory level has been pre-determined. These min/max numbers are based on previous sales histories, the number of display spaces available and the extra storage area available at the back of the outlet. Note that retail space is very expensive. Each night the system checks all inventory levels at every retail outlet. If the [inventory units on hand plus inventory units in transit] quantity is less than the minimum quantity set for that SKU at that outlet, then a replenishment order is generated and the quantity on that order is the quantity required to bring the inventory level up to the maximum quantity.
A typical retail outlet would carry between 150 and 300 coats within a style and this is spread over 3 sizes, 5 colours, 2 or 3 fabrics and from 5 to 10 brands. SKUs with the smallest expected demand typically have both minimum and maximum quantities set at one, while the more popular SKUs would typically have a minimum quantity of 2 and a maximum quantity of 3 or 4.
The life of a new style is usually less than six months and at some point, full replenishment of all outlets is no longer possible from the distribution centre. The buyers then have to decide which outlets will get the remaining inventory. The system is queried extensively to help in this decision, as buyers have to take into account recent sales by outlet and SKUs available by outlet, in addition to other factors. These other factors include the maximum and minimum numbers of coats each outlet can hold, the number of different styles, etc and the number of display spaces available.
Buyers allocate SKUs to those outlets where it is possible to maintain a full range. When it is no longer possible to maintain a full range at any outlet, the whole style is closed out, and any remaining stock at each outlet is collected and sent to a "factory" outlet, where it is heavily discounted and sold out.
It is very important to The Pampered Puss that the data in their system is accurate, as inaccuracies would have a serious detrimental effect on their successful operation. Mistakes can happen at the initial receipt of products, in the picking for distribution and in the receipt by each retail outlet. Outlets only get credited with what they have verified as having been received. The problem at outlets is that often, they receive their biggest shipments when they are the most crowded and in their busiest period. Sorting and checking under these conditions leads to errors. Staff turnover at some outlets is high and there is often too little time provided for thorough training.
The Pampered Puss conducts a full physical count of all inventory at all outlets and the distribution centre, every six months. In addition, 3 or 4 retail outlets are checked each week. These outlet counts are conducted by a visiting outlet sales manager or by an independent, outside firm.
(a) Draw two process flow diagrams. The first is for the "initial receipt of new fashion product and distribution to retail outlets" process, and the second is for the "retail outlet replenishment and style close-out" process for coats.
(b) Identify where the push-pull interface is located in the total supply chain that originates at the suppliers and goes through to the end customer. You must state your reasons for determining its location.
(c) One of The Pampered Puss's primary performance measures is inventory turnover, which they calculate as the cost of goods sold during a year divided by average inventory value during that year. Currently, as measured by The Pampered Puss, inventory turnover is a little more than two times per year. Given that coat and other fashion products have a life time of about six months, does the current inventory performance as measured by The Pampered Puss make sense? Explain your answer in terms of what is measured, how it is measured and what this might imply about their overall inventory holdings.
Is there a better measure of inventory performance that The Pampered Puss should be using?
(d) Buyers are able to segregate outlets using a Pareto analysis based on product groups. A particular outlet may be an A outlet for winter coats, a B outlet for food and a C outlet for collars. What impact is this likely to have on inventory management?
(e) If you were in charge of Operations and Supply Chain at The Pampered Puss, what changes would you recommend to further improve both efficiency and effectiveness, of what is a successful business?