McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5
The Value of
Information
5-2
5.1 Introduction
 Value of using any type of information
technology
 Potential availability of more and more
information throughout the supply chain
 Implications this availability on effective
design and management of the integrated
supply chain
5-3
Information Types
 Inventory levels
 Orders
 Production
 Delivery status
5-4
More Information
 Helps reduce variability in the supply chain.
 Helps suppliers make better forecasts,
accounting for promotions and market changes.
 Enables the coordination of manufacturing and
distribution systems and strategies.
 Enables retailers to better serve their customers
by offering tools for locating desired items.
 Enables retailers to react and adapt to supply
problems more rapidly.
 Enables lead time reductions.
5-5
5.2 Bullwhip Effect
 While customer demand for specific
products does not vary much
 Inventory and back-order levels fluctuate
considerably across their supply chain
 P&G’s disposable diapers case
 Sales quite flat
 Distributor orders fluctuate more than retail
sales
 Supplier orders fluctuate even more
5-6
4-Stage Supply Chain
FIGURE 5-5:
The supply
chain
5-7
Effect of Order Variability
FIGURE 5-6: The increase in variability in the supply chain
5-8
Factors that Contribute to the
Variability - Demand Forecasting
 Periodic review policy
 Characterized by a single parameter, the base-stock
level.
 Base-stock level =
Average demand during lead time and review period +
a multiple of the standard deviation of demand during
lead time and review period (safety stock)
 Estimation of average demand and demand variability
done using standard forecast smoothing techniques.
 Estimates get modified as more data becomes
available
 Safety stock and base-stock level depends on these
estimates
 Order quantities are changed accordingly increasing
variability
5-9
 Increase in variability magnified with increasing
lead time.
 Safety stock and base-stock levels have a lead
time component in their estimations.
 With longer lead times:
 a small change in the estimate of demand variability
implies
 a significant change in safety stock and base-stock
level, which implies
 significant changes in order quantities
 leads to an increase in variability

Factors that Contribute to the
Variability – Lead Time
5-10
Factors that Contribute to the
Variability – Batch Ordering
 Retailer uses batch ordering, as with a (Q,R) or
a min-max policy
 Wholesaler observes a large order, followed by
several periods of no orders, followed by
another large order, and so on.
 Wholesaler sees a distorted and highly variable
pattern of orders.
 Such pattern is also a result of:
 Transportation discounts with large orders
 Periodic sales quotas/incentives
5-11
Factors that Contribute to the
Variability – Price Fluctuations
 Retailers often attempt to stock up when
prices are lower.
 Accentuated by promotions and discounts at
certain times or for certain quantities.
 Such Forward Buying results in:
 Large order during the discounts
 Relatively small orders at other time periods
5-12
Factors that Contribute to the
Variability – Inflated Orders
 Inflated orders during shortage periods
 Common when retailers and distributors
suspect that a product will be in short
supply and therefore anticipate receiving
supply proportional to the amount ordered.
 After period of shortage, retailer goes back
to its standard orders
 leads to all kinds of distortions and variations
in demand estimates

5-13
Quantifying the Bullwhip
 Consider a two-stage supply chain:
 Retailer who observes customer demand
 Retailer places an order to a manufacturer.
 Retailer faces a fixed lead time
 order placed at the end of period t
 Order received at the start of period t+L.
 Retailer follows a simple periodic review policy
 retailer reviews inventory every period
 places an order to bring its inventory level up to a
target level.
 the review period is one
5-14
Quantifying the Bullwhip
 Base-Stock Level = L x AVG + z x STD x √L
 Order up-to point =
 If the retailer uses a moving average
technique,


t t
LS z L + µ
ˆ
=
t
µ

p
D
t
p t i
i ¿
÷
÷ =
1
1
) (
1
2
2
÷
÷
=
¿
÷
÷ =
p
D
S
t
p t i
t i
t
µ

5-15
Quantifying the Increase in
Variability
 Var(D), variance of the customer demand seen by the
retailer
 Var(Q), variance of the orders placed by that retailer to
the manufacturer




 When p is large and L is small, the bullwhip effect is
negligible.
 Effect is magnified as we increase the lead time and
decrease p.

2
2
2 2
1
) (
) (
p
L
p
L
D Var
Q Var
+ + >
5-16
Lower Bound on the Increase in
Variability Given as a Function of p
FIGURE 5-7: A lower bound on the increase in
variability given as a f unction of p
5-17
Impact of Variability Example
 Assume p = 5, L=1


 Assume p = 10, L=1



 Increasing the number of observations used in
the moving average forecast reduces the
variability of the retailer order to the
manufacturer
4 . 1
) (
) (
>
D Var
Q Var
2 . 1
) (
) (
>
D Var
Q Var
5-18
Impact of Centralized Information
on Bullwhip Effect
 Centralize demand information within a
supply chain
 Provide each stage of supply chain with
complete information on the actual customer
demand
 Creates more accurate forecasts rather than
orders received from the previous stage
5-19
Variability with Centralized
Information
 Var(D), variance of the customer demand seen by the
retailer
 Var(Q
k
), variance of the orders placed by the k
th
stage to
its
 L
i
, lead time between stage i and stage i + 1



 Variance of the orders placed by a given stage of a
supply chain is an increasing function of the total lead
time between that stage and the retailer
2
2
1 1
) ( 2 2
1
) (
) (
p
L
p
L
D Var
Q Var
k
i
i
k
i
i
k
¿ ¿
= =
+ + >
5-20
Variability with Decentralized
Information
 Retailer does not make its forecast information
available to the remainder of the supply chain
 Other stages have to use the order information


 Variance of the orders:
 becomes larger up the supply chain
 increases multiplicatively at each stage of the supply
chain.
)
2 2
1 (
) (
) (
2
2
1
p
L
p
L
D Var
Q Var
i
k
i
i
k
+ + >
[
=
5-21
Managerial Insights
 Variance increases up the supply chain in
both centralized and decentralized cases
 Variance increases:
 Additively with centralized case
 Multiplicatively with decentralized case
 Centralizing demand information can
significantly reduce the bullwhip effect
 Although not eliminate it completely!!
5-22
Increase in Variability for
Centralized and Decentralized
Systems
FIGURE 5-8: Increase in variability for centralized and
decentralized systems
5-23
Methods for Coping with the Bullwhip
 Reducing uncertainty. Centralizing
information

