Ecko Unlimited Operations Management 1

Issues

OPER 2P91 Assignment Title Page:

Ecko Unlimited Operations Management Issues

Will Taleb, Justin Caporuscio, Archchun Srisotheeswaran

Brock University
Ecko Unlimited Operations Management 2
Issues

Abstract

This report will cover operations management issues that Ecko Unlimited has
been faced with. The two major problems we will discuss are inventory management and
internal control. We will use quantitative and qualitative analysis to come up with a valid
and efficient recommendation for the management at Ecko Unltd. to improve their
operations while reducing total annual costs while providing the right amount of
inventory at the right time to enhance their customer satisfaction.

Introduction/Brief History

Marc Ecko began his passion for hip-hop/urban clothing while he was in high
school. In 1993, he founded Ecko Unlimited and adopted the rhino logo, which is still the
brand image of the organization. From 1993 to 2005, Marc Ecko opened up stores, made
new clothing lines, and even launched a video game. Within the time period of 1993 to
1998, Marc started running into financial troubles and was considering shutting down the
entire Ecko Unlimited operation. These troubles stemmed from facing issues with
manufacturers and the low sales of their new attempt at jeans and jackets. After 1998,
sales started to skyrocket due to the high demand for the urban/hip-hop look. From 1998
to 2004, sales increased from $36 million to $500 million. This was also due to Ecko
beginning to brand new products such as watches, gloves, footwear, women clothing, and
even a line of cosmetics. The acquisition of Zoo York and the production for the then
famous “G-Unit” clothing lines also helped this boom.

Sales continued to flourish until the 2009 recession. Ecko Unltd.’s sales have
declined in the years of 2009 to 2014. In 2013, Ecko Unltd. was sold to Iconix Brand
Group for full ownership but Iconix kept the brand as Ecko. In 2014, Ecko Unltd. filed
for chapter 11 bankruptcy while having $30 million in assets and $62 million in debt. The
company sold most of its warehouse inventory in a clear-out sale with major discounts
and had a large number of retailers shut down. The main cause for this decline was the
recession and the drastic change in fashion trends.

In 2015, Ecko Unltd. began reopening in the United States an Canada. Sales have
been inconsistent, with multiple openings and closings of stores in different locations
simultaneously.

The location we will be reviewing was opened in the Outlet Collection of Niagara
in Niagara-on-the-Lake in October of 2015. This location is one of two locations in the
Niagara Region, with the other being located in the Pen Center in St Catharines. Sales
have been steady in the Niagara-on-the-Lake location with trends of higher sales on
weekends and in warmer weather. The Pen Center location is currently in the process of
shutting down due to low revenues while a new location was just opened up in
Burlington. The Niagara-on-the-Lake location is now the only one in the region in our
analysis of forecasts.
Ecko Unlimited Operations Management 3
Issues

As one can tell, there are major changes taking place with Ecko Unltd. and
solutions to issues must be found to ensure this location is not the next one to close.

Identification of Operations Management Issues

The following research will be focused on the Ecko Unltd. store located in the
Outlet Collection Mall in Niagara-on-the-Lake. After several visits to the store, we have
noticed many issues pertaining inventory management, supply chain management,
communication, internal control.

Inventory Management:
 Overstock of unpopular clothing
 Out-of-stock of popular clothing & popular sizes
 Out-of-date tracking system
 Poor re-ordering/ re-stocking process

The above inventory management issues lead to problems such as unnecessarily high
inventory costs (carrying costs), shortage costs, and lost sales. The inventory costs should
be minimized to have the greatest positive impact on Ecko Unltd.’s profits.

The issues of overstock and out-of-stock inventory stem from the out-of-date tracking
systems and the poor re-ordering processes. The system used is as follows:

 Once the inventory on an item is completely depleted an order is placed for more
product; some orders take up to two to three weeks to receive
 This leaves no excess inventory for the lead time period which results in potential
lost sales

Further on in our report, we will discuss potential resolutions for dealing with these
issues.

Supply-Chain Management:
 Improper methods for transportation of goods from supplier to Ecko Store

This issue is a major one since all of the revenue is generated from products sold in
the store. If the store has long period of inventory drought, the sales will be hindered.
Since our project is focused more on inventory and internal control issues, we will only
slightly comment on supply-chain management resolutions (if any at all).

