Tiffany Chen was concerned about Winner Apparels sales results from the previous season. For some products, the

Question:

Tiffany Chen was concerned about Winner Apparel’s sales results from the previous season. For some products, the company had to sell about a third of the seasonal purchase at sharply discounted prices. For other products, the company ran out of stock well before the end of the season. Tiffany wanted to improve the matching of supply and demand. A local supplier had offered to bring a second delivery around the middle of the season but wanted a 5 percent increase in purchase price. Tiffany had to decide whether the price increase was worth the benefit of a second mid-season delivery.
The Previous Season for Winner Apparel

The sales year for Winner was divided into four selling seasons of about three months each. The company had implemented a low-cost sourcing strategy and identified suppliers from low-cost countries in Asia. Although these suppliers provided a low purchase price, they required Winner to place its orders well before the start of the selling season. To lower costs, suppliers delivered a single lot a few weeks before the start of the season. This put the onus for accurate forecasting on the purchasing department. Tiffany had a very experienced group of buyers who looked at historical sales patterns and the new designs for the current season to come up with order quantities from each supplier. Unfortunately, their track record of matching supply and demand was rather poor. Winner always appeared to be short of products that were selling very well and had a surplus of products that were not selling well.

Tiffany decided to focus on a couple of products that had problems last season. “Trendy” was a collection of women’s shirts that,
as the name suggested, incorporated cutting-edge fashion. The buying committee had been bullish on the new designs and ordered 570 units for the season. Unfortunately, 250 of those units were still unsold at the end of the season. Trendy shirts sold at a full price of $100, but for the 250 units unsold at the end of the season, Winner would be able to salvage only $20/unit. This was a significant loss, given that each unit had been purchased for $40. In contrast, “Basic” was a collection of Tshirts that Winner always maintained in its portfolio. The buying committee had ordered 1,080 Basic units, but Winner ran out of stock before the end of the season. Tiffany’s team estimated that the company could have sold another 60 units if stock had been available. Given that Winner had a margin of $20 for each Basic T-shirt, the company had lost $1,200 in margin because of being out of stock.

Proposal from Responsive Supplier

A local supplier had heard that Tiffany was reconsidering product sourcing. It proposed filling Winner’s needs in two deliveries. The first delivery would arrive before the start of the season and be designed to cover about a half-season of sales. The second delivery would arrive around the middle of the season, but the timing and quantity could be adjusted to account for sales in the first half. The supplier promised delivery to ensure no stockouts during the first half. In other words, the supplier would bring in the second delivery early (and a larger quantity) if sales in the first half seemed to be higher than predicted. If sales in the first half were slower than anticipated, Winner could reduce the amount ordered for the second delivery. For this flexibility, the local supplier wanted a premium of 5 percent compared to the low-cost supplier. If purchased from the local supplier, the Trendy line would thus cost $42 (instead of $40) per unit and the Basic line would cost $31.50 (instead of $30). Tiffany felt that with a mid-season delivery, any customers who could not find product during the first half of the season would return for the second half and purchase the item. Thus, there would be no lost sales during the first half of the season. Her team prepared the demand and cost data shown in Table 13-8 and 13-9. Tiffany had to decide whether the responsiveness of the local supplier was worth the additional 5 percent in unit cost.

Table 13-8