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Summary
Posh Purses (PP) is a small company that makes purses “for women with the taste of the 1% and the budget of the 99%.”Last year, PP landed a major deal with a national department store chain (NDSC) that brought PP’s products to more than 800 retail stores nationwide. With sales lagging behind expectations, PP needs to structure a new deal with NDSC for the upcoming fiscal year.Your task is to find a way to increase profit per linear foot of shelf space and/or increase shelf inventory turnoverin a way that makes economic sense for both NDSC and PP.
Learning Objectives
Upon completion of this case analysis, students will be in a position to
- articulate and addresssome of the challenges of doing business in a retail environment;
- develop numerical illustrations to support managerial decision-making;
- clearly and concisely communicate recommendations, both visually and in writing;
- critically evaluate retail customers’ performance metrics;
- demonstrate and explain the benefits of risk pooling in inventory management.
Disclaimer:This case is written solely for educational purposes. All names and numbers provided in this case are fictional. Statements made in this case study are not intended to represent appropriate or inappropriate behaviors and/or successful or unsuccessful managerial decision making. All statements and information provided in this case and any supplemental files are intended to stimulate discussion and serve as a basis for further analysis.
2010-2016: The birth, rise and decline of Posh Purses
Posh Purses was founded in 2010 by Penelope Clifford in Inglewood, California. Penelope had just been laid off from her job as a fashion scout for a local apparel label that faced severe difficulties due to the economic downturn. Almost broke herself, Penelope started her own business with the goal of making fashionable accessories (mostly purses) affordable to those with lots of style but no budget to match. Her designs were and still are “inspired by the likes of Chanel, Dior, and Prada” but have their own unique twist. Importantly, they are sold at about $120 a piece, whereas comparable brand-name products might retail upwards of $3,000!
Consumers responded favorably to PP’s offerings. Those who were tired of cheap knock-offs and ubiquitous mass market products, flocked to PP for stylish yet affordable handbags. The company quickly grew to an administrative staff of over 20 people (all production is outsourced to vendors in Vietnam), and opened several boutiques in the greater Los Angeles, CA area. By 2014, PP was highly profitable, and its future looked bright.
2015 marked a turning point for PP. Changing fashion trends and an ever-increasing influx of competing brands and stores in the already hotly contested Southern California market led to slowing sales growth and, ultimately, a reversal of PP’s fortunes. By the end of 2016, PP had closed all but one of its retail boutiques and let go more than half of its administrative staff. An attempt to boost online sales via PP’s own website also failed, presumably due to a lack of advertising funds. PP continued to operate, but its fate was highly uncertain.
2017: A glimmer of hope: The NDSC deal
Penelope’s efforts to find other ways to distribute and sell PP’s merchandise finally paid off in late 2016! After months of meetings and negotiations, PP signed a deal with a large national department store chain (NDSC)! The deal sawfour of PP’s best-selling stock keeping units (SKUs)being sold in just over 800 hundred of NDSC’s more than 1,000 retail locations starting in 2017.As shown in Figure 1, the four SKUs are PP-1, PP-2, PP-3, and PP-4, respectively. According to theplanogram, each product had one 1-foot facing on the shelf, and the agreed upon planned max. shelf inventory per SKU was two (although a third unit for each SKU would fit on the shelf if needed). Replenishments (up to planned max. shelf inventory) were received from NDSC’s distribution centers on a weekly basis.
The anticipated contract volume for 2017 was about 160,000 units in total. At a wholesale price of $60/unit, this would equate to over $9.6 million in estimated sales and nearly $2 million in gross profits for PP. Things seemed to turn around for Penelope and her team! That said, this perspective came at a price: PP had to guarantee a minimum retail gross profit of $3,000 per linear foot of shelf space for NDSC and would have to cover any shortfalls.
January 2018: The cold hard reality
The expected sales and profits never materialized. On average, each of NDSC’s stores sold20% less in 2017 than what was expected. Accordingly, PP’s sales to NDSC came in at a comparatively meager $7.7 million. And because of PP’s poor performance in NDSC’s stores (and resulting penalty payments ofover $1.9 million), Penelope and her team finished 2017 with a net loss of over $380,000, nearly wiping out PP’s cash reserves.A summary of key contract and financial information is provided in Table 1.
