MusicToday, LLC:Implementing a Periodic Review Inventory SystemCASE ANALYSIS PRESENTED BY:Abhishek Puri (400907001), Amulya Kalia (400907002), Chetan Mathur (400907005), Karanveer Singh (400907012)Ratandeep Singh (400907037)*

Case Review*

About MusicTodayprovider of e-commerce, ticketing, and merchandising services to the music industry

Sold tickets to live events, built custom Internet stores for musicians

Fulfilled orders for merchandise that included CDs, T-shirts, hats, posters, and stickers

Maintained a warehouse at Charlottesville, Virginia*

MusicTodays HistoryStarted with the early days of Dave Mathews Band, Manager sold band T-shirts and other merchandize in and around small venues in Charlottesville

As the band grew into a successful national act, the merchandizing company as become a multimillion dollar operation.

MusicToday was formed in 1998 with the merger of:

Red Light Communications, Web Services companyMMF, Merchandize fulfillment operationBoth of these firmed owned by the manager of Dave Mathews Band*

MusicTodays GrowthServices offered as the company grew:

Comprehensive Merchandizing solution (stocking, handling and managing inventory)Built custom commerce-enabled internet sites for the artistsManaging point-of-sale to pick-pack-ship operation

Some of the prominent clients:Rolling StonesEminemMetallicaThe Grateful DeadJason Mraz*

Order Fulfillment ProcessMerchandize stocked at 50,000 feet warehouse in Charlottesville, VirginiaArtists maintained ownership of the merchandise until it reached the consumer*

Expanding OperationsProcessed approximately 1500 orders daily by 2003System was strainedTwo major sales cycles identifiedHoliday SeasonSummer Vacation Period*

AreaGrowth (1998-2003)Client66%Merchandizing Operation revenue52%Merchandize Orders Handled43% (2001-03)

Night Train (The problem of Stock out)Stock out during the peak of the holiday seasonLoss of salesClient disappointment

Variable Replenishment-order quantities

Often small expedited receipts, cost a premium to processProblem because MusicToday received fixed percentage of merchandize sales revenue as fee

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Getting back on TrackFirst goal - to determine a reorder point for every Night Train SKU stockedDecided that service level shouldnt be same for all product categoriesPast 52 weeks sales data was collected and studied, same pattern was expected in the coming yearNo formal order-cycle process, orders placed by employees reactivelyOrders given in multiples of boxes so as to not incur broken case charges*

Order-cycle Process for Night Train MerchandizeAll other Night Train merchandize came from a promotional products company Lead time 4 weeks from issuing of order*

Formulation of New SystemDecided to put each client on a Periodic Review System

This way inventory levels will be periodically reviewed

Safety stocks to cover the review period and the replenishment lead time

Decided to use 4 week review period so that additional manpower wont be required

Standoff between shorter and longer review cycleShorter review cycle less inventory, higher ordering costsLonger review cycle more inventory, higher holding costs*

Theory Review*

Continuous Review System Selecting the reorder point with variable demand and constant lead time*

Reorder Point Calculation*

Demand During Lead TimeSpecify mean and standard deviationStandard deviation of demand during lead timeSafety stock and reorder pointSafety stock = zdLTwherez =number of standard deviations needed to achieve the cycle-service leveldLT =stand deviation of demand during lead time*

General Cost EquationCalculating total systems costsTotal cost =Annual cycle inventory holding cost + Annual ordering cost + Annual safety stock holding cost*

Periodic Review SystemFixed interval reorder system or periodic reorder system*

Periodic Review SystemSelecting the period of time between reviews (P)The order-up-to level (T) when demand is variable and lead time is constant will be equal to the average demand during the protection period (P+L) + Safety Stock*

Case Analysis*

Demand Variation (Weekly)*

Percentage Demand (Quarter)*

Product Demand Variation*

Lead Time*

Product NameLead Time (WeeksNT Yankee Hotel Foxtrot CD1.5NT Black Toboggan Hat4NT Moon Buggy T-shirt SS White4NT Farm Wheel Ringer T-shirt SS White4NT Farm Wheel Rolls CD1.5NT Old School Logo T-shirt SS Granite4

Calculation: Inventory Carrying CostInventory carrying cost = 15 % * Cost of Product /unit/year*

Product NameProduct Cost )$)Carrying Cost (per unit/week) ($)NT Yankee Hotel Foxtrot CD9.180.026NT Black Toboggan Hat12.230.035NT Moon Buggy T-shirt SS White8.750.025NT Farm Wheel Ringer T-shirt SS White8.750.025NT Farm Wheel Rolls CD9.180.026NT Old School Logo T-shirt SS Granite8.750.025

Calculation: Demand During Review Period & Lead TimeDemand During Lead Time = (Average Weekly Demand + Review Period) * Lead Time Following table shows data for week review period*

