Efficiency in the Supply Chain

Case Scenario

In early 1975, brothers John and Michael Phillips founded the Stone Horse Supply Company. John and Michael, both horse riders and horse owners, had developed a horse feed to keep their own horses healthier and happier and found it in demand from other locals and neighbors. In response to that growing local demand, John and Michael converted their small home operation into a rented building in town and went forward with the business of manufacturing and selling specialized horse feeds.

Through the late 1980s and throughout the 1990s, the Rock Horse Food Supply Company enjoyed modest prosperity, providing niche products to the local area with their products selling in most of the nearby counties. However, in early 2006, the situation began to dramatically change. In early 2006, John and Michael were contacted by representative of the largest chain of stores in the region. One of the officers of the large chain was a horse owner and had been buying the special horse feed for his horse. The officer felt that because she enjoyed the product so much and knew that other local customers had used the product and perhaps the product could have success on a statewide or even a national scale.

Since its onset, John and Michael had run their business on virtually a manual basis. Suppliers were mostly local with sourcing decisions based on the supplier’s proximity. Forecasting and ordering from suppliers were completed through phone calls and faxes with new orders based on manual counts rather than any systematic process. Stone Horse Supply Company often found itself with either excess material or expediting material in from suppliers at the last minute to keep from missing a customer deadline. Likewise, Stone Horse Supply Company was in the same facility it had started in, a smaller facility that had an unusual layout that John and Michael had made minor modifications to through the years to adapt to problems encountered during those years.

While John and Michael were excited about the prospect of the company and its product becoming a mainstream product with vastly increased sales, they both knew that they were already struggling to meet current customer demand and that the current methods used to run the company would be insufficient as it entered this next phase. More specifically, John and Michael were concerned about the company’s ability to order and maintain the correct inventories to meet the new sales projections or even if many of its suppliers could meet the higher volumes. John and Michael also were concerned about how they would get the materials to Stone Horse Supply Company because they currently used a single company truck to pick up most of the local materials. Finally, John and Michael were deeply concerned about inventory levels and the cash required maintaining those inventories because they were already experiencing excess cost and issues in this area.

Having decided to move forward, John and Michael’s company faced many questions regarding the new sales opportunity. Both John and Michael knew that while the technology they had to offer was superior to any other product of that type currently on the market, they also knew their company needed help in developing a supply chain strategy to ensure that this fantastic new sales opportunity did not overwhelm the company and end in failure.

Your task starts with assisting John and Michael with an assessment of their current and desired situations. You will follow with assisting Stone Horse Supply Company in developing a supply chain that will support its future operations while also knowing that now that John and Michael’s product is going mainstream that there is great likelihood that other competitors will follow and that any strategy must address the future competitive landscape of the company.

ASSIGNMENT

John and Michael, the owners of the Stone Horse Supply Company, are very excited about the new business opportunities their company is going to face. One of the obstacles that they are concerned about is how the business is going to support the growth in customers and locations. With that in mind, John and Michael ask that you prepare a report for them explaining stock-outs and how companies approach and resolve issues relating to growth.

For this assignment, you must submit a report consisting of 1,500 to 2,000 words in which you explain stock-outs and how companies approach and resolve issues relating to growth. For full-credit, you must address the following in your report:

Explain the purpose of using stock-outs to control inventory.
What are the costs associated with using stock-outs?
What is the demand for stock-outs?
Explain in detail the ways to measure product availability.
Explain the importance of the level of product availability.
Provide at least 3 of the factors that affect the optimal level of product availability.
Research and discuss a company that has gone through times of growth and seen the effects of stock-outs.
Provide at least 3 recommendations, to John and Michael, of how not to sustain problems with stock-outs when dealing with an expansion.