Communication
 Inefficient communication methods used between head office, suppliers, and
stores
 Communication errors cause misunderstandings and a lack of efficiency and
effectiveness within the organization
Ecko Unlimited Operations Management 4
Issues

Poor communication leads to poor results and unnecessary inefficiencies. This has
been shown through Ecko Unltd.’s processes as a weakness. We have minor
recommendations for such an issue. Having a company-wide communication system such
as a company-wide email for managers or all employees would help resolve
communication errors.

Internal Control Issues

 No security ink-tags on product (clothing)
 No cameras around the till or in the store at all
 Have had unexplained variances in the till (thefts)
 Clothes have gone missing/only tags left in change rooms or around the store
(thefts)

The above issues all have a negative impact on Ecko Unltd.’s operations and profits.
After inventory audits count in early March, the store had a variance of (-120) items
totalling an overall inventory loss of approximately $3,600 in inventory. This issue would
not exist if there are proper internal control policies in effect such as cameras, security
ink-tags, and sensors when entering/exiting the store.

We will conduct a NPV analysis of the cost of the implementation of the internal
control systems (including maintenance costs) netted against the present value of a
$3,600 loss every 6 months of operations (October-March). Since we do not have a
proper discount rate, we will just multiply the $3,600 by 2 to compare find the NPV of
the cost vs. benefit for one year.

 Benefit of systems would be an annual savings of lost inventory of $7,200.

 Cost of the security ink-tags and cameras would cost about $4000 for 1 year of
operations (as talked about with manager)
 Therefore, the NPV of this implementation would be a positive $3200 in cost
savings and should be implemented.

Summary:

Since we cannot report on every single issue this organization faces, we will focus
on two. The issues we are discussing with Ecko Unltd. are inventory management, and
internal control. The main issue Ecko is experiencing with inventory management is
inventory inconsistency (shortage or oversupply of stock). The main issues with internal
control are thefts and security of the store.

Our proposed solution for the two issues is as follows:

 Inventory Management: We will be using short-range quantitative time series

models to forecast the demand for respective months and use our findings to
inform the management of volume of customers and sales to be expecting. We
Ecko Unlimited Operations Management 5
Issues

will also be using the Economic Order Quantity (EOQ) model for inventory
control to minimize costs and find the optimal order quantity. We will also
suggest a better, more secure/modern way of communication between supplier
and the Ecko store to prevent miscommunication in the future.

 Internal Control: We will suggest modern security measures to implement into the
operations of the store in order to minimize theft of money and product. We will
suggest security ink-tags on all clothing, sensors at the front doors of the store (to
inform if an item has been taken), and cameras. These security implementations
will minimize thefts in the store and smooth out the internal control operations.

Literature Review

Our primary focus is on Ecko’s inventory management. For all companies the
goal and objective of inventory management should be to achieve a balance between
investment in inventory and customer service. Ecko Unltd. is failing to follow the
functions of inventory which are: to provide a selection of goods for expected customer
demand and protecting the firm from fluctuations in these demands, to take advantage of
quantity discounts from suppliers, and to safeguard against inflation and increases in
price (Operations Management Sustainability and Supply Chain Management, 2014).

Another issue for Ecko is inventory record accuracy; this is a prominent factor to
inventory management, sales, and production scheduling. Currently the company has a
periodic system. It requires regular checks of inventory to determine how much inventory
the company has on hand. The disadvantages of this system are lack of control between
checks, and the need to carry extra inventory to hedge against shortages. A suggestion we
made to Ecko was to implement a two-bin system to resolve the company’s issue of
inconsistency in inventory capacity. A two-bin system requires the manager to set up two
bins with the same amount of quantity - each bin with a quantity to meet demand during
the time to receive another order (Operations Management Sustainability and Supply
Chain Management, 2014).

The second issue is their control in inventory. The company is experiencing

shrinkage and pilferage problems. The reason for pilferage issues is the company’s
failure to hire skilled personnel, lack of training, and failure to discipline employees. The
issue of shrinkage is occurring because of their out-dated technology. Ecko Unltd. does
not have control on received shipment due to lack using of bar codes, and RFID systems.
The company is experiencing issues with tracking which items are leaving the store and
when. Other companies deal with tracking items leaving the place of business using ink
tags, Universal Product Code, video surveillance and direct observation.

