Group Assignment $1$: Outsourcing,

nearsourcing case study

For group assignment

description see Slide

number $14.$

Details of the case

$$ "Outsourcing, Near$-$Sourcing, and supply

chain flexibility in the apparel industry

$($A$)$Anton Ovchinnikov and Alexander Pyshkov

$$ UV$7694-$PDF$-$ENG from hbsp$.$harvard.edu

Introduction

$$ Veizenburg is a company that makes regular

and limited edition shirts.

$$ Each limited edition shirt collection has a code

referred to as LEC $($Limited edition collection$)$

in the case

$$ This case pertains only to the problem

involving LEC.

Problem

$$ The LEC business was having to do substantial

price markdowns to avoid unsold inventory.

$$ The problem was diagnosed as more to do

with excess procurement instead of pricing.

$$ Procurement practices resulting in overordering were the root cause.

$$ Over$-$ordering was done to avoid stock$-$outs

due to lack of opportunity to reorder during

the specific LEC period.

Procurement

$$ Veizenburg $($USA$)$ sources fabrics and

accessories from Italy and England

$$ The fabrics and accessories are transported to

Ukraine for sewing and packed shirts are

shipped back to USA

$$ The producer has a capacity of $3000$ shirts in a

three week period

$$ The total cost of one shirt including all costs is

$$65$

Procurement

$$ The LECs are available for a short period of time

$($two to four weeks$)$

$$ Due to the long lead time of three weeks there is

no opportunity to reorder $$ Therefore, shirts are overordered to prevent stockouts

$$ The means to avoid ordering two options are

being considered $$ Ordering from local at a rate of $$95$

$$ Production rate is limited to $12$ a day $$ A proposal from Ukraine to deliver in a week

Problem Description

$$ Problem: Price markdowns due to unsold inventory

$$ Veizenburg was convinced that the price markdowns

were because of poor procurement decisions

$$ Longer lead time was resulting in overordering

$$ Two suggestions for reducing lead time to one week

$$ Suggestion $1$: Local sourcing $$ Ukraine sourcing $65$$ $$ Local sourcing $95$$ $($Capacity limited to $12$ per day$)$

$$ Suggestion $2$:Lead time reduction to $1$ month to enable

reordering

Independent variables

$$ Demand forecasting for percentage shirts in

each is done using historical size profiles.

$$ The sale of an LEC are based on the number of

days it is made available, namely duration.

$$ The data for duration and sales calculated

from the data provided with the case is shown

on the next slide $($Data are posted on the

google classroom along with these slides$)$

Duration and sales

Duration

in days

Sales in

LEC units

$117321$

$219620$

$319513$

$421015$

$529113$

$617014$

$725215$

$852021$

$916414$

$1013514$

$1115314$

$1232216$

$1329826$

$1413316$

$1519218$

$1619814$

$1799136$

$18124435$

$1985528$

$2029117$

$2114311$

$2225314$

$2338513$

Source: Based

on the data

provided in the

excel sheet

accompanying

the case

Intercept $-337\mathrm{.}121$

X Variable $137\mathrm{.}12387$

Regression equation

Sales $=-337\mathrm{.}121+37\mathrm{.}124*($Duration$)$

Plot of Sales~Duration

$0$

$200$

$400$

$600$

$800$

$1000$

$1200$

$1400$

$0510152025303540$

Y

X Variable $1$

X Variable $1$ Line Fit Plot

Y

Predicted Y

Calculations

$$ The following two slides show the profit

calculations using data provided with the case.

The data sheet is posted along with this

presentation on the google classroom.

How much to order: Outsourcing case

$$ Once we know the demand using the regression function

$$ Sales $=-337\mathrm{.}121+37\mathrm{.}124*($Duration$)$

$$ The ordering quantity can be determined. See the calculations below

$$ For the upcoming LEC with duration of $21$ days calculations are as below

Duration $212121212121212121$

Price $135135135135135135135135135$

$656565656565656565$

Outsourcing

cost

Salvage $000000000$

Demand $443443443443443443443443443$

Order qty $100200300400420440460480500$

Revenue $135002700040500540005670059400598055980559805$

Salvage $000000000$

Cost $65001300019500260002730028600299003120032500$

Profit $70001400021000280002940030800299052860527305$

Profit $=$ Revenue$-$Cost

$=($Min$($Demand$,$Outsourced production$)*135)-($Outsourced production$*65)$

For the first column: $=$Min$(443,100)*135-(100*65)=100*135-(100*65)=7000$

Near sourcing case

$$ If ordered locally the overall cost per shirt is $$95$

Price $135135135135135135135135135$

$656565656565656565$

Outsourcing

cost

Nearsourcing $959595959595959595$

Salvage $000000000$

Demand $443443443443443443443443443$

Outsourced $100200300400420440460480500$

$168168168168168168168168168$

Max

nearsourced

$16816814343233000$

actual

nearsourced

Revenue $361804968059805598055980559805598055980559805$

Salvage $000000000$

Cost $224602896033085300852948528885299003120032500$

Profit $137202072026720297203032030920299052860527305$

For the first column, the demand of $443$ units is