North West Company

Executive Summary

North West Company is facing a unique situation where inventory turnover is way below the industry average, and there are gaps between actual customer demand and procurement process. The result is aging inventory and stock outs during peak season. Heavy discounts of up to 75% are provided to push the products to the customers. This contributes to revenue loss and decline in profits. Long lead times from 3 to 6 months also contribute to low inventory turnover as replenishment orders cannot be fulfilled during peak season. The localization strategy is helpful as it address issues of actual demand by the store managers, but there would still be a gap between actual customers and company and threats arriving from bullwhip effect. Also, long lead times would still exist after implementation of localization strategy. This issue would need to be addressed as well as fulfillment of orders during season needs to be done in case of stock outs. Accurate forecast development with collaborative efforts with customers would help reduce some dead stock and help in planning future stock products.

Issue Identification
Consistent low inventory turnover at North West Company is the primary issue which is way below the industry average that concerns the company decision makers to work on localization strategy or some other way which might help the company to reach target company turnover of 3.0 to 3.5. Currently the strategic focus is on push side, where the category managers are responsible for procurement. There is a high cost of holding inventory (1.83% per month) and aging inventory is increasing. Long lead times are another major issue, where orders need to be placed at least 4 months in advance. For general merchandise, being sourced from China had a lead time of 3 to 6 months. The products would arrive 2 months prior to the selling season, which is too early for products to arrive, provided that products took anywhere between few days to four weeks to deliver to individual stores.
Environmental and Root Cause Analysis
The main cause of the low inventory turnover is disconnecting of actual customer demand from the category managers. There is no mechanism where customers or store managers provide feedback on a new product line which would help in making better decision on what to stock. Store level demand needs to be accounted too, for example, customers in urban locations such as Edmonton and Calgary would have different preferences as compared to customers at St. John’s. Longer lead times means ordering large quantities before the season starts, and very little or no chance of placing replenishment orders because the season would end by the time of receipt of goods. For example, if during back to school season peak august month, we have a stock out of pencils, replenishment order would not arrive until November, which would not make sense as it would be Christmas season.
Options
As per the situation, there could be two possible options. Firstly, a fully fledged implementation of localization strategy, which would give store managers more control on what they would like to have as stock at store level. This would control some of the dead stock that are in stores and since we would know what would sell, it would cut the mark downs as well. However, this implementation would require about 10 million dollar worth of capital investment and specialized training would need to be provided to store managers to exercise day to day ordering process. Changes in the pay structure of store managers may also need to be communicated and accounted for, as this will be a variable component in costs.
Finally, actual customer demand information could be sorted by the category managers. During the trade shows of US and China, product information could be exposed to large volume customers, which then can provide valuable feedback on sales forecasts and some in cases may provide purchase orders for the upcoming season. Further, the lead times of products needs to be cut down so that products could be replenished well within the season for a better inventory turnover. Local suppliers with a very short lead time could be an option but would raise product costs. Local distributors of products could provide quick large volume fulfillment and economies of scale; however, costs would be more than the manufacturer. This would enable replenishment orders to be fulfilled quickly and improve inventory turns.
Recommendation
As any software implementation requires at least 2 years of development and testing before its roll out, there might a hybrid approach until the localization strategy could be implemented. Collaboration with customers after US and China trade shows where product samples can be shown to customers for better demand forecasts by category managers. Alternative local suppliers can be sought for products for categories where there are stock outs, so that there can be rapid fulfillment of products during the season. In the third year, a fully fledged rollout of the localization strategy could be firm, where training could be provided to store managers. The advantage of this approach could be that a database of suppliers could be built where it can be used when there are stock outs in the season. Collaboration with customer could be beneficial as there could be strategic relationship with sharing forecasts.
Implementation
There may be a few phases in the implementation of the localization strategy. * Phase I – The procurement of the localization software is initiated. Better collaboration with customers need to be exercised where customer feedback needs to be included after US and China trade shows. This process might improve forecasts and know of what products would sell. * Phase II – Local suppliers for products need to be sought where primary focus could be on products need to be on products with regular stock outs. A database of suppliers can be created, and looked at in case of stock outs in season, where the products can be acquired at a higher costs, but with a shorter lead time. * Phase III – When the localization software is ready for implementation is ready for roll out, training and payroll changes can be implemented.
Monitor and Control

Once final forecasts are in place, they can be monitored by forecast accuracy KPI, which would provide adherence to projections and tackle problems in extreme cases such as stock outs. Local suppliers could be contacted in case of stock outs and fulfill demands of customers in season. After the roll out the localization software, acquisition by store managers need to monitored closely. Sales and Purchase figures need to be analyzed regularly to see if there is any bullwhip effect or high variance in demands.