The following discussion describes a new inventory system used by J. C. Penney 3

Question

The following discussion describes a new inventory system used by J. C. Penney39:

In an industry where the goal is rapid turnaround of merchandise, J.C. Penney stores now hold almost no extra inventory of house-brand shirts. Less than a decade ago, Penney would have stored thousands of them in warehouses across the U.S., tying up capital and slowly going out of style.

The entire program is designed and operated by TAL Apparel Ltd., a closely held Hong Kong shirt maker. TAL collects point-of-sale data for Penney’s shirts directly from its stores in North America for analysis through a computer model it designed. The Hong Kong company then decides how many shirts to make, and in what styles, colors, and sizes. The manufacturer sends the shirts directly to each Penney store, bypassing the retailer’s warehouses and corporate decision makers.

a. Discuss how this case illustrates the concept of the opportunity cost of capital.

b. How does this innovation also help in demand management?

Explanation / Answer

A)

The possibility fee of capital is the incremental return on investment that a business foregoes when it elects to make use of money for an internal assignment, as an alternative than investing cash in a marketable safety. Accordingly, if the projected return on the internal assignment is not up to the anticipated rate of return on a marketable protection, one would now not invest in the inner mission, assuming that this is the one foundation for the determination. The opportunity cost of capital is the change between the returns on the two projects.

For illustration, the senior administration of a industry expects to earn 8% on a protracted-term $10,000,000 funding in a brand new manufacturing facility, or it could make investments the money in shares for which the anticipated long-time period return is 12%. Barring some other considerations, the better use of the cash is to invest $10,000,000 in shares. The opportunity price of capital of investing in the manufacturing facility is 2%, which is the difference in return on the 2 funding opportunities.

This notion is not as simple as it is going to first appear. The man or woman making the selection have got to estimate the variety of returns on the substitute investments via the period in the course of which the money is expected to be used. To return to the illustration, senior administration may be special that the organization can generate an eight% return on the new manufacturing facility, whereas there is also colossal uncertainty related to the range of returns from an funding in stocks (which might even be bad in the course of the cash usage interval). As a result, the range of returns should also be viewed when arriving on the opportunity cost of capital. This uncertainty will also be quantified by means of assigning a chance of prevalence to one of a kind return on investment results, and using the weighted ordinary because the definitely return. No matter how the drawback is addressed, the predominant point is that there is uncertainty surrounding the derivation of the opportunity cost of capital, in order that a determination is rarely based on entirely risk-free funding expertise.

b)

We're residing in instances of gigantic alternate, no longer least of which is the purchaser control over so many elements of business operations. Businesses have got to consistently innovate to maintain up with and satisfy quick-altering client demand. Is your demand management approach competently aiding this innovation requirement? That help for innovation is called into query by the findings of the recently launched JDA vision 2015 deliver Chain Market study. The be taught is founded on a world govt survey with over 250 responses representing a extensive determination of industries across 17 international locations.

Demand administration as a self-discipline has been around for a very long time, as have pc techniques used to forecast demand. They had been originally designed to maintain factories humming, pumping out these products most in demand. However the outcome from the market study suggest that one of the most pressing disorders in at presents speedy-paced, client-driven marketplace, corresponding to new product introductions, promotions and activities, aren't being good served by way of those older processes or technologies.

With the purchaser firmly in manage of the purchaser-seller relationship, demand has come to be more unstable and fickle, inserting a top rate on agility and innovation, with the need for extra regular new merchandise introductions. By means of ecommerce and cell search capabilities, buyers at present are additionally much more price-aware and have been conditioned to shop for offers, for that reason making promotions a a lot larger element of most merchandising plans. Consequently, you would expect that producers and shops would now be using rising exceptional practices and the ultra-modern applied sciences to forecast demand for new product introductions and promotions or pursuits. In keeping with the survey outcome, nevertheless, that is it appears now not going down.

The study determined that over half of of the responding firms still rely on their sales, advertising and marketing or merchandising groups to provide forecasts for new product introductions (fifty three%) or promotions and routine (fifty two%). Most often, these teams are making use of historical earnings numbers for their forecasts, not forward-looking predictive analytics. Actually, not up to 40 percentage of respondents say they're utilising modeling or predictive efficiency applied sciences to forecast revenue for brand new product introductions. Worse yet, a miniscule three percentage say they're making use of algorithmic technologies to develop advertising models for promotions and movements. It appears many are reluctant to stop the historical and familiar approaches, and consequently should not adopting the brand new predictive technologies as a way to separate winners from losers in at present fast-altering and risky market.

The Challenges

not using cutting-edge predictive technologies is solely probably the most challenges going through many companies today. When requested for his or her top demand administration challenges, the clear leader, at over sixty five percentage, was once the disconnect between the sales and Operations Planning (S&OP) procedure and distinctive demand plans. S&OP has come to be a strategic process for a lot of businesses as they attempt to better steadiness customer demand with inventory and creation plans in mild of growing demand volatility, which was the 2nd most-noted venture within the survey. The third most in general noted venture used to be managing new product introductions. As a consequence, the executives consider that volatility, new product introductions and lack of integration are their largest challenges, and thus are what they most ought to center of attention on this yr.

Given the criticality of the above challenges, it is no shock that the highest initiatives the respondents are taking in 2015 are in direct response to those challenges. Top amongst these is integration of a nice-in-category S&OP system with their demand planning system. Clearly, executives understand they must better align their companies round ever-changing demand alerts with a view to compete in in these days risky market.

Optimizing the new product introduction process was once the 2nd most-referred to initiative, reflecting both the callenges in this field and the necessity for more innovation to compete in in these days consumer-pushed marketplace. Tied for 2d position used to be bettering exception administration, a transparent offshoot of the have got to higher handle volatility and toughen consumer service.

The fourth most-cited initiative is making improvements to advertising administration; once more, a direct response to some of the key challenges organizations are dealing with. Firms might not be competent to enhance promotion effectiveness, nonetheless, if they continue to make use of average planning processes and applied sciences. New, progressive modeling and predictive analytics techniques are wanted to raised align promotions and new product introductions with exact demand.

Fairly particularly given all of the hype around social networks and gigantic information, leveraging social knowledge for demand planning was the least-noted initiative for this yr. Probably it's rough to take on more recent, less understood applied sciences when there are so many challenges but to be solved within the normal blocking off and tackling of adapting to at presents risky, patron-driven marketplace. However, it is anticipated that the usage of social knowledge to force demand will quickly upward thrust to be a high initiative in the near future.

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