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    of 5

    DEPARTMENT OF INFORMATION & DECISION SCIENCES

    Beautiful Bags Case Study

    Course: IDS 552 – Supply Chain Management

    Submitted by:

    Siddharth Chaudhary: UIN: 670707934


    Tanvi Anandpara: UIN: 668806742
    Akshay Bhilare: UIN: 654316629
    Anuj Ghildial: UIN: 660926984

    Date of Submission: 04/17/2018


    Beautiful Bags is a fashion merchandise that deals in a variety of fashion products. Beautiful bags has close to 6000
    SKU’s which they have to manage. Their team attends fashion shows across the world and after careful thinking
    they have decided the prints, color, patterns and items that they want for the next season. The problem for
    merchandise management is to decide what quantity of each SKU they must order. The fashion industry is very
    volatile, and it is very difficult to predict demand for each SKU. Beautiful bags have six suppliers in China that the
    products with a lead time of 4 weeks. They have their own production facility, Thomas Jefferson Lane Facility(TJL).
    TJL was 20 minutes from their distribution center. The main points of focus for BB are:

    1. Categorizing products according to their demand characteristics.


    2. Deciding which supplier to use for each of their SKU’s.
    3. Having a model to balance inventory and choosing the suppliers.
    4. Improving the Cash Cycle to free capital for operations that would supplement in upcoming projects.
    5. Structuring strategy to be more inclusive and not only based on blue jeans products.
    6. Identifying potential blue jeans products from high fashions and what’s next.

    SOURCING STRATEGY

    There are three categories of products in the BB according to their demand characteristics.

    a. Blue jeans (High Demand, Low Volatility)


    b. What’s next (Medium Demand, Medium Volatility)
    c. High Fashion (Low Demand, High Volatility)
    Blue Jeans
    An important point to keep in mind about the blue jeans product is the fact that they can be held in inventory and
    excess products can be sold in the following season. This rules out using the newsvendor model to determine the
    cycle service level. An order up to level can be used for the sourcing strategy for blue jeans products. A periodic
    review policy can be used to determine the reorder point and the order up-to level. It would be advisable for BB to
    order blue jeans products in bulk from Chinese suppliers only. As there is high profit due to low cost, there is more
    margin from china suppliers as compared to others. High service can be maintained in case of blue jeans. Holding
    the inventory for blue jeans won’t be an issue as loss incurred due to that would be minimal. Since it is low risk,
    high demand category, it will be the best to target maximum profits by Sourcing it from China. Exhibit 1 shows how
    profit can be maximized using the Chinese suppliers. The cost associated with production from TJL is substantially
    more than the Chinese suppliers and hence would eat into the margin of profit. The holding cost is very low when
    compared to the difference in margin of profit from Chinese suppliers and TJL.

    What’s Next

    For What’s next with medium demand and medium volatility, optimal order quantity should be considered and
    sourced from china. The service level should be bit low than that of blue jeans. If demand increased, it can be
    fulfilled from TJL. There is risk involved in with low demand and comparatively the profit is marginal. So, the quantity
    sourced from China should be such that it should not be more than the optimal order quantity calculated using the
    newsvendor model. Unlike the blue jeans product, the what’s next products cannot be sold in the following season
    and must be salvaged. This increases the risk associated with maintain high service level. The risk can be hedged by
    maintaining a service level of 90 % and incase of shortage products can be delivered from TJL. Our proposal for the
    what’s next product can be seen in Exhibit 2.

    High Fashion

    High fashion has low demand with high volatility so sourcing them from China is not a good option. Sourcing from
    China would mean risking demand variability. High fashion has a very high overage cost and ordering excess
    inventory would mean risking substantial losses. Though on the other hand High fashion products are the most
    profitable. Ordering from China would be a double-edged sword. Considering the high risk involved, it is best to get
    it from TLJ solely. AS they have a short ETA can cater needs at cheaper price compared to China. This can help in
    reducing the loss of sourcing it from China in case there is excess inventory and the demand is low. For high fashion
    we propose a JIT(Just in Time) model from TJL. The TJL facility has a capacity of 2200 (average of 55 units per hour)
    unit per week. This is enough capacity for producing the high fashion products. But as the number of SKU’s of high
    fashion products increases, the facility at Thomas Jefferson Lane would require an expansion to increase the
    capacity to accommodate for the new SKU’s in the High fashion products.
    In conclusion we propose the following strategy:

    1. Blue Jeans product – China supplier only with high service level
    2. What’s next – Chinese supplier with low service level and TJL for any unfulfilled demand
    3. High Fashion – TJL only.