Product NameQ1Q2Q3Q4NT Yankee Hotel Foxtrot CD2597402956406705NT Black Toboggan Hat50181711431318NT Moon Buggy T-shirt SS White1021168123642895NT Farm Wheel Ringer T-shirt SS White49285210971262NT Farm Wheel Rolls CD1346233830673587NT Old School Logo T-shirt SS Granite857148221962481

Calculation: Safety StockSafety Stock = z * Std. Dev. * Sqrt(Review Period + Lead Time )

Here z = 1.29 for 90% service levelFollowing table shows data for week review period*

Product NameQ1Q2Q3Q4NT Yankee Hotel Foxtrot CD426148014112502NT Black Toboggan Hat58223287425NT Moon Buggy T-shirt SS White148505423849NT Farm Wheel Ringer T-shirt SS White65210206421NT Farm Wheel Rolls CD2286546811551NT Old School Logo T-shirt SS Granite108448415759

Calculation: Base Stock LevelBase Stock Level = Demand during review period and lead time + Safety StockFollowing table shows data for week review period*

Product NameQ1Q2Q3Q4NT Yankee Hotel Foxtrot CD3023550970529207NT Black Toboggan Hat559104014301742NT Moon Buggy T-shirt SS White1169218627883744NT Farm Wheel Ringer T-shirt SS White558106213031683NT Farm Wheel Rolls CD1574299137485138NT Old School Logo T-shirt SS Granite966193026103240

Case QuantityProducts are to be ordered in the multiples of case quantity only.

Following table shows the case quantity of various products*

Product NameLead Time (WeeksNT Yankee Hotel Foxtrot CD100NT Black Toboggan Hat25NT Moon Buggy T-shirt SS White50NT Farm Wheel Ringer T-shirt SS White50NT Farm Wheel Rolls CD100NT Old School Logo T-shirt SS Granite50

Allocating orders : Sample SheetBased on the closing inventory and the base stock level, a quantity in multiples of case quantity is orderedFollowing table the allocation of order receipts for Q1 of various products in different weeks for the periodic order with 4 week review period*

Questions*

Q1: Should Music today consider a continuous review/ reorder point system? Yes, It should. Music Today deals with some merchandise goods such as CDs, T-Shirts, hats, and stickers and also sells some tickets to live events, built custom Internet stores.

Due to the demand fluctuation Music today faced problems like frequent stock outs during critical periods, varying replenishment quantities and varying demand.

To improve this continuous review point system is a good option. But this can be implemented only when inventory can be continuously reviewed like for example when computerized inventory systems are used.

If inventory is not continuously monitored , then periodic review system is best option in which inventory is reviewed at regular intervals and appropriate quantity is ordered after each review*

Q1: Should Music today consider a continuous review/ reorder point system? Periodic Inventory ReviewPeriodic inventory review reduces the time a business owner or manager spends analyzing inventoryThe owner or manager must make assumptions between inventory review periods regarding inventory counts. It also can make accounting less accurate.Perpetual Inventory ReviewPerpetual inventory review permits real-time updates of inventory countsFacilitates accurate accounting High cost of implementation -- bar code scanners, inventory software and computer systems are all necessary to maintain perpetual inventory review.

The Company should adopt a Reorder Point System*

Q2: Is a four-week cycle an appropriate review period? What would happen if the review period were shortened to two weeks? Should all items have the same review period? Why or Why not? *

Yes , 4 week review period is appropriate period for inventory review period because total cycle cost is least for review period of 4 as compared to 2 week review period*

Present System4 week periodic Review2 week Periodic ReviewNumber of Orders8066108Average Inventory / Year363334224939002Ordering Cost / Year ($)8000660010800Carrying Cost / Year ($)96811211036Total Cycle Cost / Year ($)8968772111836

When the review period is reduced to two weeks then numbers od orders have increased to 108 from 66 and total cycle cost has also increased. Also 2 week review period requires more administrative cost*

Present System4 week periodic Review2 week Periodic ReviewNumber of Orders8066108Average Inventory / Year363334224939002Ordering Cost / Year ($)8000660010800Carrying Cost / Year ($)96811211036Total Cycle Cost / Year ($)8968772111836

No all items should not have same review period. The optimal review period of each product is given by formula:

Review Period (weeks) = EOQ/Average weekly demand*

Product NameAverage weekly demand (over the year)EOQReview Period (in weeks)NT Yankee Hotel Foxtrot CD86225143NT Black Toboggan Hat1188057NT Moon Buggy T-shirt SS White24913805.5NT Farm Wheel Ringer T-shirt SS White1169448NT Farm Wheel Rolls CD47018564NT Old School Logo T-shirt SS Granite21912946

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