 Reducing variability.
 Reducing variability inherent in the customer
demand process.
 “Everyday low pricing” (EDLP) strategy.
5-24
Methods for Coping with the Bullwhip
 Lead-time reduction
 Lead times magnify the increase in variability due to
demand forecasting.
 Two components of lead times:
 order lead times [can be reduced through the use of cross-
docking]
 Information lead times [can be reduced through the use of
electronic data interchange (EDI).]
 Strategic partnerships
 Changing the way information is shared and inventory
is managed
 Vendor managed inventory (VMI)
 Manufacturer manages the inventory of its product at the
retailer outlet
 VMI the manufacturer does not rely on the orders placed by a
retailer, thus avoiding the bullwhip effect entirely.
5-25
5.3 Information Sharing And
Incentives
 Centralizing information will reduce variability
 Upstream stages would benefit more
 Unfortunately, information sharing is a problem
in many industries
 Inflated forecasts are a reality
 Forecast information is inaccurate and distorted
 Forecasts inflated such that suppliers build capacity
 Suppliers may ignore the forecasts totally
5-26
Contractual Incentives to Get True
Forecasts from Buyers
 Capacity Reservation Contract
 Buyer pays to reserve a certain level of capacity at
the supplier
 A menu of prices for different capacity reservations
provided by supplier
 Buyer signals true forecast by reserving a specific
capacity level
 Advance Purchase Contract
 Supplier charges special price before building
capacity
 When demand is realized, price charged is different
 Buyer’s commitment to paying the special price
reveals the buyer’s true forecast
5-27
5.4 Effective Forecasts
 Retailer forecasts
 Typically based on an analysis of previous sales at the
retailer.
 Future customer demand influenced by pricing,
promotions, and release of new products.
 Including such information will make forecasts more
accurate.
 Distributor and manufacturer forecasts
 Influenced by factors under retailer control.
 Promotions or pricing.
 Retailer may introduce new products into the stores
 Closer to actual sales – may have more information
 Cooperative forecasting systems
 Sophisticated information systems
 iterative forecasting process
 all participants in the supply chain collaborate to arrive at
an agreed-upon forecast
 All parties share and use the same forecasting tool
5-28
5.5 Information for the Coordination
of Systems
 Many interconnected systems
 manufacturing, storage, transportation, and retail
systems
 the outputs from one system within the supply chain
are the inputs to the next system
 trying to find the best set of trade-offs for any one
stage isn’t sufficient.
 need to consider the entire system and coordinate
decisions
 Systems are not coordinated
 each facility in the supply chain does what is best for
that facility
 the result is local optimization.
5-29
Global Optimization
 Issues:
 Who will optimize?
 How will the savings obtained through the
coordinated strategy be split between the
different supply chain facilities?
 Methods to address issues:
 Supply contracts
 Strategic partnerships
5-30
5.6 Locating Desired Products
 Meet customer demand from available retailer
inventory
 What if the item is not in stock at the retailer?
 Being able to locate and deliver goods is sometimes
as effective as having them in stock
 If the item is available at the competitor, then this is a
problem
 Other Methods
 Inventory pooling (Chapter 7)
 Distributor Integration (Chapter 8)
5-31
5.7 Lead-Time Reduction
 Numerous benefits:
 The ability to quickly fill customer orders that can’t be filled
from stock.
 Reduction in the bullwhip effect.
 More accurate forecasts due to a decreased forecast horizon.
 Reduction in finished goods inventory levels
 Many firms actively look for suppliers with shorter lead
times
 Many potential customers consider lead time a very
important criterion for vendor selection.
 Much of the manufacturing revolution of the past 20
years led to reduced lead times
 Other methods:
 Distribution network designs (Chapter 6)
 Effective information systems (e.g., EDI)
 Strategic partnering (Chapter 8) (Sharing point-of-sale (POS)
data with supplier)
5-32
5.8 Information and Supply Chain
Trade-Offs
 Conflicting objectives in the supply chains
 Designing the supply chain with conflicting
goals
5-33
Wish-Lists of the Different Stages
 Raw material suppliers
 Stable volume requirements and little variation in mix
 Flexible delivery times
 Large volume demands
 Manufacturing
 High productivity through production efficiencies and low
production costs
 Known future demand pattern with little variability.
 Materials, warehousing, and outbound logistics
 Minimizing transportation costs through: quantity discounts,
minimizing inventory levels, quickly replenishing stock.
 Retailers
 Short order lead times and efficient, accurate order delivery
 Customers
 In-stock items, enormous variety, and low prices.
5-34
Trade-Offs: Inventory-Lot Size
 Manufacturers would like to have large lot sizes.
 Per unit setup costs are reduced
 Manufacturing expertise for a particular product increases
 Processes are easier to control.
 Modern practices [Setup time reduction, Kanban and CONWIP]
 Reduce inventories and improve system responsiveness.
 Advanced manufacturing systems make it possible for
manufacturers to meet shorter lead times and respond more
rapidly to customer needs.
 Manufacturer should have as much time as possible to react to
the needs of downstream supply chain members.
 Distributors/retailers can have factory status and manufacturer
inventory data:
 they can quote lead times to customers more accurately.
 develops an understanding of, and confidence in, the
manufacturers’ ability.
 allows reduction in inventory in anticipation of manufacturing
problems
5-35
Trade-offs
Inventory-Transportation Costs
 Company operates its own fleet of trucks.
 Fixed cost of operation + variable cost
 Carrying full truckloads minimizes transportation costs.
 Outside firm is used for shipping
 quantity discounts
 TL shipping cheaper than LTL shipping
 In many cases
 demand is much less than TL
 Items sit for a long time before consumption leading to higher
inventory costs.
 Trade-off can’t be eliminated completely.
 Use advanced information technology to reduce this effect.
 Distribution control systems allow combining shipments of different
products from warehouses to stores
 Cross-docking,
 Decision-support systems allow appropriate balance between
transportation and inventory costs
5-36
Trade-offs
Lead Time-Transportation Costs
 Transportation costs lowest when large quantities of
items are transported between stages of the supply
chain.
 Hold items to accumulate enough to combine shipments
 Lead times can be reduced if items are transported
immediately after they are manufactured or arrive from
suppliers.
 Cannot be completely eliminated
 Information can be used to reduce its effect.
 Control transportation costs reducing the need to hold items
until a sufficient number accumulate.
 Improved forecasting techniques and information systems
reduce the other components of lead time
 may not be essential to reduce the transportation
component.
5-37
Trade-Offs
Product Variety-Inventory
 Higher product variety makes supply chain
decisions more complex
 Better for meeting customer demand
 Typically leads to higher inventories
 Strategies:
 Delayed Differentiation (Chapter 6)
 Ship generic products as far as possible down the
supply chain
 Design for logistics (Chapter 11)

