Case in Point: Managing Inventory to Maximize Profit

2017-10-03 09_46_52-SAGE Knowledge - SAGE Business CasesDo young professionals want robot vacuum cleaners more than they want waffle makers? Catering to young professionals who have little time to cook meals or clean their homes, The Young Professional Dream Company, Inc. sells an array of electronic appliances. As a start-up e-commerce company with a limited budget, it must be careful to stock the most in-demand products for their customers. But how do they determine the right products to order from their suppliers, and how much?

These questions are explored in the case study, The Young Professional Dream Company’s Stochastic Inventory Management Problem, by Wenbo Cai and Layek Abdel-Malek of the New Jersey Institute of Technology. Published in SAGE Business Cases, the case examines how the start-up manages its inventory by using data to forcast demand, identifying ordering policies, and evaluating how its contracts with suppliers will impact its profit.

 

Interested in learning more, we interviewed the authors for our Case In Point Series. Read the full interview below.

1. Your case is about a young company’s efforts to procure inventory while sticking to a limited budget. What are some common challenges that arise when start-upsembark on this kind of detailed operations management planning?

Usually start-up companies have known historical data regarding their suppliers’ performance, lead times, and quality. However, they do not know about the demands of their customers and their nature. The problem is then compounded by budget limitation and how to allocate it among the competing products. As a result, when a start-up company embarks on operations management planning, it usually faces many blind spots. Applying operations management techniques could be quite helpful to alleviate some of these challenges.

2. How difficult or risky is it to keep in mind a product’s demand uncertainty when evaluating suppliers and Order Quantity Commitments?

Unlike the common Economic Order Quantity models where the costs of the ordering policy are less sensitive to the order quantities, when the demand is uncertain, the amount ordered affects drastically the profitability of the company. The variance in the demand of a product will have a significant impact on the order quantity even in cases where the average is the same.

3. What are some strategies small start-ups (particularly those with limited money to invest) can apply when negotiating pricing with suppliers?

Start-up companies should negotiate as much flexibility as possible in their contracts which allow for updating their orders during the season, the return of left-overs, low extra charge for expedite deliveries, low minimum order quantities, and ability to pass over one or more of the products on the list.

4. You developed an exercise for this case in which readers are given a hypothetical budget to spend on stock, shipping costs, and more. What’s the benefit of providing decision-making exercises in case studies?

The case we developed goes beyond the single-period stochastic inventory model, which is  often used as a demonstrative strategy in operations management. However, this strategy may need to be modified when companies have a limited budget or other restrictions. We want to highlight some of these issues companies may face in this case study and provide an opportunity for students to discover the rich literature in operations management that discusses these issues in-depth. Moreover, the case study is intended for students to act as decision makers by weighing quantitatively the benefits and costs of flexible contract terms.

5. In your opinion, how does teaching with case studies expose students to the kind of operational dilemmas they might face in their careers?

We think case studies, in general, promote the development of analytical skills by asking students to act as decision makers. Unlike the traditional problems where the real-world challenges have been extracted and synthesized into useful information and the students only need to figure out what methodology to apply, there are no definitive answers of which methodology is the most suitable or guarantees the best performance in case studies. Students have to figure that out by exercising critical thinking, researching, and discussing with group members.

6. Can you share any tips for new instructors using this case in their course?

I believe that it is beneficial to analyze this case in the following steps.

  • Understand the risk of demand uncertainty without the consideration of contract terms. For example: the impact of unsold inventory on the retailer’s profit is relatively easy to compute, but how are companies, both brick-and-mortar retailers and e-commerce companies, handling unsold items in practice?
  • Explore the joint impact of the minimum ordering quantity and penalty. Though the minimum ordering quantity and penalty are given in the case, performing sensitivity analysis will give students insights on the joint impact of the two factors.
  • Investigate the benefit of the expedited-delivery option. In addition to question four in the case (What are the criteria under which you should exercise the expedited-delivery option?), the instructors may want to ask questions pertaining to the supplier’s side. For example: Why would a supplier want to offer flexible contract terms? How expensive is it to provide these options? Is there a win-win situation for both the supplier and the retailer in terms of their expected profitability? Please see the following paper for answers: Cai, W., Abdel-Malek, L., Hoseini, B., & Dehkordi, S. R. (2015). Impact of flexible contracts on the performance of both retailer and supplier.International Journal of Production Economics170, 429-444.

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2 thoughts on “Case in Point: Managing Inventory to Maximize Profit

  1. Pingback: Case in Point: Managing Inventory to Maximize Profit — Business and Management INK | Cochran Consulting

  2. Pingback: Case in point: A Company Goes Green to Become a Better Competitor | Business and Management INK

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