MusicToday, LLC:

Implementing a Periodic Review Inventory System

CASE ANALYSIS PRESENTED BY: Abhishek Puri (400907001), Amulya Kalia (400907002), Chetan Mathur (400907005), Karanveer Singh (400907012) Ratandeep Singh (400907037) 1

Case Review

About MusicToday
provider of e-commerce, ticketing, merchandising services to the music industry and

Sold tickets to live events, built custom Internet stores for musicians Fulfilled orders for merchandise that included CDs, T-shirts, hats, posters, and stickers Maintained a warehouse at Charlottesville, Virginia

MusicTodays History
Started with the early days of Dave Mathews Band, Manager sold band T-shirts and other merchandize in and around small venues in Charlottesville

As the band grew into a successful national act, the merchandizing company as become a multimillion dollar operation.
MusicToday was formed in 1998 with the merger of: Red Light Communications, Web Services company MMF, Merchandize fulfillment operation Both of these firmed owned by the manager of Dave Mathews Band4

MusicTodays Growth
Services offered as the company grew:
Comprehensive Merchandizing solution (stocking, handling and managing inventory) Built custom commerce-enabled internet sites for the artists Managing point-of-sale to pick-pack-ship operation

Some of the prominent clients:

Rolling Stones Eminem Metallica The Grateful Dead Jason Mraz

Order Fulfillment Process

Order Receipt
Order is received through MusicTodays ecommerce solution

Order Processing
Pick-pack-ship operation is carried at the warehouse by the Order Fulfillment Division

Order Shipment
In stock orders are shipped within 24 hours through postal service Express orders shipped through expedited shipping

Merchandize stocked at 50,000 feet warehouse in Charlottesville, Virginia Artists maintained ownership of the merchandise until it reached the consumer

Expanding Operations
Area Client Merchandizing Operation revenue Merchandize Orders Handled Growth (1998-2003) 66% 52% 43% (2001-03)

Processed approximately 1500 orders daily by 2003 System was strained Two major sales cycles identified
Holiday Season Summer Vacation Period
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Night Train (The problem of Stock out)

Stock out during the peak of the holiday season
Loss of sales Client disappointment

Variable Replenishment-order quantities

Often small expedited receipts, cost a premium to process Problem because MusicToday received fixed percentage of merchandize sales revenue as fee
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Getting back on Track

First goal - to determine a reorder point for every Night Train SKU stocked Decided that service level shouldnt be same for all product categories Past 52 weeks sales data was collected and studied, same pattern was expected in the coming year No formal order-cycle process, orders placed by employees reactively

Orders given in multiples of boxes so as to not incur broken case charges

Order-cycle Process for Night Train Merchandize

Purchase order for CDs sent to the band by MusicToday Order forwarded to alliance Entertainment Corporation (AEC) Lead Time 2 business days

Shipment of Products by AEC Lead Time 5 business days

Transit lead time 3 business days

All other Night Train merchandize came from a promotional products company Lead time 4 weeks from issuing of order
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Formulation of New System

Decided to put each client on a Periodic Review System

This way inventory levels will be periodically reviewed

Safety stocks to cover the review period and the replenishment lead time Decided to use 4 week review period so that additional manpower wont be required Standoff between shorter and longer review cycle Shorter review cycle less inventory, higher ordering costs 11 Longer review cycle more inventory, higher holding costs

Theory Review

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Continuous Review System

Selecting the reorder point with variable demand and constant lead time
Amount used during first lead time Inventory on hand

EOQ Reorder point, ROP

Average lead time usage, dL

d3 d1 d2 EOQ

Safety stock, SS

First lead time, LT1

LT2

LT3

Time
Order 1 placed Order 2 placed Order 3 placed

Shipment 1 received Shipment 2 received Shipment 3 received

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Reorder Point Calculation

Reorder point = Average demand during lead time + Safety stock
= dL + safety stock

Where d = average demand per week (or day or months) L = constant lead time in weeks (or days or months)

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Demand During Lead Time

Specify mean and standard deviation Standard deviation of demand during lead time dLT = d2L = d L Safety stock and reorder point
Safety stock = zdLT

where z = number of standard deviations needed to achieve the cycle-service level dLT = stand deviation of demand during lead time
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General Cost Equation

Calculating total systems costs Total cost = Annual cycle inventory holding cost + Annual ordering cost + Annual safety stock holding cost

Q C= 2

D (H) + Q

(S) + (H) (Safety stock)

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Periodic Review System

Fixed interval reorder system or periodic reorder system
Inventory on Hand Review period Target inventory level, TIL

RP

RP

RP

First order quantity, Q1

Q2

Q3

Amount used during first lead time

d1

d3

d2

Safety stock, SS

First lead time, LT1

LT2

LT3 Time

Order 1 placed

Order 2 placed

Order 3 placed

Shipment 3 received Shipment 1 received Shipment 2 received

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Periodic Review System

Selecting the period of time between reviews (P) The order-up-to level (T) when demand is variable and lead time is constant will be equal to the average demand during the protection period (P+L) + Safety Stock T = d(P + L) + safety stock for protection interval

Safety stock = zP + L , where P + L = d P L

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Case Analysis

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Demand Variation (Weekly)