5-38
Trade-Offs
Cost-Customer Service
 Reducing inventories, manufacturing costs, and
transportation costs typically comes at the
expense of customer service
 Customer service could mean the ability of a
retailer to meet a customer’s demand quickly
 Strategies:
 transshipping
 direct shipping from warehouses to customers
 Charging price premiums for customized products
5-39
5.9 Decreasing Marginal Value of
Information
 Obtaining and sharing information is not free.
 Many firms are struggling with exactly how to use the data they
collect through loyalty programs, RFID readers, and so on.
 Cost of exchanging information versus the benefit of doing so.
 May not be necessary to exchange all of the available information, or
to exchange information continuously.
 Decreasing marginal value of additional information
 In multi-stage decentralized manufacturing supply chains many of
the performance benefits of detailed information sharing can be
achieved if only a small amount of information is exchanged
between supply chain participants.
 Exchanging more detailed information or more frequent
information is costly.
 Understand the costs and benefits of particular pieces of information
 How often this information is collected
 How much of this information needs to be stored
 How much of this information needs to be shared
 In what form it needs to shared
5-40
Summary
 The bullwhip effect suggests that variability in demand
increases as one moves up in the supply chain.
 Increase in variability causes significant operational
inefficiencies
 Specific techniques to “counteract” bullwhip effect
 Information sharing, i.e., centralized demand information.
 Incentives to share credible forecasts
 Alignments of expectations associated with the use of
information.
 Interaction of various supply chain stages.
 A series of trade-offs both within and between the different
stages.
 Information is the key enabler of integrating the different supply
chain stages
 Information can be used to reduce the necessity of many of
these trade-offs
5-41
CASE: Reebok NFL Replica
Jerseys: A Case for Postponement
Stephen C. Graves, John C. W. Parsons
MIT, Cambridge MA, USA
McKinsey & Co., Toronto, Ontario, Canada

5-42
Planning Question
 How should Reebok
plan and manage
inventory to manage
costs while
providing the
flexibility required to
meet demand for
NFL Replica
jerseys?
Stephen C. Graves Copyright 2003. All Rights Reserved
5-43
Outline of Case Discussion
•Discuss business context, nature of demand,
the sales cycle, key success factors, failure
modes
•Discuss supply chain, planning cycle, planning
challenges
•Frame as single-season planning problem; relate
to newsvendor model
•Develop approach and key insights with NE
Patriots example
•Report on findings for NFL
•Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-44
Situation
Licensed Apparel Business
Impact
 Reebok received an NFL
exclusive license in 2000
 Highly seasonal & very uncertain
demand for player jerseys
 Teams are more predictable, but
correlated with success
 Hot-market players and teams
emerge during season
 High margins, fashion item
 Demand driven by availability
 Unsold jerseys can become
instantly obsolete – trades;
design changes
 No direct competition for
product – 100% market share
 Demand is concentrated over
five month period
 If product is not quickly
available to meet demand the
opportunity is lost
 Lost sales cost more than
inventory overstocks, but come
with a high risk of obsolescence
Stephen C. Graves Copyright 2003. All Rights Reserved
5-45
Nature of Consumer Demand
 Sales are highest at start of season,
August – Sept.
 “Hot market” players and teams emerge
over course of season
 Increase at end of season for contending
teams & stars: Christmas, playoffs and
Super Bowl
 Off season is slower, with demand spikes
for big-name player movements
Stephen C. Graves Copyright 2003. All Rights Reserved
5-46
Annual Sales Cycle
Jan -
Feb
May -
Aug
March -
April
Sept -
Dec
 Retailers get discount to place pre-season
orders for delivery in May

 Limited ordering by retailers to re-balance
stocks; some short LT orders to respond to
player movements

 Retailers order to position stock in their
DC’s and stores in anticipation of season,
and expect 3 – 4 week delivery LT
 Retailers order to replenish stores, chase
the demand, and expect 1 – 2 week LT for
Hot Market items

Stephen C. Graves Copyright 2003. All Rights Reserved
5-47
Outline of Case Discussion
 Discuss business context, nature of demand, the
sales cycle, key success factors, failure modes
 Discuss supply chain, planning cycle,
planning challenges
 Frame as single-season planning problem;
relate to newsvendor model
 Develop approach and key insights with NE
Patriots example
 Report on findings for NFL
 Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-48
Supply Chain Overview
Raw
Material
Suppliers
Contract
Manufacturers
Reebok
Warehouse
Retail
Distribution
Centers
Retail
Outlets
Consumers
2 - 16
weeks
4 - 8
weeks
3-12 weeks
1 week
1-2 weeks or less
1 week
Normal Demand
“Hot Market” Demand
Stephen C. Graves Copyright 2003. All Rights Reserved
5-49
Internal Supply Chain
Fabric
Inventory
Cut, sew,
and
assembly
Blank
Inventory at
supplier
FG Inventory
Shipping
2 - 16
weeks
4
weeks
4
weeks
Screen Printing
Screen
Printing
Blank Goods
Inventory
1
weeks
Contract Manufacturers (CM) Reebok (Indianapolis)
Stephen C. Graves Copyright 2003. All Rights Reserved
5-50
Purchasing Cycle
 Reebok places orders on CMs for April
delivery; primarily orders blanks
(~20% of annual buy)
 Reebok places orders for dressed
jerseys based on retailers’ advance
orders & remaining inventory (~ 15 –
20%) Reebok orders dressed & blank
jerseys, based on forecasts and
inventory targets
 Last purchase phase is most
challenging
July-
Oct
Jan-Feb
Mar-
June
Stephen C. Graves Copyright 2003. All Rights Reserved
5-51
Outline of Case Discussion
 Discuss business context, nature of demand, the
sales cycle, key success factors, failure modes
 Discuss supply chain, planning cycle, planning
challenges
 Frame as single-season planning problem;
relate to newsvendor model
 Develop approach and key insights with NE
Patriots example
 Report on findings for NFL
 Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-52
Single-Season Planning Problem
 What volume and mix of jerseys to
purchase during March to June?
 Planning framework:
 Given forecasts (and advanced orders) for
team and players
 Decide inventory targets for dressed and
blank jerseys for season
 Place orders guided by these targets
 Revise forecasts (say) each month based on
current information; update targets
accordingly
 How should we set inventory targets?
Stephen C. Graves Copyright 2003. All Rights Reserved
5-53
Outline of Case Discussion
 Discuss business context, nature of demand, the
sales cycle, key success factors, failure modes
 Discuss supply chain, planning cycle, planning
challenges
 Frame as single-season planning problem;
relate to newsvendor model
 Develop approach and key insights with NE
Patriots example
 Report on findings for NFL
 Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-54
Representative Numbers for
Replica Jersey
Suggested Retail Price ---- more than $50
Wholesale Price = $24.00

Blank Cost = $9.50
Cost to dress at CM = + $1.40
Cost to dress at Reebok = + $2.40

Salvage Value for unsold Dressed Jersey = $7
Holding Cost for unsold Blank Jersey = $1.04

Salvage Value for unsold Blank Jersey =
$9.50 - 1.04 = $8.46
Stephen C. Graves Copyright 2003. All Rights Reserved
5-55
2003 Forecast – As of March 1, 2003
CMs have minimum order quantities of 1728
What should inventory target be for dressed jerseys for
each player? And blank jerseys for team?
Stephen C. Graves Copyright 2003. All Rights Reserved
5-56
What’s the Objective?
 Expected revenue:

