One important facet of our services is our demand and supply planning consulting. I have recently started one such project and would like to share my experiences and learning with a series of blog posts.
Background:
The company is a design and manufacturer of specialty dance apparel. Their challenges are many of which the greatest is that 75% of their annual demand occurs in a span of only 5 months with each season a replacement of the prior season. During the balance of 7 months they are preparing for the coming season with design and production.
A typical fiscal year follows. A number of months prior to the end of their fiscal year they start the design process for the coming season. They make their best guess as to what will sell the coming year, design the outfits, plan fittings, and design and prepare the catalog. Projections are made by reviewing the past season sales to determine what level of growth could be achieved and what will sell. Additionally, they pull in complementary analysis to assess color and style tastes for the coming season. The final projection is an overall unit sales goal of each outfit and accessory for the coming season.
A new season comprises of three sales components:
- Brand new designs not previously offered.
- Sales of selected items from past seasons – so called staple items.
- Sell off of excess inventory.
Point 3 is critical. If all goes well they are left with little inventory from the prior season and enough cash to prepare for the coming season. Unfortunately, that did not happen this past season. Not only did they end up with a lot of extra inventory they experienced significant stock outs throughout the season causing them to expedite raw materials and work excessive overtime to meet their demand. This in turn burned through profit and the cash necessary to sustain them in preparation for the next season.
As shown in the graph above (green line), peak demand occurs in January, February, and March. The sales volume is such that there is insufficient capacity available to meet the sales volume at the time of demand. As such, they must pre-build the inventory to assure stock is available when the sales are realized. Since their forecast for the year is a lump sum quantity by item there was only a cursory effort made to calculate the production rate necessary to meet demand (i.e. produce 300 a month over the next 4 months). They in turn did not sufficiently load their system with the planed order quantities to drive and phase raw material purchases in time to meet the production plan. To complicate things, production had a tendency to produce in large batch quantities. This ended up consuming valuable available raw material and capacity. If the item did not sell as well as projected then the raw materials and capacity was wasted and no longer available for items that were selling better than plan. The result, increased production costs, excess finished goods inventory, and lost revenue.
In the next post I will share the plan we put into place to meet this challenge.