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Percentage Demand (Quarter)

21

Product Demand Variation

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Lead Time
Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

Lead Time (Weeks

1.5 4 4 4 1.5 4

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Calculation: Inventory Carrying Cost

Inventory carrying cost = 15 % * Cost of Product /unit/year Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

Product Cost )$)

9.18 12.23 8.75 8.75 9.18 8.75

Carrying Cost (per unit/week) ($)

0.026 0.035 0.025 0.025 0.026 0.025

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Calculation: Demand During Review Period & Lead Time

Demand During Lead Time = (Average Weekly Demand + Review Period) * Lead Time Following table shows data for week review period Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

Q1
2597 501 1021 492 1346 857

Q2
4029 817 1681 852 2338 1482

Q3
5640 1143 2364 1097 3067 2196

Q4
6705 1318 2895 1262 3587 2481

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Calculation: Safety Stock

Safety Stock = z * Std. Dev. * Sqrt(Review Period + Lead Time ) Here z = 1.29 for 90% service level Following table shows data for week review period Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat

Q1
426 58 148 65 228

Q2
1480 223 505 210 654

Q3
1411 287 423 206 681

Q4
2502 425 849 421 1551

NT Moon Buggy T-shirt SS White

NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

108

448

415

759

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Calculation: Base Stock Level

Base Stock Level = Demand during review period and lead time + Safety Stock

Following table shows data for week review period Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat

Q1
3023 559 1169 558 1574

Q2
5509 1040 2186 1062 2991

Q3
7052 1430 2788 1303 3748

Q4
9207 1742 3744 1683 5138

NT Moon Buggy T-shirt SS White

NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

966

1930

2610

3240

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Case Quantity
Products are to be ordered in the multiples of case quantity only. Following table shows the case quantity of various products Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

Lead Time (Weeks

100 25 50 50

100
50

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Allocating orders : Sample Sheet

Based on the closing inventory and the base stock level, a quantity in multiples of case quantity is ordered Following table the allocation of order receipts for Q1 of various products in different weeks for the periodic order with 4 week review period

5-Jan 12-Jan NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

19-Jan

26-Jan

2-Feb

9-Feb

16-Feb

23-Feb

2-Mar

9-Mar

16-Mar

23-Mar

30-Mar

2,500 200 650 0 0 0

2,200 250 550 0 0 0

1,700 250 500 0 0 200

1,800

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Questions

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Q1: Should Music today consider a continuous review/ reorder point system?
Yes, It should. Music Today deals with some merchandise goods such as CDs, TShirts, hats, and stickers and also sells some tickets to live events, built custom Internet stores. Due to the demand fluctuation Music today faced problems like frequent stock outs during critical periods, varying replenishment quantities and varying demand. To improve this continuous review point system is a good option. But this can be implemented only when inventory can be continuously reviewed like for example when computerized inventory systems are used. If inventory is not continuously monitored , then periodic review system is best option in which inventory is reviewed at regular intervals and appropriate quantity is ordered after each review 31

Q1: Should Music today consider a continuous review/ reorder point system?
Periodic Inventory Review Periodic inventory review reduces the time a business owner or manager spends analyzing inventory The owner or manager must make assumptions between inventory review periods regarding inventory counts. It also can make accounting less accurate.

Perpetual Inventory Review Perpetual inventory review permits real-time updates of inventory counts Facilitates accurate accounting High cost of implementation -- bar code scanners, inventory software and computer systems are all necessary to maintain perpetual inventory review. The Company should adopt a Reorder Point System
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Q2: Is a four-week cycle an appropriate review period? What would happen if the review period were shortened to two weeks? Should all items have the same review period? Why or Why not?

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 Yes , 4 week review period is appropriate period for inventory review period because total cycle cost is least for review period of 4 as compared to 2 week review period
Present 4 week System periodic Review Number of Orders Average Inventory / Year Ordering Cost / Year ($) 80 36333 8000 66 42249 6600 2 week Periodic Review 108 39002 10800

Carrying Cost / Year ($)

Total Cycle Cost / Year ($)

968
8968

1121
7721

1036
11836
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 When the review period is reduced to two weeks then numbers od orders have increased to 108 from 66 and total cycle cost has also increased. Also 2 week review period requires more administrative cost
Present 4 week System periodic Review Number of Orders Average Inventory / Year Ordering Cost / Year ($) 80 36333 8000 66 42249 6600 2 week Periodic Review 108 39002 10800

Carrying Cost / Year ($)

Total Cycle Cost / Year ($)

968
8968

1121
7721

1036
11836
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 No all items should not have same review period. The optimal review period of each product is given by formula: Review Period (weeks) = EOQ/Average weekly demand
Product Name
NT Yankee Hotel Foxtrot CD NT Black Toboggan Hat NT Moon Buggy T-shirt SS White NT Farm Wheel Ringer T-shirt SS White NT Farm Wheel Rolls CD NT Old School Logo T-shirt SS Granite

Average weekly demand (over the year) 862 118 249 116 470 219

EOQ

Review Period (in weeks) 3 7 5.5 8 4 6

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2514 805 1380 944 1856 1294

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