 $24*E[Dressed_Sold] + 24*E[Blanks_Sold]
+ $7*E[Dressed_Unsold] + $8.46* E[Blanks_Unsold]

 Expected Cost:

 $9.50*Blanks + $10.90*Dressed + $2.40*E[Blanks_Sold]
Stephen C. Graves Copyright 2003. All Rights Reserved
5-57
Model Calculations: Dressed
Jerseys
( )
| | ( ) ( )
| | | |
| | | |
;
| , .
| ,
_
_ _
Q
Q order for dressed jerseys for a star player
f x is prob density function for demand
E UnmetDemand x Q f x dx
E Dressed Sold E UnmetDemand
E Dressed Unsold Q E Dressed Sold
µ o
µ o
µ
·
=
= ÷
= ÷
= ÷
}
Stephen C. Graves Copyright 2003. All Rights Reserved
5-58
Model Approximation: Blank
Jerseys
( ) | |
( )
( )
( )
| | ( ) ( )
;
+
| , . .
| ,
_
B
starplayers
B
B
B B
B B
B
B order for blank jerseys
otherplayers E UnmetDemand
otherplayers
otherplayers
f x is approx prob density function for demand for blanks
E UnmetDemand x B f x dx
E Blanks S
µ µ
µ
o o
µ
µ o
µ o
·
=
=
= ×
= ÷
¿
}
| | | |
| | | |
_ _
B
old E UnmetDemand
E Blanks Unsold B E Blanks Sold
µ = ÷
= ÷
Stephen C. Graves Copyright 2003. All Rights Reserved
5-59
Newsvendor-based Approach
 Solve newsvendor for entire team to get total
quantity of blanks and dressed jerseys to buy,
and more importantly:
 Get service measure for team = probability of
not stocking out (critical ratio)
 Solve newsvendor for each star player to
determine how many dressed jerseys to
procure from CM, where underage cost reflects
option to use blanks
 Given the dressed jersey quantities, re-solve
newsvendor for entire team to find blank
jerseys to procure
Stephen C. Graves Copyright 2003. All Rights Reserved
5-60
Newsvendor Model with Risk Pooling for
NE Patriots
 Determine total quantity to buy, assuming
blank jerseys are the marginal units to
buy
 For blank jerseys:
 Cost of overage = $9.50 – 8.46 = 1.04
 Cost of underage = $24.00 – 11.90 = 12.10
 Prob. of not stocking out of blanks = 0.92
Stephen C. Graves Copyright 2003. All Rights Reserved
5-61
Newsvendor Model with Risk Pooling for
NE Patriots
Given the stock-out probability for the team:
 Consider each dressed jersey (i.e. for each star
player):
 Cost of overage = $10.90 – 7.00 = 3.90
 Cost of underage if blank available = $1.00
 Cost of underage if blank not available = $24.00 –
10.90 = 13.10
 Approx. cost of underage =
.92*$1.00 + (1 - .92)*$13.10=$1.96
 Critical ratio = 0.33
 Newsvendor purchases 51000 dressed
jerseys
Stephen C. Graves Copyright 2003. All Rights Reserved
5-62
Newsvendor Model with Risk Pooling for
NE Patriots
 Given the quantities for dressed jerseys,
determine demand for blanks:
 the unmet demand for star players
 plus demand for the other players
 Solve newsvendor for blanks:
 Cost of overage = $9.50 – 8.46 = 1.04
 Cost of underage = $24.00 – 11.90 = 12.10
 Prob. of not stocking out of blanks = 0.92
 Newsvendor purchases 71000 blank jerseys
 Expected profit is $1.04 M

Stephen C. Graves Copyright 2003. All Rights Reserved
5-63
Purchas
e
E[sold] E[unsold
]
E[short]
Dressed 87531 60244 27287 4161
Blanks 38027 22898 15129 377
Total 125558 83142 42416 4537
Purchas
e
E[sold] E[unsold
]
E[short]
Dressed 51227 44265 6962
Blanks 70932 42712 28221
Total 122159 86976 35183 703
Results: Newsvendor with Risk Pooling
Results: Simple Newsvendor
Stephen C. Graves Copyright 2003. All Rights Reserved
5-64
Newsboy Order E[Sold] E[Unsold] E[Unmet Demand]
BRADY,TOM #12 41018 28918 12100 1845
LAW,TY #24 14092 9935 4157 634
BROWN, TROY #80 10879 7670 3209 489
VINATIERI, ADAM #04 10501 6688 3812 581
BRUSCHI, TEDY #54 7983 5084 2898 442
SMITH, ANTOWAIN #32 3059 1948 1111 169
Total -- Dressed 87531 60244 27287 4161
Other Players --- Blanks 38027 22898 15129 377
Totals 125558 83142 42416 4537
Exected Profit 944,033 $
Newsboy Order E[Sold] E[Unsold] E[Unmet Demand]
BRADY,TOM #12 24852 21789 3063 8974
LAW,TY #24 8538 7486 1052 3083
BROWN, TROY #80 6591 5779 812 2380
VINATIERI, ADAM #04 5407 4442 965 2828
BRUSCHI, TEDY #54 4110 3377 734 2150
SMITH, ANTOWAIN #32 1728 1392 336 725
Totals -- Dressed 51227 44265 6962 20140
Totals -- Blanks 70932 42712 28221 703
Totals 122159 86976 35183 703
Exected Profit 1,040,036 $
NV model with Risk Pooling
Naïve NV model
Stephen C. Graves Copyright 2003. All Rights Reserved
5-65
Observations from Example
 Expected profit increases by 5 to 10%
over current practice & naïve newsvendor
 Much different solution strategy: blanks
used not just for “other” players but also as
postponement option
 Many more jerseys dressed in Indianapolis
 Mix of leftovers is largely blanks
 Value of newsvendor perspective

Stephen C. Graves Copyright 2003. All Rights Reserved
5-66
Outline of Case Discussion
 Discuss business context, nature of
demand, the sales cycle, key success
factors, failure modes
 Discuss supply chain, planning cycle,
planning challenges
 Frame as single-season planning problem;
relate to newsvendor model
 Develop approach and key insights with
NE Patriots example
 Report on findings for NFL
 Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-67
Global Comparison: Model vs. Actual
 Ex post analysis of 2003 season using model for 31 teams
 Applied model using forecast available on Mar. 1, 2003
 Only able to observe sales in 2003 and volume “pulled
forward”
Actual Risk-Pool
NV
Naïve NV
Sales 100 100 100
In-stock 85 95 96
Under-
stock
15 5 4
Over-
stock
27 28 47
Stephen C. Graves Copyright 2003. All Rights Reserved
5-68
Global Comparison: Model vs. Actual
 Risk-pool NV increases profits by 6% (naïve NV
increases profits by 2%)
 Plus
 A less risky mix of remaining jerseys at end of season
Over-stock
Profile
Actual Risk-Pool
NV

