Inventory management

Efficient production planning aims to high inventory turnover, also called stock turn, which indicates how many times inventory is sold or used in a certain period of time. It measures an average time for company to sell and replace its inventory. The faster the inventory turns, the more efficiently the company is able to manage its assets.

(Mattila et al. 2008) Inventory turnover can be calculated as following:

Inventory turnover depends on the industry, so the key figure should be compared to the values of companies in the same industry. Also logistical solutions affect this key figure. NOMO Jeans’ concept and operations differs a lot from the other companies in the industry, as the company has only material inventory for made-to-order jeans, and ready products are sent to customers straight after production. However, it is important that the company sets goals for key performance indicators in economic planning, so that the liquidity can be controlled and managed. (Neilimo & Uusi-Rauva 2005)

Inventory turnover is monitored by bookkeeping. When producing made-to-order products, the required storage of needed materials have to be kept according to estimated demand. The consumption should be followed weekly according to sales, and compared to the stock inventory to avoid interruptions in manufacturing caused by material shortage. Delivery time for the materials supply need to be taken into considerations, so that materials are ordered and purchased in advance, and will arrive on time. If the supplier does not have the required fabric in the storage, NOMO Jeans have to prepare for a longer delivery time. The minimum purchase amounts for fabrics are much higher in China than in Europe. This affects negatively to the inventory turnover, since the volumes have been relatively low per certain denim fabric at the beginning, but a minimum of 1000-3000 meters of fabric have to be purchased at once.

At the moment, NOMO Jeans has only two stores, both of which have been opened about six months ago. New stores will be opened during this year. This means that volumes are still relatively low and will increase in the future. There is limited amount of data available to create long-term consumption estimations. Another challenge is NOMO Jeans’ purchase strategy. NOMO Jeans sources and purchases required materials, which are delivered straight to the factories, where the materials are then

Inventory turnover time (days) = 360 x current assets

Turnover - Gross margin (12 months)

Inventory turnover = Costs of goods sold Average inventory

stored. Inventory management is challenging, since it is difficult to get accurate inventory information on time. Tools for consumption monitoring need to be developed.

The average consumption of each fabric as well as exact consumption of accessories, such as zippers, buttons, labels and studs, can be calculated from the weekly production batches. Then the consumption can be reduced from the existing storage. The sales of the different styles and colors depend on the time of the year, and can vary weekly. In addition, NOMO Jeans has a high growth target and plans to open several new stores, so it is the most reasonable to plan short-term estimations for inventory, and take the volume growth into account when new stores are opened to avoid shortages.

The required time to keep inventory and space to storage for many batches in advance should be compared to ordering accessories according to batches if the delivery is fast and suppliers can keep storage for weekly ordered materials. When the supplier keeps storage, there is no need to buy large amounts beforehand, and accessories can be ordered and purchased according to consumption. For example, yarn and zipper suppliers keep storage in Estonia, and required amount are delivered to the factory according to weekly orders. However, in production of made-to-order products this increases the set-up time, since materials are ordered after the customer has already purchased the product.

Table 4 (next page) shows an example of NOMO Jeans’ denim fabric inventory. There are five different fabrics (SH674-23, VO44, 53210A, 638-2 and Bond-069), which can be washed altogether to 12 different colors. There are also new summer fabrics that are recently added to selection, and these are not listed in this example. The monthly orders are estimations, and an average denim fabric consumption is 1,5 meters per a pair of jeans. A minimum amount of fabric supply varies depending the country, as well as how much supplier has in the storage, or is the fabric produced according to order. If the demand would stay constant, consumption and number of restocks per year for each fabric could be calculated as in the table. This would mean that for example fabric SH674-23 would last over 3 months when the minimum supply of 2000 meters of the fabric would be purchased at once. However, restocking has to be organized so that the new supply is purchased in advance before the previous rolls are finished to avoid shortage. For example, if the delivery time is one month, the purchase of new fabric supply has to be scheduled so that there is enough storage to cover the delivery time.

Table 4. Denim fabric consumption and stock turn estimations.

According to the order history, it is possible to see which are the most sold materials, and the storage can be adjusted according to this information. The expenses of stocking fabric rolls are much smaller than stocking of produced and delivered garments, which are not sold, or are sold with discount in the traditional apparel retailing. Even though fast inventory is a goal for efficient production planning, too fast inventory turns might have disadvantages. For example, the probability of stocking out can rise, if the supplier cannot deliver a restock as estimated or quality problem is discovered from received materials. Purchasing of frequent small quantities can be more expensive than purchasing of large quantities at time with a discount. Frequent purchases can also increase transportation costs. (Gourdin 2001)

All of these factors have to be taken into considerations in the inventory management and purchase planning in order to find the best solution for the company. With made-to-order products, inventory turnover times fluctuate depending on demand. As the volumes grow, adequate inventory is needed to answer the peaks in demand. There is always a possibility to not restock certain material, and to replace it with a new one. In this case, this option has to be taken out of the selection at the stores on time, so that there is enough material to produce all that are sold.

4.4 Costs and profits in mass customization compared to