As a group, we have discussed many options to manage inventory and one such
idea was implementing an ABC analysis. Using this method, we would divide Ecko’s on-
hand inventory into three categories on the basis of annual dollar volume. This would be
convenient because the company can focus on monitoring expensive items and spend less
Ecko Unlimited Operations Management 6
Issues

on inexpensive items. Another option we discussed about is cycle counting, using this
method the company would count items, verify records, and document any inaccuracies.
This method has many advantages; (1) eliminates the need to shutdown
departments to conduct annual inventory count, (2) eliminates the need to adjust
inventory, (3) trained individuals will be performing the inventory count, (4) allows the
cause of the inventory count error to be identified and resolved, (5) helps maintain an
accurate inventory records (Operations Management Sustainability and Supply Chain
Management, 2014).

Research Article #1

Through our analysis of Ecko Unltd., we have identified the prominent reason for
inventory management issues arises from poor forecasting. To support our analysis we
have incorporated the findings of J. Scott Armstrong in his research article titled
“Research Needs In Forecasting”. According to Mr. Armstrong expert opinion, expert
systems, implementation, and auditing have potential to be significant tools for
forecasting in the future. Furthermore Armstrong mentions that many forecasts neglect
the occurrence of a conflict situation and suggests the use of role-play to obtain more
accurate forecasts. To back this up, Armstrong studied seven situations to recognize that
subjects who used judgement predicted the outcome 20% of the time and the subjects
who used role-playing were able to predict the outcome 70% of the time.

Expert systems are promising because they can provide statistical or numerical
evidence to aid an individual’s forecast. In this article it was stated that there was
evidence to support the fact that expert systems cost less and was more accurate than
unaided judgement. Additional studies that were conducted on implementation revealed
that forecasts are ignored if it recommends alternatives contrary to those favoured by
executives. The use of computers is recommended when dealing with implementation
because computers have forecasting programs that have procedures to ensure reliability
and validity. Currently, Ecko Unltd. is forecasting based on previous sales and are not
implementing any new systems to aid them in a more accurate forecast. The use of expert
opinions, expert systems, and other implementations can help this company regain
market share and realize weaknesses and opportunities the firm can leverage. Ecko Unltd.
must change their method of forecasting because it is leading to inventory shortages
and/or inventory surpluses.

As clothing store forecasting is important to meet the changing desires of

customers, but Ecko Unltd. is not meeting standards and goals for forecasting. According
to the article written by Armstrong, forecasting should conform to standards, such as
objectivity, re-applicability, importance, competency, generalizability, intelligibility, and
efficiency. Armstrong has summed up five important advances to consider when
conducting a forecast: (1) econometric methods result in more accurate long-range
forecasts, (2) structured methods help improve the accuracy of judgemental forecast, (3)
expert system results in more accurate and cost-efficient forecasting, (4) expertise in a
topic is of little value for long-range judgemental forecasts, and (5) complex quantitative
Ecko Unlimited Operations Management 7
Issues

models don’t necessarily mean greater accuracy. Also according to Armstrong,

forecasters are stumped with the standards they need to use for an acceptable forecast,
predicted conflict situations, methods to use to measure uncertainty, and methods to
explain to the executive’s unfavourable forecasts.

Ecko Unltd. managers are confused with the standards they need to use. This is
visible with the lack of objectivity, importance, competency, intelligibility, and efficiency
of their forecast. The managers are not capable of predicting conflicted situations evident
with the decline in sales and customer satisfaction, and lackadaisical effort in retrieving
market share. There are difficulties in measuring uncertainty resulting in the unbalanced
inventory. Finally, the fear of branch managers to state the unfavourable forecasts to
upper management is resulting in a poor communication within the organization. All of
these issues must be addressed if the company wants to be a top competitor in the
clothing industry.