Naïve NV
Dressed
jerseys
59% 17% 60%
Blanks
jerseys
41% 83% 40%
Total 100% 100% 100%
Stephen C. Graves Copyright 2003. All Rights Reserved
5-69
Outline of Case Discussion
 Discuss business context, nature of demand, the
sales cycle, key success factors, failure modes
 Discuss supply chain, planning cycle, planning
challenges
 Frame as single-season planning problem;
relate to newsvendor model
 Develop approach and key insights with NE
Patriots example
 Report on findings for NFL
 Wrap up and summary of learnings
Stephen C. Graves Copyright 2003. All Rights Reserved
5-70
Conclusion
• Context – fashion items, seasonal, high uncertainty in
demand
• Newsvendor with Risk Pooling provides way to plan for
and exploit postponement options
• Results in higher profits, 95% service level, better mix of
end-of-year inventory.
• Results in much different inventory plan – greater use of
blanks and local finishing
• Project resulted in planning tool and new insights for
planning for Reebok, and a thesis! A second project focused
on forecasting
Stephen C. Graves Copyright 2003. All Rights Reserved

5.1 Introduction
Value of using any type of information technology  Potential availability of more and more information throughout the supply chain  Implications this availability on effective design and management of the integrated supply chain

5-2

Information Types
Inventory levels  Orders  Production  Delivery status

5-3

Enables lead time reductions. Enables retailers to react and adapt to supply problems more rapidly. Helps suppliers make better forecasts. accounting for promotions and market changes. Enables retailers to better serve their customers by offering tools for locating desired items.More Information       Helps reduce variability in the supply chain. 5-4 . Enables the coordination of manufacturing and distribution systems and strategies.

5.2 Bullwhip Effect While customer demand for specific products does not vary much  Inventory and back-order levels fluctuate considerably across their supply chain  P&G’s disposable diapers case  Sales quite flat  Distributor orders fluctuate more than retail sales  Supplier orders fluctuate even more  5-5 .

4-Stage Supply Chain FIGURE 5-5: The supply chain 5-6 .

Effect of Order Variability FIGURE 5-6: The increase in variability in the supply chain 5-7 .

the base-stock level. Base-stock level = Average demand during lead time and review period + a multiple of the standard deviation of demand during lead time and review period (safety stock) Estimation of average demand and demand variability done using standard forecast smoothing techniques.Factors that Contribute to the Variability . Estimates get modified as more data becomes available Safety stock and base-stock level depends on these estimates Order quantities are changed accordingly increasing variability 5-8 .Demand Forecasting        Periodic review policy Characterized by a single parameter.

With longer lead times:     a small change in the estimate of demand variability implies a significant change in safety stock and base-stock level. which implies significant changes in order quantities leads to an increase in variability 5-9 . Safety stock and base-stock levels have a lead time component in their estimations.Factors that Contribute to the Variability – Lead Time    Increase in variability magnified with increasing lead time.

Such pattern is also a result of:   Transportation discounts with large orders Periodic sales quotas/incentives 5-10 .R) or a min-max policy Wholesaler observes a large order. Wholesaler sees a distorted and highly variable pattern of orders. followed by several periods of no orders. followed by another large order. and so on.Factors that Contribute to the Variability – Batch Ordering     Retailer uses batch ordering. as with a (Q.

Accentuated by promotions and discounts at certain times or for certain quantities.Factors that Contribute to the Variability – Price Fluctuations  Retailers often attempt to stock up when prices are lower.  Such Forward Buying results in:   Large order during the discounts  Relatively small orders at other time periods 5-11 .

retailer goes back to its standard orders   leads to all kinds of distortions and variations in demand estimates 5-12 .  After period of shortage.Factors that Contribute to the Variability – Inflated Orders Inflated orders during shortage periods  Common when retailers and distributors suspect that a product will be in short supply and therefore anticipate receiving supply proportional to the amount ordered.

order placed at the end of period t Order received at the start of period t+L.Quantifying the Bullwhip  Consider a two-stage supply chain:   Retailer who observes customer demand Retailer places an order to a manufacturer. the review period is one  Retailer faces a fixed lead time    Retailer follows a simple periodic review policy    5-13 . retailer reviews inventory every period places an order to bring its inventory level up to a target level.

   t   Di t 1 i t  p  S t2   ( Di   t ) 2 i t  p t 1 p p 1 5-14 .Quantifying the Bullwhip Base-Stock Level = L x AVG + z x STD x √L ˆ  Order up-to point =  t L  z LSt  If the retailer uses a moving average technique.

Quantifying the Increase in Variability   Var(D). variance of the customer demand seen by the retailer Var(Q). Effect is magnified as we increase the lead time and decrease p. 5-15 . the bullwhip effect is negligible. variance of the orders placed by that retailer to the manufacturer Var(Q) 2 L 2 L2  1  2 Var( D) p p   When p is large and L is small.

Lower Bound on the Increase in Variability Given as a Function of p FIGURE 5-7: A lower bound on the increase in variability given as a f unction of p 5-16 .

4 Var ( D )  Assume p = 10.2 Var ( D )  Increasing the number of observations used in the moving average forecast reduces the variability of the retailer order to the manufacturer 5-17 .Impact of Variability Example  Assume p = 5. L=1 Var (Q)  1. L=1 Var (Q )  1.

Impact of Centralized Information on Bullwhip Effect

Centralize demand information within a supply chain
Provide each stage of supply chain with complete information on the actual customer demand  Creates more accurate forecasts rather than orders received from the previous stage

5-18

Variability with Centralized Information
  

Var(D), variance of the customer demand seen by the retailer Var(Qk), variance of the orders placed by the kth stage to its Li, lead time between stage i and stage i + 1
Var(Q )  1 Var( D)
k

2i 1 Li
k

p

2(i 1 Li ) 2
k

p2

Variance of the orders placed by a given stage of a supply chain is an increasing function of the total lead time between that stage and the retailer

5-19

Variability with Decentralized Information
 

Retailer does not make its forecast information available to the remainder of the supply chain Other stages have to use the order information
k 2Li 2L2 Var(Q k )   (1   2i ) Var( D) p p i 1

Variance of the orders:

becomes larger up the supply chain increases multiplicatively at each stage of the supply chain.

5-20

Managerial Insights Variance increases up the supply chain in both centralized and decentralized cases  Variance increases:  Additively with centralized case  Multiplicatively with decentralized case   Centralizing demand information can significantly reduce the bullwhip effect  Although not eliminate it completely!! 5-21 .

Increase in Variability for Centralized and Decentralized Systems FIGURE 5-8: Increase in variability for centralized and decentralized systems 5-22 .

Reducing variability inherent in the customer demand process. Centralizing information Reducing variability.  “Everyday low pricing” (EDLP) strategy.Methods for Coping with the Bullwhip  Reducing uncertainty.   5-23 .

