Throx sells higher-end custom-design socks in three-sock sets (rather than two).
ID: 2746286 • Letter: T
Question
Throx sells higher-end custom-design socks in three-sock sets (rather than two). The company operates from a small packaging and distribution facility in Richmond, CA from which it ships product to customers. Given the company’s location and focus, 97% of sales are in California, primarily in the major urban areas of the San Francisco bay area, Los Angeles, Sacramento (and last but not least) San Diego. The company sells exclusively via online sales, at an average price of $15/three-sock set, plus shipping costs charged to the customer.
The company currently orders its product from the Chinese sock manufacturer Zhejiang Datang Hosiery Group Co., Ltd in so-called “Sock City.” Socks are shipped via truck to the port of Shanghai, from where they are shipped to the port at Los Angeles-Long Beach via ocean freight. Once offloaded in Los Angeles-Long Beach, the socks are shipped via truck to the Richmond facility. On average, shipment from the manufacturer to the Richmond facility takes 4 weeks. In addition to the transit time required for shipment, the lead time from when an order is placed with the manufacturer to when it is shipped from Zhejiang is 2 weeks. Historically, the standard deviation of lead time has been 1 week.
Product Orders (Demand) Information
The company provides you with the following information for the past two fiscal years:
Product Forecasting Information
Throx uses two main forecasting methods based on annual data to predict orders for the following year, a weighted moving average and exponential smoothing. They provide you with the following information about forecasts for FY 2014 and FY 2015:
Weighted Moving Average uses Wt = 0.7 and Wt-1 =0.3.
Exponential Smoothing uses ? = 0.9.
Inventory Management Information
The initial inventory for all sock styles combined at the beginning of FY 2016 is 3,500 units. You also have information on current costs, which includes:
- Unit order cost to Throx for an order placed with its current supplier, $/order = S = $500
- Holding cost per set per per year for materials held in the company’s warehouse = H = $5
- The company currently pays $4 for each set of socks.
The company uses a continuous review replenishment policy, and has IT systems in place that allow constant monitoring of key information. Last year, the company used an ROP under this policy of 1,750 units for all sock styles and an order quantity Q of 4,000 units for all sock styles.
Potential Alternatives to Current Supply Chain Management
The company has asked you to evaluate a number of alternatives to their current SCM practices, including their choice of supplier, transportation modes, warehouse location, order quantities and safety stock.
Alternative Suppliers
The company has contacted potential alternative suppliers in China, who have offered the following information relative to the current supplier:
To keep their order management simple, Throx wants to use a single-sourcing strategy, so they want a recommendation about which supplier would be best.
Alternative Transportation
An alternative to their current transportation approach available to Throx is shipment by UPS Express Air from Shanghai to Richmond, which averages 3.5 days. The comparison of costs is given as:
* No data are available about variation in transit times, so Throx assumes this is constant.
Similar to their decision about sourcing, Throx wants to use a single-sourcing strategy for transportation, so they want a recommendation about which mode would be best.
Alternative Warehouse Location
The company would also like to assess whether its current warehouse location is appropriate based on where customers are located. It provides you the following information about its key markets, and indicates that its orders in each market are roughly proportional to the total population.
Project Deliverable to Throx
You should address each of the following:
Calculate measures of forecast accuracy for FY 2014 and FY2015 using the MFE, MAD and MAPE. Do these forecasts seem adequate for the purposes of decision making? Why or why not?
Calculate what appropriate values of EOQ and ROP would have been for FY2015 based on the FY2015 forecast value. Give your final answer in full sock sets (round to the appropriate whole number.) Then, calculate what appropriate values for EOQ and ROP would have been for FY2015 based on actual demand. Based on this difference, indicate what the implications are for inventory management costs in FY2015. See additional tips below:
Compare the costs for decisions based on the forecast to the actual data
Use a service level of 95% (z=1.65) when calculating the ROP
Calculate average weekly demand () by dividing the forecast by 50 weeks
For the variance in weekly demand, use the data provided in the table with the FY2015 forecast for all approaches
Annual Inventory management costs will include the following: Annual Holding Costs, Annual Ordering Costs, and Purchase Cost.
Calculate inventory management costs for the company’s current decisions about EOQ and ROP based upon actual demand in FY2015. Compare these to the costs to that would have been achieved if the company had used its forecast for FY2015 to calculate more appropriate EOQ and ROP values (what you calculated in Question 2).
