Question

8.9End-of-chapter Case: On the Hot Seat: Justifying Inventory Decisions

Nelson Rossman, CookiePalooza's team lead for the GourmetShoppe account, sat at his table, shaking his head. He wasn't sure what had just happened. The morning meeting had been going so well. Lisa Fastturn, the VP of Sales for CookiePalooza, had held Nelson and his team up as real go-getters for their outstanding delivery performance of CookiePalooza's top-selling cookie—Chocolate Marvel—to the firm's second largest customer: GourmetShoppe. All of the key metrics—on-time delivery, complete orders shipped, and fill rates—had been top notch. Lisa had, however, placed extra weight on the team's inventory-to-sales ratio of .08. Getting lean was a top strategic priority. And nobody had a better inventory-to-sales ratio.

Then, just before breaking for lunch, Lisa threw down the gauntlet. Out of nowhere Lisa said, "When we come back from lunch, Nelson will explain why the inventory-to-sales ratio for Caramel Cruize cookies is so high. I'm still struggling to understand how the GourmetShoppe team could manage inventory so well with one cookie and so poorly with another. The inventory-to-sales ratio for Caramel Cruize is 62% higher."

To make matters worse, Vincent Weck, the team lead for the FarrsBetterDeserts account, chimed in with another one of his one-upmanship maneuvers, saying, "Nelson, good job this morning. Not everyone can be the best and worst at the same time. Our team always cleans your clock on inventory-to-sales ratios. You're just a one-shot wonder."

Not wanting to lose control, Lisa spoke up, saying "OK guys, let's break for lunch. There will be plenty of time after lunch to dig into the details. We really do want to learn how to do this right. That's the only way we will win as a company!" Nelson was pleased to be off the hot seat, but he knew Lisa enjoyed a little taunting. She fomented a little smack among her sales teams and seemed to think competition among the planning teams would help cut inventories.

Suddenly, Nelson was ticked and bummed at the same time. He had come into the semi-annual sales review pretty excited about his account team's performance. Now, he had less than an hour to figure out how to defend his team's performance. In the process, he'd love nothing more than to shut Vincent up. Nelson had been suspicious of Vincent's seemingly better performance for a while. He thought he knew what game Vincent was playing. But, how could he communicate that without coming off looking like the jerk he felt Vincent was. He opened his laptop and pulled up a spreadsheet with the inventory-to-sales ratios.

SKUs in the Gourmet Line	Total avg. inventory held by GourmetShoppe	Total annual sales to GourmetShoppe	Inventory-to-sales ratio
Caramel Cruize	$6,500	$50,000	0.13
Chocolate Marvel	$10,800	$140,000	0.08
Butter Best Brickle	$8,100	$80,000	0.10
Chunky Nut Champion	$7,000	$60,000	0.12

Quickly, Nelson wrote down some notes:

CookiePalooza sold its cookies through high-end, upscale grocery stores on a VMR (vendor managed inventory) consignment basis. In other words, CookiePalooza owned the inventory until it was sold (i.e., in its retailers warehouses and stores).

As a VMR operation, each planning team made the decisions on how many and when to ship cookies to key accounts. This autonomy was the source of competition and friction between Nelson and Vincent.

Thankfully, sales are very stable throughout the year and predictable to within less than 1% of actual demand.

Lead times are consistently two days from CookiePalooza's bakery to any of GourmetShoppe's distribution centers.

For technical reasons, each SKU must be managed and shipped separately. Shipments from CookiePalooza to GourmetShoppe cost a fixed dollar amount, can be of any size, and can be initiated at any time.

All relevant costs (unit costs, shipping costs, etc.) are the same for all SKUs.

Nelson had to think fast and come up with some good, logical explanations before the sales summit resumed after lunch.

Questions

​1) Imagine Nelson called you after he jotted down his notes. He had emailed you the above storyline and asked for your advice. What do you tell him? How can he explain that his team is doing a great job across all products sold to GourmetShoppe? In other words, how can he demonstrate that his team's inventory-management performance has not been inconsistent?

​2) How has Vincent achieved better inventory-to-sales ratios? That is, what are the potential reasons for the observed differences in inventory-to-sales ratios? How can Nelson make these arguments without looking like a jerk?

3) How could the VP of Sales assess whether the reasons you offer actually do explain those differences?

Answer 1

1. In the given case, Lisa Fastturn, the VP of sales for CookiePalooza had seeked an explanation from Nelson Rossman about the difference in the inventory to sales ratio of caramel cruize and Choclate Marvel. Caramel cruise happened to be the SKU with lowest sales volume and Chocolate Marvel was the highest selling SKU.

The SKU’s were dispatched separately and the company owned the products lying in the inventories of its vendors. The cost of dispatch is same irrespective of the size and time of dispatch & hence in order to minimize the transportation costs, the inventory dispatch quantity should be as per predetermined quantity to avoid inflated freight costs.

Hence, in order to compare the inventory sales ratio, effective comparison is to compare it with next highest SKU i.e. Butter Best Brickle which has a ratio of 0.10. The low selling SKU’s Chunky Nut Champion and Caramel cruise have almost the same inventory-sales ratio of 0.12 and 0.13 respectively.