Research Article #2

While gathering information on the current state of Ecko Unltd., it can be deduced
that a lot of the cost the Niagara-on-the-Lake division incurs comes from waste costs
resulting from an overabundance of inventory. With this observation, an appropriate
recommendation for Ecko Unltd. is to implement a Just-in-Time inventory system. To
support this recommendation, we have been able to connect our observations to the
findings of Musara Mazanai in her research paper entitled, “Impact of just-in-time (JIT)
inventory system on efficiency, quality and flexibility among manufacturing sector, small
and medium enterprise (SMEs) in South Africa”. It has been mentioned that Ecko Unltd.
struggles heavily with excess inventory, and therefore bear high operational costs. One
valid argument this article addresses is how JIT inventory management is a way for a
struggling company to cut their costs and provide excellent quality at that. Throughout
the article, it has been identified that 66.4% of companies in South Africa have not
implemented JIT systems, in which 57% were unaware of such system systems. Only
28% of companies have implemented JIT systems. Another common reason for lack of
implementation is insufficient company funds. Also, another significant barrier to the
implementation of the JIT inventory system is the lack of reliable supplier networks. This
is a problem for many industries because suppliers are such an essential role for the
incorporation of JIT inventory systems.

The article states that in many manufacturing industries (which, in terms of

inventory, can be compared to retail) can use JIT systems to reduce storage costs and
reduce the amount of obsolete clothing that are a result of seasonal changes. This
information can be shown through a correlation analysis in which Mazanai has conducted
on various companies in South Africa. Mazanai has calculated that, with the use of JIT
inventory systems, the improved inventory control has a positive correlation with cost
efficiency, quality, and flexibility (coefficients amounting to 0.4979, 0.5449, and 0.8711,
respectively). Mazanai has also found that the absence of JIT systems presents a negative
correlation with cost efficiency, quality, and flexibility (coefficients amounting to -
0.1968, -0.0920 and -0.2607, respectively).
Ecko Unlimited Operations Management 8
Issues

With the prior results, it can be deduced that companies highly benefit from Just-
in-Time inventory systems as they improve the overall quality of the firm, minimize
operating costs, as well as assists the company in keeping inventory consistent with
consumer needs, which is crucial when considering the different types of seasonal
demands many retail manufacturers must be tentative to. As a result, Ecko Unltd. is able
to reduce its in-plant inventory by implementing Just-in-Time inventory systems as they
assist in getting products out to the consumers when demanded while reducing costs.

Research Article #3

Another aspect of operations management Ecko Unltd. struggles with is inventory

management. The research paper entitled, “Inventory Management and Its Effects on
Customer Satisfaction”, author Scott Grant Ekert effectively presents how the presence
of inventory management affects consumer satisfaction. Ekert’s research focused on food
retailers and distributors and how inventory management affects their operations. Ekert
has suggested as inventory management becomes more and more improved, the closer a
company gets to producing the “perfect order”, which is every company’s main purpose.

As mentioned, the research conducted is used to test the hypothesis of if inventory

management affects customer satisfaction. Through research Ekert has found that modern
inventory management processes are able to optimize inventories by decreasing the
amount of inventory on hand (also known as waste), while also decreasing costs. One
way Ekert tested this was by studying the various firms’ performance with and without
the implementation of a six-month free inventory management system. Another way
Ekert came up with his results was through a qualitative customer survey, which asked
open-ended questions based on the consumer’s perception of quality based on the retailer
they shop at and their operations.

By using the prior research methods, Ekert found that with improved inventory
management, improved customer service was also present. With the distributors, it was
deduced that they were able to effectively predict demand of their consumers and also
able to stock the required amount of goods for the appropriate demand. It was found that
during the six-months the distributors had with the improved inventory system, inventory
storage was significantly reduced. It gave the distributors knowledge of what items to
order and when to order it. For retailers, Ekert found that when using an inventory
management system, they were able to easily identify products that are in high demand,
inventory going out of stock, and items that are not in demand, which can be helpful in
ensuring they do not have stock wasting away in their overall inventory.