ANSWER

Efficiency in the Supply Chain

Explain the purpose of using stockouts to control inventory

Stock-out also referred to as out-of-stock, describes an event where the inventory for a given product is finished. At this point, the product is no longer available for purchase at the retail level. However, the work may still be available at other stages of the supply chain. It is possible to document stockouts in a certain amount of time within an organization. It can either be within weeks or months (Groenevelt et al., 2014). However, it is essential to note that in a company with a supreme stock management system, and it is correctly put in place, the stock-out duration becomes minimal. Inefficiencies that arise at any supply chain stage are the leading causes of stockouts. These inefficiencies may include inadequate procurement funds required for the production of goods and services, and insufficient buffer stock of all the necessary products at levels of the supply chain, non-participatory and inadequate forecasting. They may also include inefficient distribution systems at both the regional and national levels and inaccuracy in record keeping. Therefore, companies can use stockouts to control their inventories. However, costs like overstocking can be applicable in measuring the availability of their products. Therefore, organizational managers should consider factors like quick response and postponement whenever they are dealing with expansions. In doing so, they will sustain stock-out problems.

 What are the costs associated with using stockouts?

Costs associated with stockouts are called stock-out costs. It is the income lost and expenses affiliated with a shortage of inventory. Fees due to stock-outs can arise in two ways, namely:

• Sales-related costs. These costs are incurred when there is no product available to sell to a customer when they place an order. When this occurs, the organization stands to lose the gross margin associated with the sale (Dye, 2012). Further, customers may be lost entirely; thus, the company stands to lose the margins related to future sales.
• Internal process-related costs. They occur when the firm requires inventory for the production run, but the inventory stays unavailable. For the company to acquire the required inventory on short notice, it incurs some costs. For instance, the company may be required to pay a rush fee on top of extra charges for overnight delivery to obtain the inventory. Also, the staff responsible for production planning must scramble to alter the production plan. Other jobs in the schedule are advanced to replace the jobs that are unable to run until the desired inventory is received.
• Unsatisfied or lost customers. If a company lacks the necessary products and goods for their clients, there are higher chances that their customers, despite their loyalty, will be unhappy. As a result, they may end up finding their products from the organization’s competitors. It is always essential to remember that a lost customer is not only a lost sale; it could be the loss of many repeated sales. Unfortunately, a company may never know that they lost this customer; hence they may never measure the loss.

What is the Demand for stockouts?

Most retailers often react to stockouts instead of taking various measures to prevent them. Here are some ways they can reduce stockouts and ensure their clients are not only happy but also satisfied;

Accurately forecasting demands

One of the most common reasons for stock-out is inaccurate forecasting inventories. If a company accurately predicts how much an inventory will need and controls or prevents the stock-out problem, it will be more comfortable. It may be easier for businesses that primarily depend on seasons like winter and summer sports equipment to predict a specific’s product demands. If organizations can calculate lead times, they may easily plan for busier shopping periods than those that are not.

Reconciling item counts disparities

In most cases, stockouts occur where there are item count differences from one inventory system to the next. It is impossible to eliminate human errors. However, an organization may avoid these disparities by ensuring its data inventory is well updated.

Explain in detail the ways to measure product availability.

To measure the product availability, an organization uses the cycle service level of their fill rate. The service rate the percentage of the customer demand that is satisfied with the available inventories (Tenter et al., 2017). Syncing data between bricks-and-mortar locations and online channels make it possible for retailers to manage their stock effectively.

The level of the available product = the performance of the supply chain. Therefore, a higher level of the products available is equal to extensive inventories. Let us take the example of a company that sells apparel among ski jackets. The season where ski jackets sell the most is from November to February. Before the selling season begins, a buyer buys the ski jacket supply for the manufacturers’ whole season. In this case, when calculating the product availability level, the manager of this company must balance the losses from having several unsold jackets and the lost profits from turning some of their customers away.

Explain the importance of the level of product availability.