Weekly sales data and additional inventory-related information for NDSC’s store TX-42A (located in San Antonio, TX)are provided in Table 2. This particular store is, in every respect, a perfect representation of the average NDSC store that sells PP’s products.[1]
[1]Hint: It is reasonable to assume that consumer demand for next year will be similar in magnitude and distribution to demand for 2017. As such, it is recommended that any analyses be based on the data provided for store TX-42A. There will be no need to develop sales forecasts for the upcoming year.
Table 1 Financial summary (plan vs. actual) for 2017
| Plan (2017) | Actual (2017) | |
| No. of stores to carry PP SKUs | 802 | 802 |
| No. of distinct PP SKUs | 4 | 4 |
| Shelf space allocation per SKU (ft) | 1 | 1 |
| Facings per SKU | 1 | 1 |
| Total shelf space allocation (ft.) | 4 | 4 |
| Planned inventory per SKU per store | 2 | 2 |
| Max. shelf capacity per SKU per store | 3 | 3 |
| Retail price/unit | $120 | $120 |
| Wholesale price/unit (incl. transportation) | $60 | $60 |
| Avg. sales per SKU, store, year (units) | 50 | 40 |
| Total NDSC sales per store/year (in units) | 200 | 160 |
| Total NDSC sales per store/year (@ $120/unit) | $ 24,000 | $ 19,200 |
| Total NDSC gross profit per store/year (@ $60/unit) | $ 12,000 | $ 9,600 |
| Total NDSC gross profit per store/year per ft. of shelf space | $ 3,000 | $ 2,400 |
| Total NDSC gross profit per year (all stores and SKUs) | $ 9,624,000 | $ 7,699,200 |
| Total PP sales to NDSC (@ $60 wholesale/unit) | $ 9,624,000 | $ 7,699,200 |
| Total PP gross profit (@ $12/unit) | $ 1,924,800 | $ 1,539,840 |
| Penalty payments (PP to NDSC) | – | $ 1,924,800 |
| Total PP gross profit/loss after penalties | $ 1,924,800 | $ -384,960 |
Table 2Weekly sales and avg. inventory data for NDSC store TX-42A (2017)
| Store TX-42A | Sales by SKU | ||||
| Week | PP-1 | PP-2 | PP-3 | PP-4 | Total |
| 1 | 2 | 0 | 0 | 1 | 3 |
| 2 | 1 | 0 | 1 | 2 | 4 |
| 3 | 0 | 1 | 1 | 0 | 2 |
| 4 | 2 | 1 | 2 | 1 | 6 |
| 5 | 2 | 0 | 0 | 2 | 4 |
| 6 | 1 | 0 | 0 | 0 | 1 |
| 7 | 2 | 0 | 1 | 2 | 5 |
| 8 | 1 | 1 | 0 | 1 | 3 |
| 9 | 0 | 0 | 0 | 1 | 1 |
| 10 | 2 | 1 | 0 | 0 | 3 |
| 11 | 2 | 1 | 1 | 1 | 5 |
| 12 | 1 | 0 | 1 | 2 | 4 |
| 13 | 1 | 1 | 0 | 0 | 2 |
| 14 | 0 | 0 | 1 | 1 | 2 |
| 15 | 1 | 1 | 2 | 1 | 5 |
| 16 | 2 | 1 | 1 | 0 | 4 |
| 17 | 1 | 0 | 1 | 2 | 4 |
| 18 | 2 | 0 | 0 | 0 | 2 |
| 19 | 2 | 1 | 0 | 2 | 5 |
| 20 | 0 | 1 | 1 | 0 | 2 |
| 21 | 1 | 0 | 1 | 1 | 3 |
| 22 | 1 | 0 | 1 | 2 | 4 |
| 23 | 2 | 1 | 0 | 0 | 3 |
| 24 | 0 | 1 | 1 | 0 | 2 |
| 25 | 1 | 0 | 0 | 1 | 2 |
| 26 | 2 | 0 | 1 | 1 | 4 |
| 27 | 0 | 0 | 0 | 0 | 0 |
| 28 | 1 | 1 | 1 | 0 | 3 |
| 29 | 0 | 1 | 1 | 2 | 4 |
| 30 | 1 | 0 | 0 | 1 | 2 |
| 31 | 1 | 1 | 2 | 0 | 4 |
| 32 | 2 | 1 | 1 | 0 | 4 |
| 33 | 0 | 0 | 0 | 1 | 1 |
| 34 | 2 | 0 | 0 | 0 | 2 |
| 35 | 0 | 0 | 1 | 1 | 2 |
| 36 | 1 | 1 | 2 | 0 | 4 |
| 37 | 2 | 1 | 0 | 2 | 5 |
| 38 | 1 | 0 | 0 | 1 | 2 |
| 39 | 0 | 0 | 1 | 0 | 1 |
| 40 | 1 | 1 | 0 | 1 | 3 |
| 41 | 0 | 0 | 2 | 1 | 3 |
| 42 | 2 | 1 | 1 | 0 | 4 |
| 43 | 0 | 1 | 0 | 2 | 3 |
| 44 | 2 | 0 | 1 | 1 | 4 |
| 45 | 1 | 0 | 0 | 1 | 2 |
| 46 | 1 | 1 | 1 | 0 | 3 |
| 47 | 0 | 1 | 0 | 1 | 2 |
| 48 | 2 | 0 | 1 | 1 | 4 |
| 49 | 1 | 1 | 0 | 0 | 2 |
| 50 | 1 | 1 | 2 | 1 | 5 |
| 51 | 2 | 0 | 0 | 0 | 2 |
| 52 | 1 | 0 | 1 | 2 | 4 |