As Ecko Unltd. is a retail company, they can significantly benefit from the
implementation of inventory management systems. As overabundance of inventory is an
ongoing issue, an inventory management system will be able to accurately determine the
demand of the season, which will allow Ecko Unltd. to carry only inventory that is
needed without incurring costs, and delivering maximum quality and satisfaction.
Ecko Unlimited Operations Management 9
Issues

Recommendation

(All calculations and recommendations are based on the six months of sales, store opened
six months ago)

One way we plan on minimizing inventory and control issues within Ecko Unltd.
is through using exponential smoothing. With this alternative, we plan on using
information gathered from the population demand of Ecko’s material during the year, and
the number of months that we feel it is ideal to forecast for. This evaluation of measuring
demand will be calculated using exponential smoothing formula Ft=Ft-1 + α (At-1 –Ft-1).
This formula will help us observe the quantity of material we will be able to sell as well
as set more accurate inventory orders. As accurate orders are an essential component in
managing our inventory, it will reduce the amount of lingering and unused inventory
within the store. For the alpha factor, we have decided to use an alpha of 0.5. Since the
Niagara-on-the-Lake division has opened rather recently, we are not able to effectively
interpret the seasonal trends of the company. As Ecko Unltd. continues its operations and
gathers more data, we recommend the operations team to take into consideration the
seasonal demands and apply it to forecasting with trend analysis in order to make
accurate forecasts. This will assist Ecko Unltd. to meet demands and increase sales.

We have calculated forecast for the month of April’s demand to amount to

727.775 units. We recommend the manager to order accordingly to this forecast.
However, the only flaw in this recommendation is that we cannot calculate the seasonal
indices and forecasts based on the lack of historical data since the division has only been
open for six months. As mentioned, the manager should forecast the demand including
trends when the data becomes available by next year. When trend is considered, it will
allow the company to place more accurate orders and have a consistent inventory while
minimizing carrying and ordering costs (See Appendix 2).

The goal of Ecko Unltd. should be to minimize inventory costs, since this
function of the organization is the weakest. Due to the inability of the company to order
inventory to fulfill the demand of customer, it is leading to significant setup (ordering)
costs and holding (carrying) cost. Thus, Ecko Unltd. must find an optimal order size to
minimize total costs. To determine the optimal order quantity we will be applying the
EOQ model. An advantage of this model is it is robust. This means the equation will give
us satisfactory answers even with variations in our parameters. After we have determined
the optimal quantity, we will determine the expected number of orders and expected time
between orders. This will help Ecko Unltd. solve its current issue of ordering constantly
due to error in forecasting demand. As the EOQ model helps us identify how much to
order, we still need to determine when to order and to complete this task we will be using
Ecko Unlimited Operations Management 10
Issues

the reorder point formula (ROP=d*L). To use this formula, we need to pinpoint the daily
demands per day, the lead-time (in days) for a new order, and the safety stock necessary.

For our recommendation for the pilferage issue, we will provide qualitative
evidence rather than quantitative. As of now, we recommend that the company hire
careful employees. This will prevent internal and external theft. To keep track of
incoming shipment, the firm should invest in RFID systems and Universal Product Code.
To have effective control on goods leaving the retail outlet the company should have
magnetic strips or bar code or RFID tags on the merchandise, and direct observation.
Ecko Unltd. should have an employee standing at the exits and in high-theft areas of the
store to observe customers. If this alternative seems like it will make the customers
uncomfortable we recommend installing video surveillance camera.

From our reports received from the manager, the total store sales in the first six
months of operations were approximately $150,000. We need to consider that these first
six months were in slow months of business (due to an outlet being more busy in summer
months, and the store was not widely known yet). We will still assume that if they made
approximately $150,000 in the first six months, it will double to $300,000 in annual
revenue. With that being said, the average price per unit is approximately $30 ($150,000
in annual sales and 4,990 units sold-from reports from manager).

With total annual demand being $300,000 in dollars and median price per unit
being $30, we calculated that the annual demand on units on average is 10,000 units.

Using averages from the textbook examples and brief assumptions from the
manager, the average set up costs and holding costs per unit are $10 and $5 respectively.
Therefore, we calculated the economic order quantity at 200 units (See Appendix 1).

To find the amount of orders per year, we divided the total demand in units by the
EOQ to get an optimal amount of orders of 50 orders per year (See Appendix 1).

The average daily demand is 10,000 total annual units/364 days (closed only on
Christmas)=27.47 units. We then found out the lead-time from the manager as 2 weeks
(14 days). With both these calculations, we multiplied 27.47*14 to find the re-order point
of 384.62. Therefore, the manager should re-order when the store has a quantity of
384.62 units.

