Case Study (Working Capital Management)
Issue of Nike: In Nike’s situation, they ran into some serious software implementation issues which are bugs, and data errors and resulted in incorrect demand forecast. The predictions the software made were totally off, so Nike didn’t produce enough of certain products that consumers were interested in buying. Conversely, they overproduced other Stock keeping Unit (skus) . This erroneous manufacturing plan eventually resulted in lost sales worth millions of dollars.
Suggestion can be made in an inventory control The ABC analysis or selective inventory control is an inventory categorization technique that Nike can used to solve their problem. ABC analysis divides an inventory into three categories. A is with very tight control and accurate records, B items with less tightly controlled and good records, and C items with the simplest controls possible and minimal records. In 2001, Nike has updated version of their inventory management software and this idea was to help predict which their product can be a high demand. But this new version that Nike update have some issues with bugs, and data errors which resulted in incorrect demand forecast. By using the analysis of ABC Nike needs to choose an appropriate order pattern to avoid excess capacity. ABC analysis is a method of tiered inventory or supplier valuation that divides inventory. Nike have to use the ABC analysis to identify the objective for the analysis and determine success criteria. To collect data on the Nike inventory under analysis is the most common data, generally available from standard accounting already in place, is annual spend per item. This can be in terms of raw purchase dollars or weighted cost including all ordering costs and carrying costs, if those can be readily calculated. Nike should have tight inventory control, more secured storage areas and better sales forecasts. Reorders should be frequent, with weekly or even daily reorder. Avoiding stock outis a priority. ABC analysis is a valuable tool to enable companies dedicated to strategic cost management to measure the current status for their materials management system. Nike’s
situation the simple changes that can yield the largest cost management benefits in the near and middle term periods. 1. ABC analysis: The basic work in this always better control analysis is the classification and identification of different types of inventories, for determining the degree of control required for each. In many firms it is found that they have stocks which are used at very different rates. So items are classified under three broad categories A, B and C, on the basis of usage, bulk, value, size, durability, utility, availability, criticality and should be controlled with due weightage to differential characteristics. The items included in group A involve largest investments and the inventory control should be most severe to these items. C group consists of inventory items which involve relatively small investments although the number of items remains large. These items deserve minimum attention of control. In B group that items are included which are neither of A nor C. This method can be explained by the following exhibit.
Example: Classification of Inventory Items: Class
No. of Items (per cent of total)
Value of Items (per cent of total)
A
20
85
В
30
10
С
50
5
Total
100
100
From the figure it can be observed that there are comparatively few items in A but they constitute a large proportion of the total rupee value; B items are in the intermediate range and C items are numerous but inexpensive. The purpose behind the ‘distribution by value’ analysis is ‘Always Better Control’. Donald G. Hall recommends that different attitudes shall be adopted in inventory management—aggressive for class A items, active for class B items and loose for class C items; and that each category should be given the attention as deserves. Recommends for order of selective control:
A Items
B Items
C Items
1. Control
Tight
Moderat e
Loose
2.Requirement s
Exact
Exact
Estimated
3. Postings
Individu al
Individu al
Group
4. Check
Close
Some
Little
5. Expediting
Regular
Some
None
6. Safety Stocks
Low
Medium
Large
2. Economic order quantity model:
Nike produce demand forecast, then, they would prepare a manufacturing plan. So, the basic decision in an economic order quantity (EOQ) procedure is to determine the amount of stock to be ordered, at a particular time so that the total of ordering and carrying costs may be reduced to a minimum point. Nike should place optimum orders and neither too large nor to small. EOQ also is the level of inventory order that minimizes the total cost associated with inventory. The EOQ model is based on following four assumptions, which are: (i) A firm has a steady and known demand of D units each period for a particular input. (ii) The firm consumes the input at a uniform rate. (iii) The costs of carrying stocks are a constant amount C per unit per period. (iv) The costs of ordering more inputs are a fixed amount O per order. Orders are delivered instantly. A useful formula for calculating the optimum order quantity is: EOQ = √2DO/ C
Example: A firm has an annual inventory requirement of 10,000 units. The accounting costs associated with placing an order with the supplier come to Rs. 200 per order and the carrying costs of holding stocks are expected to be Rs. 4 per unit. Hence, D=10,000 units 0=Rs. 200 C=Rs. 4 EOQ = √2 x 10,000 x 200/ 4 = √10,00.000 = 1,000 units Therefore, 1000 units should be ordered every 37 days.
In a conclusion, Nike Company should use EOQ model because it is very simple one and the EOQ analyses the trade-off between order costs and carrying cost to determine the order quantity that minimizes the total inventory costs.
3. Re-order point: Nike overproduced other stock keeping units (SKUS). This erroneous manufacturing plan eventually resulted in lost sales worth millions of dollars. So, after determined EOQ, Nike Company must know the inventory management about when to place the order for avoiding the stock-out position. The reorder point ( ROP） is calculated as the lead time the firm needs to place and receive an order and the firm’s daily usage of the inventory item. The lead time is the time lag between raising an order and the goods being delivered. For example, if the normal daily usage of materials is 100 units and it takes 30 days for the supplier to deliver the goods, then an order must be sent out when the stock level reaches 3,000 units. If safety stocks are held then re-order level should be: Safety stock+ (lead time x daily usage) Another method of ordering is the ‘two bin’ and ‘three bin systems. These involve putting a quantity equal to the re-order level in a separate bag or bin which is sealed or put in a separate location; the rest of the stock is withdrawn as needed with no record of individual usage being kept. Opening the sealed bin, however, gives the indication for a replenishment order. This method is cheap as it does not entail continuous, monitoring and is easy to understand—it has therefore gained a fair amount of acceptance. There are also other types of system in use known as ‘the ‘min-max’ or ‘S-s’ ‘method. However, an organization will have to take care of the lead time with sufficient initial stock and then follow it up regularly with EOQ cycles. Instead, lead time and usage rates are not precise, so Nike Company should hold safety stock (extra inventory) to prevent stock outs of important items.
4. Just in time system (JIT) Based on historical sales data of different product, Nike prepare different families of product. Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires producers to forecast demand accurately. This inventory supply system represents a shift away from the older just-in-case strategy, in which producers carried large inventories in case higher demand had to be met. So, through using JIT system, Nike Company would have only work-in-progress inventory, then, the objective is to minimize inventory investment. In the addition, JIT system uses no (or very little) safety stock.