| Total sales (units) | 57 | 25 | 35 | 43 | 160 |
| Avg. weekly sales (units) | 1.10 | 0.48 | 0.67 | 0.83 | 3.08 |
| Std. deviation of weekly sales | 0.77 | 0.50 | 0.68 | 0.76 | 1.31 |
| Estimated avg. inventory (units) | 1.45 | 1.76 | 1.66 | 1.59 | 6.46 |
| Avg. annual turns | 39.26 | 14.21 | 21.04 | 27.10 | 24.76 |
| Avg. gross profit per linear foot | $ 2,400 | ||||
| J+ Score | 594 |
Present day: Storm clouds ahead
Even though PP lost money on the NDSC deal in 2017, PP’s long-term success and, ultimately, its very existence hinges on the continued (but profitable!) business with NDSC. NDSC—itself under a lot of financial and shareholder pressure—has sent a long letter to PP that communicates, in no uncertain terms, the expectations for any potential future business between the two companies:
“[…] Our board has agreed to a new performance metric that will be applied to all products we carry. Internally, we call this the “J+ Score” – it is a combination of the gross profit per linear foot metric we previously used and inventory turnover (J+ Score = Gross profit/ft.*Avg. annual turns/100). By introducing this metric, we strive to renew our emphasis on both profitability and efficiency. This past year, PP’s J+ Score was an unacceptable 594. The targetfor the Women’s Fashion Accessories category is 800. Moving forward, we encourage our suppliers to help us maximize these scores. Vendors who fail to achieve target scores may be dropped.
[…] In addition, we continue to require vendors to guarantee at least $3,000 in average gross profit per store, year and linear foot.
[…] We cannot price the bags at more than $120 a unit, and we do not believe that discounting them would sufficiently stimulate demand.Moreover, we will not fund, support or participate in any advertising or promotional campaigns of any kind or otherwise invest in your brand.
[…] We will pay you $60 per unit. This is not negotiable.
[…] You must show credible evidence that you have a plan that meets our expectations. As part of this plan, please advise which products you wish to slot for the next year.”
It almost seems a bit odd that NDSC’s letter to PP ends with “You are a valued supplier, and we look forward to continuing our cordial and successful partnership with your company.”
Reading the letter, Penelope is upset and surprised. After all, Penelope doubts that NDSC would find a set of better-selling and more profitable SKUs if it dropped PP’s products from its assortment entirely. Either way, PP must determine if there is a way to meet NDSC’s goals and constraints. Clearly, the key to success lies in increasing sales and profits per linear foot of shelf space and/or increasing shelf inventory turnover… and doing so in a way that makes economic sense for both NDSC and PP.
NDSC’s letter also states the following: “[…] We expect our vendor partners to help us excel and identify/highlight opportunities for cost savings throughout our distribution network. Specifically, we need to lower inventory (safety stock) levels in our distribution centers. Any business plan for the upcoming year will need to highlight the reduction of safety stock requirements in our distribution centers. Of course, we will continue to strive for service excellence and maintain an in-stock target of 99%.”
