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North West Case Essay

Executive Summary

North West Company will move towards a “pull strategy” within its supply chain. Pull production is based on actual or consumed demand and individual store managers will monitor this. The benefit of localization for North West will be a higher inventory turnover rate. The benefit for customers will be a more customized shopping experience based on their community. The potential risks are there are high costs involved in implementing a new database system and procurement decisions will be divided between category managers and store managers. We will implement a new database system and train store managers to purchase inventory based on local and regional needs. This system will allow stores to be a part of their community and customer needs can be better met.

Issue Identification

These are the following issues that must be addressed:

Forecasting and Procurement – Low Inventory Turnover Rate
Product Receiving and Shipping – Reducing Cycle Time
Merchandising and Selling – Interorganizational Information Systems Store Managers – Preference Implications

Environment and Root Cause Analysis

Environment

North West Company has a lower inventory turnover rate than most of its competitors and that is due to the use of a “push strategy” within the supply chain. Customer demands are not taken into consideration and they often have to shop at competitors to meet their needs.

Issue Identification

Forecasting and Procurement – Low Inventory Turnover Rate

Forecasting and procurement use a “push strategy” where production decisions are based on long term historical forecasting. Category managers look at past trends and base their buying decisions on past sales. Purchase orders are submitted at least 4 months prior to the intended selling period. This does not allow for a response to changes in demand. This can lead to overstocking inventory, which is what causes the low turnover rate. The relationship with suppliers is streamlined because orders are placed in large batches and way ahead of time. The lack of customization allows suppliers to respond quickly and production is ahead of schedule.

Product Receiving and Shipping – Reducing Cycle Time

Products arrive at the distribution center approximately two months prior to the selling period. Inventory is separated between temporary and regular on two floors. Space is optimized because of the tight managing schedule or receiving and shipping however the lead-time to distribute the merchandise is too long. Excess merchandise is “pushed” to stores and eventually ends up being marked down.

Merchandising and Selling – Interorganizational Information Systems

Once merchandise arrives to the stores it is immediately put on display. Rural stores often sell out of popular items and customers are left with no choice but to shop at a competitor or substitute for other items. Demand for particular stores is not forecasted and this is an opportunity cost. The product assortment is kept fresh throughout the selling period by splitting up shipments throughout the period. There is a lack of information between stores and what each store/region requires.

Store Managers – Preference Implications

Category managers currently make all procurement decisions. Individual stores have no say in what they will be selling and cannot combat customer demands. Although a costly process, if managers are given the ability to customize their inventory stores will be able to cater to their specific communities.

Alternatives and Options

Forecasting and Procurement – Inventory Turnover

Pro: Forecasting and procurement is a fairly simple process because orders are placed in large batches and way ahead of time based on historical data.

Con: It takes longer to respond to changes in demand, which results in overstocking.

Alternative: Dividing inventory into two categories – General and Seasonal/Customized. General merchandise with consistent sales will maintain the “push strategy” as the process is less costly and decisions are based on data. Seasonal/Customized inventory will adopt a “pull strategy” where store managers will have the opportunity to make decisions based on their immediate environment.

Product Receiving and Shipping – Reducing Cycle Time

Pro: The distribution center is already divided into two floors – one for immediate shipping and the other for storage. This makes for easy access to what needs to be shipped right away and what does not.

Con: Two months is a long time to be housing inventory that is projected for a specific period. Demands can change in this time frame and the distribution center is left with no choice other than to “push” inventory to store warehouses. This is what leads to unnecessary markdowns.

Alternative: Placing orders with suppliers at a later date will reduce the time inventory sits at the distribution center. The center already runs smoothly and on schedule so pushing back shipments should not be a problem. This will allow orders to go in at a later date where inventory demands might change.

Merchandising and Selling – Interorganizational Information Systems

Pro: Merchandise is immediately put on display so stores do not have to stock inventory.

Con: If a store runs out of certain products they cannot meet demand. Similarly, if a product does not sell it will eventually go into clearance.

Alternative: Creating a database between stores that shows inventory of each store will allow inventory to move easily from one location to the next. Stores should hold some general merchandise in order to allow a continuous flow of turnover.

Store Managers – Preference Implications

Pro: Store managers can customize orders based on customer needs and local trends. There is opportunity to have higher inventory turnover because of localization.

Con: Manager’s preferences can be biased and oppose that of the company as a whole.

Alternative: Store managers should be given proper training and a guideline of what they can purchase. Managers are limited to “OTB” dollars.

Recommendations

The following is a summary of my recommendations:

Categorize inventory into two sections: General and Seasonal/Customized Maintain the current system for General merchandise Seasonal/Customized inventory to move to a “pull system” Within the “pull system”, seasonal/customized inventory is ordered at a later date to reduce storage time at distribution center Create storage space within individual stores for General merchandise Implementing a database for all stores to view on hand inventory Training store managers to use the database

Developing an allowance for store managers to purchase products for their individual stores

Implementation

The first step is to categorize inventory between general and seasonal/customized. This will be appointed to category managers. General inventory will maintain the system that is already in place and will be consistent for all 147 stores. Once seasonal/customized inventory is identified, forecasting should be done two months prior to purchasing period. This responsibility will be that of the store manager. Cycle time will be reduced as the distribution center will now only be a gathering point for incoming shipments rather than a storage facility.

Individual stores should allow for some storage space for General inventory and overstock. North West will need to invest at least $10 million to develop a database. The database will take a month to implement and we should consider up to two months for training of store managers. The category managers will determine the allowance that each store manager is given. We can look at data to determine which stores are most successful and calculate an allowance based on individual store inventory turnover. The entire plan should take no longer than six months to implement.

Monitor and Control

Timely checks should be made to see if the implementation plan is successful. Once inventory has been categorized and a database has been developed, category managers should measure the store managers’ performance. This includes examining if inventory turnover has gone up. Customers can be given surveys to measure whether or not their needs are being met. The reduction in markdowns should be measured as well in order to determine whether or not this is a feasible system.


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