Two components of lead times:   order lead times [can be reduced through the use of crossdocking] Information lead times [can be reduced through the use of electronic data interchange (EDI). 5-24 .]  Strategic partnerships   Changing the way information is shared and inventory is managed Vendor managed inventory (VMI)   Manufacturer manages the inventory of its product at the retailer outlet VMI the manufacturer does not rely on the orders placed by a retailer. thus avoiding the bullwhip effect entirely.Methods for Coping with the Bullwhip  Lead-time reduction   Lead times magnify the increase in variability due to demand forecasting.

5.3 Information Sharing And Incentives      Centralizing information will reduce variability Upstream stages would benefit more Unfortunately. information sharing is a problem in many industries Inflated forecasts are a reality Forecast information is inaccurate and distorted   Forecasts inflated such that suppliers build capacity Suppliers may ignore the forecasts totally 5-25 .

Contractual Incentives to Get True Forecasts from Buyers  Capacity Reservation Contract    Buyer pays to reserve a certain level of capacity at the supplier A menu of prices for different capacity reservations provided by supplier Buyer signals true forecast by reserving a specific capacity level Supplier charges special price before building capacity When demand is realized. price charged is different Buyer’s commitment to paying the special price reveals the buyer’s true forecast 5-26  Advance Purchase Contract    .

Future customer demand influenced by pricing. promotions.5. Promotions or pricing. Retailer may introduce new products into the stores Closer to actual sales – may have more information Sophisticated information systems iterative forecasting process all participants in the supply chain collaborate to arrive at an agreed-upon forecast All parties share and use the same forecasting tool  Distributor and manufacturer forecasts      Cooperative forecasting systems     5-27 .4 Effective Forecasts  Retailer forecasts    Typically based on an analysis of previous sales at the retailer. and release of new products. Including such information will make forecasts more accurate. Influenced by factors under retailer control.

transportation. and retail systems the outputs from one system within the supply chain are the inputs to the next system trying to find the best set of trade-offs for any one stage isn’t sufficient. need to consider the entire system and coordinate decisions each facility in the supply chain does what is best for that facility the result is local optimization. storage.5 Information for the Coordination of Systems  Many interconnected systems     manufacturing.5. 5-28  Systems are not coordinated   .

Global Optimization  Issues: Who will optimize?  How will the savings obtained through the coordinated strategy be split between the different supply chain facilities?   Methods to address issues: Supply contracts  Strategic partnerships  5-29 .

5. then this is a problem Inventory pooling (Chapter 7) Distributor Integration (Chapter 8)  Other Methods   5-30 .6 Locating Desired Products   Meet customer demand from available retailer inventory What if the item is not in stock at the retailer?   Being able to locate and deliver goods is sometimes as effective as having them in stock If the item is available at the competitor.

g. More accurate forecasts due to a decreased forecast horizon.7 Lead-Time Reduction  Numerous benefits:     The ability to quickly fill customer orders that can’t be filled from stock. Much of the manufacturing revolution of the past 20 years led to reduced lead times Other methods:    Distribution network designs (Chapter 6) Effective information systems (e. Reduction in finished goods inventory levels     Many firms actively look for suppliers with shorter lead times Many potential customers consider lead time a very important criterion for vendor selection. EDI) Strategic partnering (Chapter 8) (Sharing point-of-sale (POS) data with supplier) 5-31 .5. Reduction in the bullwhip effect..

8 Information and Supply Chain Trade-Offs Conflicting objectives in the supply chains  Designing the supply chain with conflicting goals  5-32 .5.

quickly replenishing stock. Short order lead times and efficient. enormous variety. accurate order delivery In-stock items.Wish-Lists of the Different Stages  Raw material suppliers    Stable volume requirements and little variation in mix Flexible delivery times Large volume demands High productivity through production efficiencies and low production costs Known future demand pattern with little variability. 5-33  Manufacturing    Materials. Minimizing transportation costs through: quantity discounts. warehousing. minimizing inventory levels. and outbound logistics    Retailers  Customers  . and low prices.

the manufacturers’ ability. Distributors/retailers can have factory status and manufacturer inventory data:    they can quote lead times to customers more accurately. allows reduction in inventory in anticipation of manufacturing problems 5-34 . Advanced manufacturing systems make it possible for manufacturers to meet shorter lead times and respond more rapidly to customer needs.  Modern practices [Setup time reduction. Reduce inventories and improve system responsiveness.    Per unit setup costs are reduced Manufacturing expertise for a particular product increases Processes are easier to control. and confidence in. develops an understanding of. Kanban and CONWIP]     Manufacturer should have as much time as possible to react to the needs of downstream supply chain members.Trade-Offs: Inventory-Lot Size  Manufacturers would like to have large lot sizes.

Decision-support systems allow appropriate balance between transportation and inventory costs 5-35  Trade-off can’t be eliminated completely.Trade-offs Inventory-Transportation Costs  Company operates its own fleet of trucks.     . Distribution control systems allow combining shipments of different products from warehouses to stores Cross-docking. quantity discounts TL shipping cheaper than LTL shipping  Outside firm is used for shipping    In many cases   demand is much less than TL Items sit for a long time before consumption leading to higher inventory costs.   Fixed cost of operation + variable cost Carrying full truckloads minimizes transportation costs. Use advanced information technology to reduce this effect.

Improved forecasting techniques and information systems reduce the other components of lead time  may not be essential to reduce the transportation component. Cannot be completely eliminated    Information can be used to reduce its effect.  Hold items to accumulate enough to combine shipments   Lead times can be reduced if items are transported immediately after they are manufactured or arrive from suppliers. 5-36 . Control transportation costs reducing the need to hold items until a sufficient number accumulate.Trade-offs Lead Time-Transportation Costs  Transportation costs lowest when large quantities of items are transported between stages of the supply chain.

Trade-Offs Product Variety-Inventory  Higher product variety makes supply chain decisions more complex Better for meeting customer demand  Typically leads to higher inventories   Strategies:  Delayed Differentiation (Chapter 6)  Ship generic products as far as possible down the supply chain  Design for logistics (Chapter 11) 5-37 .

manufacturing costs.Trade-Offs Cost-Customer Service    Reducing inventories. and transportation costs typically comes at the expense of customer service Customer service could mean the ability of a retailer to meet a customer’s demand quickly Strategies:    transshipping direct shipping from warehouses to customers Charging price premiums for customized products 5-38 .

RFID readers.   May not be necessary to exchange all of the available information. Exchanging more detailed information or more frequent information is costly. Cost of exchanging information versus the benefit of doing so.9 Decreasing Marginal Value of Information    Obtaining and sharing information is not free.      Understand the costs and benefits of particular pieces of information How often this information is collected How much of this information needs to be stored How much of this information needs to be shared In what form it needs to shared 5-39 . Many firms are struggling with exactly how to use the data they collect through loyalty programs. and so on. or to exchange information continuously. Decreasing marginal value of additional information   In multi-stage decentralized manufacturing supply chains many of the performance benefits of detailed information sharing can be achieved if only a small amount of information is exchanged between supply chain participants.5.