“Great,” thinks Penelope, “so they pretty much want us to do more with less, both in the stores and in the distribution centers?” Could this get any worse?Penelope knows that she will have to show how safety stock holdings will change with PP’s new (and yet to be developed) plan for the upcoming year.
To help with this task, NDSC has shared some data (from 2017) for one of its distribution centers, DC TX-2E (see Table 3). This distribution center serves 40 of NDSC’s stores across the Eastern part of Texas as well as Oklahoma, Arkansas, and Louisiana and, for all intents and purposes, is representative of the average distribution center in NDSC’s network. DC TX-2E currently holds an average of 154 units in safety stock across all of PP’s four SKUs.
Your task
Penelope hires your team as consultants and charges you with helping her develop a plan to propose to NDSC. Your task consists of four parts (deliverables).
- Based on analysis of the information and data provided, please outline your recommendations: What exactly do you propose for the upcoming year? Which PP product(s) should be sold in NDSC’s stores?
Please write a memo that outlines your recommendation and highlights how implementing this recommendation will be beneficial to both NDSC (in terms of gross profit per linear ft. and/or J+ Score) and PP (in terms of total gross profit). Also, please provide an Excel file that clearly shows your underlying calculations and the financial aspects of your proposal. Please populate the rightmost column of Table 4 (further below; also available in Excel). In addition, please calculate the expected J+ Score for the average store.
- Based on the information provided in the case and your answer to 1), please
- estimate how safety stock requirements will change at the distribution center level;
- in your memo (see above), offer two reasons for the projected decrease in safety stocks.
- Please draft a short (1 or 2 slides only!) PowerPoint presentation that Penelope can use to support her presentation to NDSC. Please do not put bullet points or excessive amounts of text on the slide(s). Think of meaningful (and professional) graphic ways to support the message you want to get across (see part 1).
- In your memo (see above) please briefly discuss the merits or risks you see associated with NDSC’s introduction of the J+ Score as the primary performance metric. Is this a good idea? Why or why not? Please offer compelling arguments to support your perspective.
Table 3 Weekly throughput data and safety stock estimates for NDSC DC TX-2E
Table 4 Financial summary (plan vs. actual for last year, projections for next year)
| Plan (2017) | Actual (2017) | Next year* | ||
| No. of stores to carry PP SKUs | 802 | 802 | 802 | |
| No. of distinct PP SKUs | 4 | 4 | ||
| Shelf space allocation per SKU (ft) | 1 | 1 | 1 | |
| Facings per SKU | 1 | 1 | 1 | |
| Total shelf space allocation (ft.) | 4 | 4 | ||
| Planned inventory per SKU per store | 2 | 2 | ||
| Max. inventory per SKU per store | 3 | 3 | 3 | |
| NDSC | Retail price/unit | $120 | $120 | $120 |
| Wholesale price/unit (incl. transportation) | $60 | $60 | $60 | |
| Avg. sales per SKU, store, year (units) | 50 | 40 | ||
| Total NDSC sales per store/year (in units) | 200 | 160 | ||
| Total NDSC sales per store/year (@ $120/unit) | $ 24,000 | $ 19,200 | ||
| Total NDSC gross profit per store/year (@ $60/unit) | $ 12,000 | $ 9,600 | ||
| Total NDSC gross profit per store/year per ft. of shelf space | $ 3,000 | $ 2,400 | ||
| Total NDSC gross profit per year (all stores and SKUs) | $ 9,624,000 | $ 7,699,200 | ||
| Posh Purses | Total PP sales to NDSC (@ $60 wholesale/unit | $ 9,624,000 | $ 7,699,200 | |
| Total PP gross profit (@ $12/unit) | $ 1,924,800 | $ 1,539,840 | ||
| Penalty payments (PP to NDSC) | $ – | $ 1,924,800 | ||
| Total PP gross profit/loss after penalties | $ 1,924,800 | $ -384,960 | ||
| *information printed in red is given and not negotiable | ||||
Appendix
Penelope found the results of consumer surveys, focus groups, and in-store tests conducted by PP last year that may be helpful:
Table5 Product substitutability estimates
Example: If SKU PP-3 was unavailable, 40% of those customers whose first preference is PP-3 will buy PP-1 instead. Similarly, 15% of customers will buy PP-2, and 20% will buy PP-4. Hence, 25% of total customer demand for PP-3 would be lost if the SKU was no longer on offer.