8.9End-of-chapter Case: On the Hot Seat: Justifying Inventory Decisions Nelson R

Question

8.9End-of-chapter Case: On the Hot Seat: Justifying Inventory Decisions

Nelson Rossman, CookiePalooza's team lead for the GourmetShoppe account, sat at his table, shaking his head. He wasn't sure what had just happened. The morning meeting had been going so well. Lisa Fastturn, the VP of Sales for CookiePalooza, had held Nelson and his team up as real go-getters for their outstanding delivery performance of CookiePalooza's top-selling cookie—Chocolate Marvel—to the firm's second largest customer: GourmetShoppe. All of the key metrics—on-time delivery, complete orders shipped, and fill rates—had been top notch. Lisa had, however, placed extra weight on the team's inventory-to-sales ratio of .08. Getting lean was a top strategic priority. And nobody had a better inventory-to-sales ratio.

Then, just before breaking for lunch, Lisa threw down the gauntlet. Out of nowhere Lisa said, "When we come back from lunch, Nelson will explain why the inventory-to-sales ratio for Caramel Cruize cookies is so high. I'm still struggling to understand how the GourmetShoppe team could manage inventory so well with one cookie and so poorly with another. The inventory-to-sales ratio for Caramel Cruize is 62% higher."

To make matters worse, Vincent Weck, the team lead for the FarrsBetterDeserts account, chimed in with another one of his one-upmanship maneuvers, saying, "Nelson, good job this morning. Not everyone can be the best and worst at the same time. Our team always cleans your clock on inventory-to-sales ratios. You're just a one-shot wonder."

Not wanting to lose control, Lisa spoke up, saying "OK guys, let's break for lunch. There will be plenty of time after lunch to dig into the details. We really do want to learn how to do this right. That's the only way we will win as a company!" Nelson was pleased to be off the hot seat, but he knew Lisa enjoyed a little taunting. She fomented a little smack among her sales teams and seemed to think competition among the planning teams would help cut inventories.

Suddenly, Nelson was ticked and bummed at the same time. He had come into the semi-annual sales review pretty excited about his account team's performance. Now, he had less than an hour to figure out how to defend his team's performance. In the process, he'd love nothing more than to shut Vincent up. Nelson had been suspicious of Vincent's seemingly better performance for a while. He thought he knew what game Vincent was playing. But, how could he communicate that without coming off looking like the jerk he felt Vincent was. He opened his laptop and pulled up a spreadsheet with the inventory-to-sales ratios.

Quickly, Nelson wrote down some notes:

CookiePalooza sold its cookies through high-end, upscale grocery stores on a VMR (vendor managed inventory) consignment basis. In other words, CookiePalooza owned the inventory until it was sold (i.e., in its retailers warehouses and stores).

As a VMR operation, each planning team made the decisions on how many and when to ship cookies to key accounts. This autonomy was the source of competition and friction between Nelson and Vincent.

Thankfully, sales are very stable throughout the year and predictable to within less than 1% of actual demand.

Lead times are consistently two days from CookiePalooza's bakery to any of GourmetShoppe's distribution centers.

For technical reasons, each SKU must be managed and shipped separately. Shipments from CookiePalooza to GourmetShoppe cost a fixed dollar amount, can be of any size, and can be initiated at any time.

All relevant costs (unit costs, shipping costs, etc.) are the same for all SKUs.

Nelson had to think fast and come up with some good, logical explanations before the sales summit resumed after lunch.

Questions

2) How has Vincent achieved better inventory-to-sales ratios? That is, what are the potential reasons for the observed differences in inventory-to-sales ratios? How can Nelson make these arguments without looking like a jerk?

3) How could the VP of Sales assess whether the reasons you offer actually do explain those differences?

SKUs in the Gourmet Line Total avg. inventory held by GourmetShoppe Total annual sales to GourmetShoppe Inventory-to-sales ratio Caramel Cruize $6,500 $50,000 0.13 Chocolate Marvel $10,800 $140,000 0.08 Butter Best Brickle $8,100 $80,000 0.10 Chunky Nut Champion $7,000 $60,000 0.12

Explanation / Answer

2. As it can be observed that Caramel cruise cookies is the least popular item at the account Nelson manages, with a sale of $50000 only.Inventory to sales ratio of other cookies is also not as good as the chocolate marvel. Since the operation is vendor managed one, the company needs to pay for the inventory managed at the store till it is sold. The different rates of inventory turn for different cookies need to be matched to the supply, particularly the rate of fill. Since each SKU has to be filled separately, the redoing of the replenishment rate according to sales may help to reduce the inventory and improve the ratio. Vincent might be lucky to have near equal sales rate and a common inventory management policy working for him right.

2. The VP of sales can assess the claims by verifying the historical data of sales for different items for different stores and fill rate of those items and the resultant variations in the ratio.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.