Increase in variability causes significant operational inefficiencies Specific techniques to “counteract” bullwhip effect    Information sharing. A series of trade-offs both within and between the different stages. i.Summary    The bullwhip effect suggests that variability in demand increases as one moves up in the supply chain. Information is the key enabler of integrating the different supply chain stages Information can be used to reduce the necessity of many of these trade-offs 5-40  Interaction of various supply chain stages. Incentives to share credible forecasts Alignments of expectations associated with the use of information. centralized demand information.    .e..

Ontario. USA McKinsey & Co.CASE: Reebok NFL Replica Jerseys: A Case for Postponement Stephen C. John C. W. Canada 5-41 . Graves. Toronto. Cambridge MA.. Parsons MIT.

Planning Question  How should Reebok plan and manage inventory to manage costs while providing the flexibility required to meet demand for NFL Replica jerseys? Stephen C. Graves Copyright 2003. All Rights Reserved 5-42 .

All Rights Reserved 5-43 . Graves Copyright 2003. nature of demand.Outline of Case Discussion •Discuss business context. the sales cycle. planning challenges •Frame as single-season planning problem. failure modes •Discuss supply chain. relate to newsvendor model •Develop approach and key insights with NE Patriots example •Report on findings for NFL •Wrap up and summary of learnings Stephen C. planning cycle. key success factors.

but correlated with success Hot-market players and teams emerge during season High margins. fashion item Demand driven by availability Unsold jerseys can become instantly obsolete – trades. All Rights Reserved 5-44 .Licensed Apparel Business Situation  Impact  Reebok received an NFL exclusive license in 2000 Highly seasonal & very uncertain demand for player jerseys Teams are more predictable. design changes No direct competition for product – 100% market share Demand is concentrated over five month period If product is not quickly available to meet demand the opportunity is lost Lost sales cost more than inventory overstocks. Graves Copyright 2003. but come with a high risk of obsolescence          Stephen C.

August – Sept. playoffs and Super Bowl  Off season is slower. with demand spikes for big-name player movements  Stephen C. Graves Copyright 2003.Nature of Consumer Demand Sales are highest at start of season. All Rights Reserved 5-45 .  “Hot market” players and teams emerge over course of season  Increase at end of season for contending teams & stars: Christmas.

Annual Sales Cycle Jan Feb March April May Aug Sept Dec  Retailers get discount to place pre-season orders for delivery in May Limited ordering by retailers to re-balance stocks. All Rights Reserved . chase the demand. Graves Copyright 2003. and expect 3 – 4 week delivery LT Retailers order to replenish stores. some short LT orders to respond to player movements    Retailers order to position stock in their DC’s and stores in anticipation of season. and expect 1 – 2 week LT for Hot Market items 5-46 Stephen C.

Graves Copyright 2003.Outline of Case Discussion       Discuss business context. planning challenges Frame as single-season planning problem. failure modes Discuss supply chain. All Rights Reserved 5-47 . key success factors. relate to newsvendor model Develop approach and key insights with NE Patriots example Report on findings for NFL Wrap up and summary of learnings Stephen C. the sales cycle. planning cycle. nature of demand.

Graves Copyright 2003. All Rights Reserved 5-48 .16 weeks 4-8 weeks 3-12 weeks 1 week “Hot Market” Demand 1-2 weeks or less 1 week Stephen C.Supply Chain Overview Consumers Raw Material Suppliers Contract Manufacturers Reebok Warehouse Retail Distribution Centers Retail Outlets Normal Demand 2 .

sew.16 weeks 4 weeks 4 weeks 1 weeks 5-49 Stephen C. Graves Copyright 2003.Internal Supply Chain Contract Manufacturers (CM) Fabric Inventory Cut. and assembly Blank Inventory at supplier Reebok (Indianapolis) Blank Goods Inventory Shipping Screen Printing Screen Printing FG Inventory 2 . All Rights Reserved .

primarily orders blanks (~20% of annual buy) Reebok places orders for dressed jerseys based on retailers’ advance orders & remaining inventory (~ 15 – 20%) Reebok orders dressed & blank jerseys. All Rights Reserved 5-50 . Graves Copyright 2003. based on forecasts and inventory targets Last purchase phase is most challenging Stephen C.Purchasing Cycle JulyOct   Jan-Feb MarJune  Reebok places orders on CMs for April delivery.

nature of demand. All Rights Reserved 5-51 . key success factors.Outline of Case Discussion       Discuss business context. Graves Copyright 2003. the sales cycle. planning challenges Frame as single-season planning problem. relate to newsvendor model Develop approach and key insights with NE Patriots example Report on findings for NFL Wrap up and summary of learnings Stephen C. failure modes Discuss supply chain. planning cycle.

Graves Copyright 2003. All Rights Reserved 5-52 . update targets accordingly   How should we set inventory targets? Stephen C.Single-Season Planning Problem What volume and mix of jerseys to purchase during March to June?  Planning framework:  Given forecasts (and advanced orders) for team and players  Decide inventory targets for dressed and blank jerseys for season  Place orders guided by these targets  Revise forecasts (say) each month based on current information.

the sales cycle. Graves Copyright 2003. key success factors. relate to newsvendor model Develop approach and key insights with NE Patriots example Report on findings for NFL Wrap up and summary of learnings Stephen C.Outline of Case Discussion       Discuss business context. planning cycle. All Rights Reserved 5-53 . nature of demand. failure modes Discuss supply chain. planning challenges Frame as single-season planning problem.

1.40 Cost to dress at Reebok = + $2.04 = $8.50 .46 Stephen C.50 Cost to dress at CM = + $1.00 Blank Cost = $9.40 Salvage Value for unsold Dressed Jersey = $7 Holding Cost for unsold Blank Jersey = $1.Representative Numbers for Replica Jersey Suggested Retail Price ---. All Rights Reserved 5-54 . Graves Copyright 2003.04 Salvage Value for unsold Blank Jersey = $9.more than $50 Wholesale Price = $24.

Graves Copyright 2003. All Rights Reserved 5-55 .2003 Forecast – As of March 1. 2003 What should inventory target be for dressed jerseys for each player? And blank jerseys for team? CMs have minimum order quantities of 1728 Stephen C.

Graves Copyright 2003.46* E[Blanks_Unsold] Expected Cost: $9.50*Blanks + $10. All Rights Reserved 5-56 .90*Dressed + $2.40*E[Blanks_Sold]   Stephen C.What’s the Objective?   Expected revenue: $24*E[Dressed_Sold] + 24*E[Blanks_Sold] + $7*E[Dressed_Unsold] + $8.

Model Calculations: Dressed Jerseys Q  order for dressed jerseys for a star player . All Rights Reserved 5-57 . f  x |  .  dx Q  E  Dressed _ Sold     E UnmetDemand  E  Dressed _ Unsold   Q  E  Dressed _ Sold  Stephen C.   is prob.density function for demand E UnmetDemand     x  Q  f  x |  . Graves Copyright 2003.