Since the manager needs to make an order 50 times a year it would be adequate to
implement a JIT system because the 14 day lead time is a concern especially when there
is a high demand for the company’s product. Implementing a JIT system will help reduce
the holding costs of inventory. Also it will reduce in-plant inventory by delivery in small
lots directly to the outlet when they need them. Another reason we are recommending JIT
is to removal of in-transit inventory because our suppliers are located at Montreal making
it difficult for the company to receive the shipments when it is needed. If Ecko can
Ecko Unlimited Operations Management 11
Issues

somehow convince the suppliers to move nearby and provide frequent small shipments it
can significantly decrease inventory and help bring in inventory when needed.

Conclusion

Since this location has just been recently opened, there is no historical data or
benchmarks to apply to our recommendations. Some may argue that we can use historical
data from other locations, but we concluded that those numbers would not be as accurate
due to the fact this location is in an outlet and it is the only outlet Ecko Unltd. store in
Canada. Analyzing sales reports over the six months of operations, we have noticed a
strong correlation in sales and weekends, and sales and nice weather days. Therefore, to
conclude our argument about our numbers being very difficult to find and use historical
data from previous locations, they are contingent based on the trends (weekends and
weather) that boost the stores revenues drastically.

All of our quantitative analyses were completed with the best efforts with the
numbers we had access to. Our most appropriate estimates based off our knowledge from
the organizational reports, the classroom lectures, and the textbook information.

Based on our report, we have concluded that the main operations management
issues that we can discuss are inventory management and internal control. We have
chosen to resolve these issues by calculating an economic order quantity, which
ultimately minimizes Ecko Unltd.’s ordering and carrying costs. With findings, we have
noticed that the store should implement a just-in-time inventory system mainly because
of the 14-day lead-time. In conclusion, we hope that this report will assist the
management at Ecko Unlimited fix their operations management issues.
Ecko Unlimited Operations Management 12
Issues

Appendix 1

EOQ Model:
2𝐷𝑆
𝑄∗ = √
𝐻
Annual demand for Ecko Unltd. (D)= 10,000 units
Setup/ordering costs (S)= $10
Holding Costs (H)= $5
364 working days

2(10,000)(10)
𝑄∗ = √ = 200 units
5

𝐷 10,000
N= = = 50 orders per year
𝑄 200

# 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 364

𝑇= = = 7.28 days
𝑁 50

Ecko Unltd. Must order inventory every 7.28 days.

Appendix 2

Forecasting using Exponential Smoothing:

𝐹𝑡 = 𝐹𝑡−1 + 𝛼(𝐴𝑡−1 − 𝐹𝑡−1 )

Using monthly forecasting, Ft-1 is equal to the annual demand (10,000 units) divided by
12 months, which gives a monthly demand of 833.33 units. Actual demand is found by
dividing $18,666.67 by the average unit price of $30 per unit. This gives Ecko Unltd. an
actual demand of approximately 622.22 units.

𝐹𝑡 = 833.33 + 0.5(622.22 − 833.33) = 727.775 units

Ecko Unlimited Operations Management 13
Issues

References

History of Ecko Unltd.:

Marc Ecko Biography. (2016). Retrieved March 16, 2016, from http://www.notablebiographies.com/newsmakers2/2006-A-Ec/Ecko-
Marc.html
Ecko Unltd. seeks Chapter 11 bankruptcy protection, citing changing trends, recession effects | Fox News. (2014). Retrieved March
16, 2016, from http://www.foxnews.com/us/2014/04/03/ecko-unltd-seeks-chapter-11-bankruptcy-protection-citing-changing-
trends.html

Research Articles:
M. M. (2012, May 2). Impact of just-in-time (JIT) inventory system on efficiency, quality and flexibility among manufacturing sector,
small and medium enterprise (SMEs) in South Africa. Retrieved March 15, 2016, from
http://www.academicjournals.org/journal/AJBM/article-full-text-pdf/3876C3027189

Ekert, S. G. (2007, Summer). Inventory Management and Its Effects on the Customer. Retrieved March 15, 2016, from
http://www.scap.pk/article/Inventory Management and Its Effects on Customer Satisfaction.pdf

Armstrong, J. S. (1988, January 4). Research Needs in Forecasting. Retrieved March 15, 2016, from
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1078&context=marketing_papers

Textbook:
Heizer, J., & Render, B. (n.d.). Operations Management: Sustainability and Supply Chain Management. Pearson.