Develop a forecast for FY 2016 using the two forecasting methods currently employed by the company. Comment on which of the forecasts is likely to be more appropriate to support decisions based on your assessment of forecast accuracy. Use ONE of the forecast values to support your recommended decisions in Question 5 below.
Provide the company with the following recommendations for FY 2016 to improve SCM performance, based on analysis of available data and appropriate methods from SCM 301. Include a discussion of WHY the recommendations would be expected to improve performance, which usually will require calculating performance metrics for your recommended decision compared to the company’s current decisions. Use your forecast values from 4) as input into your decisions.
Indicate which of the three suppliers should be used for FY2016. It will be helpful to develop a supplier scorecard (NOTE: Use scores of 3=best, 2=second best, 1=worst);
Indicate which transportation mode should be used for FY2016. You may use a scorecard, but you must also include an analysis of the transportation costs associated with each option and discuss other implications (such as inventory levels, safety stock, etc);
Indicate an appropriate location for a new facility if one is to be built. Round your final coordinates (X, Y) to two decimal places. Use methods discussed in the course, but be sure to include discussion of other relevant factors that would influence the choice of a specific location;
Indicate what appropriate values for EOQ and ROP would be for FY2016 based on your forecast from 4) and recommended supplier from Question 5a. Give your final answer in full sock sets (round to the appropriate whole number). What are the expected costs for inventory management based on your decisions, and how do these compare to the performance observed in FY2015 based on the company’s decisions for that year (Question 3 numbers based upon the order quantity of 1000)?
Discuss potential issues with the implementation of your recommendations. What changes or resources would be necessary to implement them, and what might create challenges?
Explanation / Answer
ANSWER
1.
Mean Forecast Error (MFE) = [(Actual – Forecast)]/n = (Error)/n
Mean Absolute Deviation (MAD) = [ |Actual – Forecast|]/n = (|Error|)/n
Mean Absolute percentage error (MAPE) = [(Actual – Forecast)/Actual]/n
The forecast error is 25% for the weighted moving average method and 22.5% for the Exponential Forecast.
The demand is higher than the forecast for both 2014 & 2015. Hence, there is no loss due to inventory carrying cost. Still, the opportunity to tap the market demand was not fully utilised due to forecast error.
2.
EOQ & ROP of Weighted moving average forecast
Variance of Weekly Demand = 150
SD = 150 = 12.2474
Shipment from the manufacturer to the Richmond facility = 4 weeks, Lead time = 2 weeks
Total Lead time = 6 weeks
Mean demand for 1 week = Forecast data/50 = 14550/50 = 291
Safety Stock = Zd
Reorder point = mean demand during replenishment lead time + safety stock
ROP = (6*291) + (1.65*12.2474) = 1766.20821
ROP = 1766
EOQ, Q = [(2 × Quantity × Cost Per Order )/ Holding cost]
Q = (2*500*14550 )/4
Q = 1706
EOQ & ROP of Weighted Exponential forecast
Mean demand for 1 week = Actual Demand/50 = 14815/50 = 296.3
Reorder point = mean demand during replenishment lead time + safety stock
Safety Stock = Zd
ROP = (6* 296.3) + (1.65*12.2474) = 1798.00821
ROP = 1798
EOQ, Q = [(2 × Quantity × Cost Per Order )/ Holding cost]
Q = (2*500*14815)/4
Q = 1721
EOQ & ROP of Actual Demand.
Mean demand for 1 week = Actual Demand/50 = 22000/50 = 440
Reorder point = mean demand during replenishment lead time + safety stock
Safety Stock = Zd
ROP = (6*440) + (1.65*12.2474) = 2660.20821
ROP = 2660
EOQ, Q = [(2 × Quantity × Cost Per Order )/ Holding cost]
Q = (2*500*22000 )/4
Q = 2098
The reorder point is earlier than the actual demand. Hence there is chances of having more inventory at the end of the year.
Economic order quantity is also high for the actual; using the forecast the EOQ is estimated less. Hence the no.of orders was more there by increasing the order cost overall for the year.
3.
There was no.of orders calculated using the forecast is 9, whereas the actual is only 7.
Hence 2*500 = $ 1000 order cost could have been reduced if there is no/less forecast error.
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