    Sheeny should also monitor the performance of all the SKU’s of High fashion as they would be potential blue jeans
    products of the future. This would require seeing which products show a steady demand with an increase. Such
    products would then qualify for the blue jeans category. The policy should not be to concentrate only on the blue
    jeans product. A more inclusive approach is required. This approach would be a shift from the current policy that
    is followed by blue jeans.

    Exhibit 1

    Crystal Ball - Basic Newsvendor


    Demand 10000 7500 5000
    Order quantity 11,900 8,600 5,500
    Over 1900 1100 500
    Under 0 0 0
    Sold at full price 10000 7500 5000
    Sold at discount price 1900 1100 500
    Total sales $ 352,167 $ 236,367 $ 189,583
    Total manufacturing cost $ 145,775 $ 121,260 $ 94,600
    Profit $ 206,392 $ 115,107 $ 94,983
    Only TJL
    Sales 10000 8,600 5,500
    Profits $ 162,500.00 $ 96,750.00 $ 97,625.00
    Exhibit 2
    Crystal Ball - Periodic Review
    Under cost $ 20.75
    Over cost (holding) $ 0.41
    Critical fractile $ 0.98
    Z 2.07
    Q*(Newsvendor) 12,068
    Demand 10000
    Order quantity 12,100
    Over 2100
    Under 0
    Sold at full price 10000
    Sales $ 330,000
    Manufacturing cost $ 122,500
    Holding cost $ 858
    Profit $ 206,643
    Exhibit 3

    SKU 100455 SKU 300412 SKU 991095


    Blue Jeans What’s Next High Fashion
    Hipster Backpack Lunch Sack
    Forecast Demand 10,000 7,500 5,000
    Forecast Standard Deviation 1,000 1,250 1,600
    Price
    Retail $ 45.00 $ 40.00 $ 37.50
    Wholesale $ 30.00 $ 27.50 $ 22.00
    Outlet $ 17.00 $ 15.00 $ 6.00
    Third Party $ 10.00 $ 10.00 $ 4.00
    Clearance Sale $ 8.00 $ 6.00 $ 2.50
    Cost - China
    Labor and Overhead $ 5.25 $ 6.05 $ 7.35
    Material $ 4.50 $ 4.35 $ 5.95
    Freight and Duty $ 2.50 $ 3.70 $ 3.90
    Total China Cost $ 12.25 $ 14.10 $ 17.20
    Cost - TJL
    Labor and Overhead $ 11.21 $ 13.25 $ 13.50
    Material $ 5.54 $ 5.50 $ 6.25
    Freight and Duty $ - $ - $ -
    Total TJL Cost $ 16.75 $ 18.75 $ 19.75
    % Retail 20% 20% 100%
    % Wholesale 80% 80% 0%
    Weighted original price $ 33.00 $ 30.00 $ 37.50
    Contribution from China $ 20.75 $ 15.90 $ 20.30
    Contribution from TJL $ 16.25 $ 11.25 $ 17.75
    Salvage revenue $ 11.67 $ 10.33 $ 4.17
    Newsvendor from China
    Underage cost $ 20.75 $ 15.90 $ 20.30
    Overage cost $ (0.58) $ (3.77) $ (13.03)
    Critical fractile 97.27% 80.85% 60.90%
    Z 1.921350774 0.872288798 0.276713637
    Q*(Newsvendor) 11,921.35 8,590.36 5,442.74

    *Exhibit 1, Exhibit 2, Exhibit 3

    [ Tim Kraft, Assistant Professor of Business Administration, and Elliott N. Weiss, Oliver Wight Professor of Business
    Administration. Copyright © 2015 by the University of Virginia Darden School Foundation, Charlottesville, VA ]

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