Introduction: Retailers know that
wholesale cost is a primary factor when you order merchandise - in fact it usually determines the choice of supplier. However, low wholesale costs do not necessarily mean improved profits, particularly when the
supplier, such as one from overseas, delivers on fixed schedules and amounts based on preseasonal forecasts by a buyer.Forecasting errors can lead to either oversupply of an item, requiring markdowns at the end of
the season, or an under supply of popular items, resulting in lost sales and dissatisfied customers. To solve this problem, researchers at North Carolina State University, working with
Textile/Clothing Technology Corp. ([TC]2) and the DAMA Project
have developed a tool called the Sourcing Simulator that can help a retail buyer quickly and easily analyze sourcing decisions.
Benefits:
- Analyzes various "what if" sourcing scenarios on methods of supply [quick response (QR) vs. vendor-managed inventory (VMI) vs. fixed delivery times] and amounts of merchandise
- Provides performance measures for comparison
- Stand-alone Windows-based PC tool
Capabilities:
By using the Sourcing Simulator, a retailer can
compare the overall financial results of sourcing apparel made in the United States under a quick response or vendor-managed inventory program with the costs of traditional sources. The model first takes information
about:
- the line of apparel [number of stock keeping units (SKUs), wholesale costs, other procurement costs, inventory carrying costs, etc.],
- the buyer's preseason forecast of demand (total volume, SKU mix, and seasonality pattern),
- means of merchandising (retail price, markdown schedule, etc.),
- sourcing means (type of vendor, initial delivery quantity, number of in-season replenishment orders, lead time until receipt, vendor reliability, etc.).
Example of a Sourcing Simulator screen describing the buyer's plan. The model then simulates the arrival of customers to a retail store over a given season and their selection of
garments, recording sales or, if stock is out, an alternative choice based on a model of consumer behavior. The buyer using this model can do multiple side-by-side runs to see the effect of scenario changes, such as
different vendors, replenishment strategies, or markdown schedules. The model provides performance measures that are difficult if not impossible to obtain in any other way,
e.g., percent of lost sales due to depleted stock, customer service level, percentage of goods sold at first price, percent of items marked down, and the percent of items remaining after markdown and sold to
jobbers. It uses tabular and graphic displays to show a buyer how a given level of forecast error will affect
financial performance, inventory (turnovers, in-stock level), and customer service (lost sales, service level). It provides gross margin return on investment (GMROI), a prime indicator of buyer performance.
A simple scenario can show that choosing the least expensive supplier may not produce the best results, in terms of either profits or customer service. Retailers can reduce sales lost through inadequate inventory by
both estimating demand again as a season progresses and using quick-response suppliers (even at 50% higher wholesale costs). The gross margin is still good, customer demand is satisfied, and fewer garments
have to be liquidated.
Applications:
- The Sourcing Simulator has been applied to multiple retail-apparel scenarios within the DAMA team members.
- The Sourcing Simulator has been presented at multiple conferences, such as Bobbin '97 and '98, and at Quick Response '98.
- The Sourcing Simulator Version 2 is available from
[TC]
2 and classes are available.
References:
See the following Web sites:
AMTEX: Link is: http://amtex.sandia.gov DAMA: Link is:
http://www.dama.tc2.com Sourcing Simulator: Link is http://tc2.sandia.gov/sosim2.html |
