Analytics Exercise: Inventory Management at VarsityTees VarsityTees is a new company started last year by two recent varsity graduates. The idea behind the company was simple. It will sell premium logo T-shirts to supporters of the Top 10 varsity rugby teams with one major, unique feature.

This unique feature is a special large monogram that has the customer’s name, school, and year of graduation. The T-shirt is the perfect gift for graduating students and alumni, particularly avid rugby fans who want to show support during the season. The company is off to a great start and had a successful first year while selling to only a few varsities. This year it plans to expand to a few more varieties and target the entire varsity rugby cup within three years.

You have been hired by VarsityTees and need to make a good impression by making good supply chain decisions. This is your big opportunity with a startup. There are only two people in the firm and you were hired with the prospect of possibly becoming a partner in the future. You majored in supply chain (operations) management in university and had a great internship at a big retailer that was getting into Internet sales.

The experience was great,but now you are on your own and have none of the great support that the big company had. You need to find and analyze your own data and make some big decisions. Of course, Rachel and Siya, the partners who started the company,are knowledgeable about this venture and they are going to help along the way.

Rachel had the idea to start the company two years ago and talked her friend from business school, Siya, into joining her. Rachel is into Web marketing, has a degree in computer science, and has been working on completing an online MBA. She is as much an artist as a techie. She can really make the Website sing. Siya majored in accounting and likes to pump the numbers. He has done a great job of keeping the books and selling the company to some small venture capital people in the area.

Last year, he was successful in getting them to invest R2,000,000 in the company (a one-time investment).Therewere some significant strings attached to this investment in that it stipulated that only R100,000 per year could go toward paying the salary of the two principals.

The rest had to be spent on the Website, advertising, and inventory. In addition, the venture capital company gets 25 percent of the company profits, before taxes, during the first four years of operation, assuming the company makes a profit.

Your first job is to focus on the firm’s inventory.The company is centered on selling premium T-shirts to varsity rugby fans through a Website. Your analysis is

important since a significant portion of the company’s assets is the inventory that it carries. The business is cyclic, and sales are concentrated during the period leading up to the varsity cup rugby season, which runs between early February and August of each year. For the upcoming season, the firm wants to sell T-shirts to only a few of the largest varsities in the Gauteng region. In particular, it is targeting the University of the Witwatersrand (Wits), University of Johannesburg (UJ), University of Pretoria (UP), Tshwane University of Technology (TUT), and North-West University (NWU). These five varsities have major rugby programs and a loyal fan base.

The firm has considered the idea of making the T-shirts in its own factory, but for now it purchases them from a supplier in China. The prices are great, but service is a problem because the supplier has a 20- week lead time for each order and the minimum order size is 5,000 T-shirts. The order can consist of a mix of the different logos, such as 2000 for Wits, 1500 for UJ, 750 for UP, 500 for TUT, and 250 for NWU. Within each logo sublot, sizes are allocated based on percentages, and the supplier suggests 20 percent Xlarge, 50 percent large, 20 percent medium, and 10 percent small based on its historical data.

Once an order is received, a local subcontractor applies the monograms and ships the T-shirt to the customer. The subcontractor stores the inventory of T-shirts for the company in a small warehouse area located at their site.
This is the company’s second year of operation.

Last year, it sold T-shirts to only three varsities, Wits, UJ, and TUT. It ordered a minimum of 5000 T-shirts and sold all of them, but the experience was painful because the company had too many UJ T-shirts and not enough for Wits fans. Last year, it ordered 2300 Wits, 1800 UJ, and 900 TUT T-shirts. Of the 5000 T-shirts, 342 had to be sold at a steep discount on Marketplace after the season.

The company was hoping not to do this again. For the next year, you have collected some data relevant to the decision. Exhibit 20.12 shows cost information for the product when purchased from the supplier in China. Here we see that the cost for each T-shirt, delivered to the warehouse of our monogramming sub-contractor, is R46.00. This price is valid for any quantity we order above 5,000 T-shirts. This order can be a mix of T-shirts for each of the five varsities we are targeting. The supplier needs 20 weeks to process the order, so the

order needs to be placed around September 1 for the upcoming rugby season. Our monogramming subcontractor gets R16for each T-shirt. The shipping cost is paid by the customer when the order is placed.

In addition to the cost data, you also have some demand information, as shown in exhibit 20.13. The exact sales numbers for last year are given. T-shirts sold at the full retail price were sold forR150 each. T-shirts leftover at the end of the season were sold through Marketplace for R40 each and these T-shirts were not monogrammed by our sub-contractor. Keep in mind that the retail sales numbers do not accurately reflect actual demand because they stocked out of the Wits T-shirts toward the end of the season. As for advertising the T-shirts for next season, Rachel is committed to using the same approach used

last year. The firm placed ads in the rugby program sold at each game. These worked very well for reaching those attending the games, but she realized there may be ways to advertise that may open sales to more alumni. She has
hired a market research firm to help identify other advertising outlets but has decided to wait at least another year to try something different.

Forecasting demand is a major problem for the company. You have asked Rachel and Siya to predict what they think sales might be next year. You have also asked the market research firm to apply their forecasting tools. Data on these forecasts are given in Exhibit 20.13. To generate some statistics, you have averaged the forecasts and calculated the standard deviation for each Varsity and in total.

Based on advice from the market research firm, you have decided to use the aggregate demand forecast and standard deviation for the aggregate demand. The aggregate demand was calculated by adding the average
forecast for each item.

The aggregate standard deviation was calculated by squaring the standard deviation for each item (this is the variance), summing the variance for each item, and then taking the square root of this sum.

This assumes that the demand for each varsity is independent, meaning that the demand for Wits is totally unrelated to the demand at UJ and the other varieties.

You will allocate your aggregate order to the individual varsities base on their expected percentage of total demand. You discussed your analysis with Rachel and Siya and they are OK with your analysis. They would like to see what the order quantities would be if each varsity was considered individually. You have a spreadsheet set up with all the data from the exhibits called VarsityTees.xls and you are ready to do some calculations.

Questions

1. You are curious as to how much Rachel and Siya made in their business last year. You do not have all the data, but you know that most of their expenses relate to buying the T-shirts and having them monogrammed. You know they paid themselves R50,000 each and you know the rent, utilities, insurance, and benefits package for the business was about R20,000.

About how much do you think they made “before taxes” last year? If they must make their payment to the venture capital firm, and then pay 50 percent in taxes, what was their increase in cash last year?

2. What was your reasoning behind using the aggregate demand forecast when determining the size of your order rather than the individual varsity forecasts? Should you rethink this or is there a sound basis for doing it this way?

3. How many T-shirts should you order this year? Break down your order by individual varsity. Document your calculations in your spreadsheet. Calculate this based on the aggregate forecast and also the forecast by individual varsity.

4. What do you think they could make this year? They are paying you R30,000 and you expect your benefits package addition would be about R10,000 per year. Assume that they order based on the aggregate forecast.

5. How should the business be developed in the future? Be specific and consider changes related to your supplier, the monogramming subcontractor, target customers, and products