 B    otherplayers  + B    otherplayers  B starplayers  E UnmetDemand     otherplayers  f  x |  B . prob.  B  is approx. Graves Copyright 2003.  B dx E  Blanks _ Sold    B  E UnmetDemand  E  Blanks _ Unsold   B  E  Blanks _ Sold  B  Stephen C. All Rights Reserved 5-58 .density function for demand for blanks E UnmetDemand     x  B  f  x |  B .Model Approximation: Blank Jerseys B  order for blank jerseys.

where underage cost reflects option to use blanks Given the dressed jersey quantities. and more importantly: Get service measure for team = probability of not stocking out (critical ratio) Solve newsvendor for each star player to determine how many dressed jerseys to procure from CM. Graves Copyright 2003. All Rights Reserved 5-59 .Newsvendor-based Approach     Solve newsvendor for entire team to get total quantity of blanks and dressed jerseys to buy. re-solve newsvendor for entire team to find blank jerseys to procure Stephen C.

Newsvendor Model with Risk Pooling for NE Patriots Determine total quantity to buy.90 = 12.04  Cost of underage = $24.10  Prob.92  Stephen C. of not stocking out of blanks = 0.50 – 8.46 = 1. Graves Copyright 2003. assuming blank jerseys are the marginal units to buy  For blank jerseys:  Cost of overage = $9.00 – 11. All Rights Reserved 5-60 .

e.90 – 7.10=$1.90 Cost of underage if blank available = $1.10 Approx.33  Newsvendor purchases 51000 dressed jerseys Stephen C.92*$1.00 Cost of underage if blank not available = $24.00 = 3.90 = 13.96 Critical ratio = 0. All Rights Reserved 5-61 .92)*$13.00 – 10.Newsvendor Model with Risk Pooling for NE Patriots Given the stock-out probability for the team:  Consider each dressed jersey (i. cost of underage = . Graves Copyright 2003. for each star player):      Cost of overage = $10.00 + (1 ..

Newsvendor Model with Risk Pooling for NE Patriots  Given the quantities for dressed jerseys.04 M Stephen C.92  Solve newsvendor for blanks:      Newsvendor purchases 71000 blank jerseys Expected profit is $1. All Rights Reserved 5-62 . determine demand for blanks:   the unmet demand for star players plus demand for the other players Cost of overage = $9.10 Prob.00 – 11.50 – 8. Graves Copyright 2003.46 = 1. of not stocking out of blanks = 0.04 Cost of underage = $24.90 = 12.

All Rights Reserved . Graves Copyright 2003.Results: Newsvendor with Risk Pooling Dressed Blanks Total Purchas e 51227 70932 122159 E[sold] 44265 42712 86976 E[unsold E[short] ] 6962 28221 35183 703 Results: Simple Newsvendor Dressed Blanks Total Purchas e 87531 38027 125558 E[sold] 60244 22898 83142 E[unsold E[short] ] 27287 4161 15129 377 42416 4537 5-63 Stephen C.

NV model with Risk Pooling BRADY.Blanks Totals Exected Profit Newsboy Order 41018 14092 10879 10501 7983 3059 87531 38027 125558 $ 944. ANTOWAIN #32 Total -.033 E[Sold] 28918 9935 7670 6688 5084 1948 60244 22898 83142 E[Unsold] 12100 4157 3209 3812 2898 1111 27287 15129 42416 E[Unmet Demand] 1845 634 489 581 442 169 4161 377 4537 Stephen C.Dressed Totals -. TEDY #54 SMITH. TROY #80 VINATIERI.036 E[Sold] 21789 7486 5779 4442 3377 1392 44265 42712 86976 E[Unsold] 3063 1052 812 965 734 336 6962 28221 35183 E[Unmet Demand] 8974 3083 2380 2828 2150 725 20140 703 703 Naïve NV model BRADY.TOM #12 LAW. ADAM #04 BRUSCHI. TROY #80 VINATIERI. All Rights Reserved 5-64 .Dressed Other Players --.TY #24 BROWN. ADAM #04 BRUSCHI.Blanks Totals Exected Profit Newsboy Order 24852 8538 6591 5407 4110 1728 51227 70932 122159 $ 1.TY #24 BROWN.TOM #12 LAW. TEDY #54 SMITH.040. ANTOWAIN #32 Totals -. Graves Copyright 2003.

All Rights Reserved 5-65 .Observations from Example Expected profit increases by 5 to 10% over current practice & naïve newsvendor  Much different solution strategy: blanks used not just for “other” players but also as postponement option  Many more jerseys dressed in Indianapolis  Mix of leftovers is largely blanks  Value of newsvendor perspective  Stephen C. Graves Copyright 2003.

failure modes  Discuss supply chain. Graves Copyright 2003. key success factors. the sales cycle. nature of demand. relate to newsvendor model  Develop approach and key insights with NE Patriots example  Report on findings for NFL  Wrap up and summary of learnings  Stephen C. planning challenges  Frame as single-season planning problem.Outline of Case Discussion Discuss business context. planning cycle. All Rights Reserved 5-66 .

1. Graves Copyright 2003.Global Comparison: Model vs. Actual    Ex post analysis of 2003 season using model for 31 teams Applied model using forecast available on Mar. 2003 Only able to observe sales in 2003 and volume “pulled forward” Actual Sales In-stock Understock Overstock 100 85 15 27 Risk-Pool NV 100 95 5 28 Naïve NV 100 96 4 47 5-67 Stephen C. All Rights Reserved .

Graves Copyright 2003.Global Comparison: Model vs. Actual    Risk-pool NV increases profits by 6% (naïve NV increases profits by 2%) Plus A less risky mix of remaining jerseys at end of season Over-stock Profile Actual Risk-Pool NV Naïve NV Dressed jerseys Blanks jerseys Total 59% 41% 100% 17% 83% 100% 60% 40% 100% 5-68 Stephen C. All Rights Reserved .

the sales cycle. All Rights Reserved 5-69 . planning cycle. Graves Copyright 2003. failure modes Discuss supply chain. planning challenges Frame as single-season planning problem. relate to newsvendor model Develop approach and key insights with NE Patriots example Report on findings for NFL Wrap up and summary of learnings Stephen C.Outline of Case Discussion       Discuss business context. key success factors. nature of demand.

Graves Copyright 2003. better mix of end-of-year inventory. • Results in much different inventory plan – greater use of blanks and local finishing • Project resulted in planning tool and new insights for planning for Reebok. All Rights Reserved 5-70 . high uncertainty in demand • Newsvendor with Risk Pooling provides way to plan for and exploit postponement options • Results in higher profits. seasonal. 95% service level.Conclusion • Context – fashion items. and a thesis! A second project focused on forecasting Stephen C.