Product availability is an essential aspect of the business world. Customers everywhere search for reliable and convenient service providers with a constant flow of goods whenever they need it. The level of product availability positively contributes to an organization, and here are some of the ways how;

• It helps in retaining clients. If consumers have a constant flow of their products and do not experience any stockouts, they will be loyal to that organization (Kim & Lennon, 2011). However, in a case where they continuously share stockouts and are forced to wait, they will be forced to find alternative organizations that can provide them with the services they need.
• Maintaining future sales: If an organization loses a customer, they do not merely lose that one sale. Once a customer builds trust with a particular company, the chances are high that he can recommend the company to other friends and family members searching for similar products. Therefore, if they experience stockouts, they may opt for other companies; hence they may recommend the new companies.

Provide at least 3 of the factors that affect the optimal level of product availability.

Cost of production

The production cost implies a decrease in product availability if the cost of production decreases and vice versa. There is an inverse relationship between the cost of production and the availability of a product for supply.

Under stocking Cost

If a company undergoes inventory problems, the chances are high that they could be making various mistakes. However, a company sometimes experiences stocking because they do not have enough money to continue production. There are chances that the demand for products will be higher than their availability in the market with little show.

Possible scenarios

These may include seasonal items that have one order in a season. They are like one-time orders that occur when a quantity discount is offered, seasonal items ordered per season, continuously stocked items and demand during stock out are backlogged or lost.

Research and discuss a company that has gone through times of growth and seen the effects of stockouts.

Walmart is an example of a company that has experienced stockouts, but it survived through it. For years, Walmart has struggled to keep its shelves stocked with the merchandise they need. In 2011, Walmart had missing goods, and it hired Acosta Inc. firms to help it track down their interests (Ciravegna & Brenes, 2016). Unfortunately, after that, it was still back in the red zone in 2013. In a meeting during this year, the Walmart’s CEO announced that their stock issue was worsening, and it was becoming a threat to them. The following year, 2014, the managers prioritized in-stocks to prevent losses. As of 2016, it announced low earnings once more because there was a surplus in their goods, and they had messy storage spaces.

Provide at least three recommendations to John and Michael on how not to sustain stockouts when dealing with an expansion.

• John and Michael should strive to minimize the chances of human error as much as possible. They need to keep track of forecasts, safety stock, seasonality and more. For instance, acquiring a reliable real-time inventory tracking method is the first important thing that John and Michael need to do. Setting the par level for their products will help John and Michael know when to produce more. However, as time goes by, John and Michael are advised to continuously check on the per levels to confirm that they still make sense. Considering they will be expanding, demands are set to change, and that will necessitate that the per levels also change to avoid shortages.
• Another strategy recommended for John and Michael is the First in first out (FIFO) principle. According to this principle, the oldest stock is prioritized for sale over new stock. The FIFO approach is essential to avoid having a dead stock product or their product expiring. However, the FIFO system comes with the need to have a well-organized storage place. Most of the time, a warehouse where a new product is stored from the back is recommended to ensure the old product stays at the front.
• Regular auditing is recommended for the Stone Horse Supply Company. Traditional reconciliation is considered crucial for ensuring facts from software and reports match up. Stock takes can be done every once in a while to provide all the parameters are matching. After the stock takes, spot-checking can be done on the materials that are found to be problematic.

References

Ciravegna, L., & Brenes, E. R. (2016). Learning to become a high reliability organization in the food retail business. Journal of Business Research, 69(10), 4499-4506.

Dye, C. Y. (2012). A finite horizon deteriorating inventory model with two-phase pricing and time-varying demand and cost under trade credit financing using particle swarm optimization. Swarm and Evolutionary Computation, 5, 37-53.

Groenevelt, R. B. R., Opalach, A., Fano, A., & Linaker, F. (2014). U.S. Patent No. 8,630,924. Washington, DC: U.S. Patent and Trademark Office. https://www.uspto.gov/

Kim, M., & Lennon, S. J. (2011). Consumer response to online apparel stockouts. Psychology & Marketing, 28(2), 115-144.

Teunter, R. H., Syntetos, A. A., & Babai, M. Z. (2017). Stock keeping unit fill rate specification. European Journal of Operational Research, 259(3), 917-925.

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