Blue Collar Skateboards and Inventory Management

3620 Irongate Rd #107

Bellingham WA 98225

360-420-0048

Silvester Avena is currently an undergraduate student in Operations Management at Western Washington University in Bellingham, Washington.

Jeffrey Forbes is currently an undergraduate student in Operations Management at Western Washington University in Bellingham, Washington.

Ashley Howe is currently an undergraduate student in Operations Management at Western Washington University in Bellingham, Washington.

Erica Redman is currently an undergraduate student in Manufacturing and Supply Chain Management at Western Washington University in Bellingham, Washington.

Colton Rekers is currently an undergraduate student in Manufacturing and Supply Chain Management at Western Washington University in Bellingham, Washington.

Western Washington University

Full-Time Undergraduate

June 2015

Blue Collar Skateboards and  Inventory Management

ABSTRACT

This paper is an overview of inventory management and how it affects a manufacturing and distribution plant. For this project, Blue Collar Skateboards' inventory management system was analyzed and evaluated. The purpose was to get a glimpse of a real life scenario and give recommendations of improvement.

OVERVIEW OF INVENTORY MANAGEMENT

There are many different strategies when planning and managing inventories within a supply chain. The three key inventory control areas within a supply chain are managing economies of scale, managing uncertainty in the supply chain, and determining the optimal level of product availability (1). Although these key performance indicators are aimed to improve inventory control they can be a double edged sword if not managed properly.

Economies of scale can provide short term lower prices of materials, quantity discounts and transportation costs but ordering a larger lot size for an unforecasted demand can cause excess inventory throughout the supply chain and has the ability to increase costs immensely. The key performance indicator for managing economies of scale in a supply chain is cycle inventory. Cycle inventory is the average inventory in a supply chain due to either production or purchases in lot sizes that are larger than demand by the customers, and is used in economies of scale to reduce cost in the supply chain (1). As lot size increases, cycle inventory increases and expanding the equation using Little’s Law for flow rate, the average flow rate from cycle inventory can be deciphered. It illustrates the average amount of time a certain product spends within the supply chain. The larger the cycle inventory, the longer the lag time is between when a product is produced and when it is sold (1). Cycle inventory is dependent on three main costs: average price paid per unit purchased, fixed ordering cost, and holding costs, with the goal of minimizing total cost to find the optimal lot size also known as an economic order quantity (EOQ).

FIGURE 1. Economic Order Quantity Model

Through understanding these costs and creating a strategic plan to promotions and quantity discounts, managerial levers can be identified to reduce cycle inventory without increasing costs (1).

   In order to manage demand uncertainty effectively companies improve their product availability using safety inventory. Safety inventory is the inventory carried to satisfy demand that exceeds the amount forecasted for a given period and is carried to deal with fluctuations in actual demand (1). Although increasing product availability can cause high customer capture, it can also drive up inventory holding costs. Through the evolution of the e-commerce, product availability has become essential, as the increase ease of searching puts more pressure on the brick-and-mortar stores (1). The fraction of inventory that is safety stock has significantly increased throughout the years as well as product variety. A byproduct of this is a shortened product life cycle, making the management of inventory difficult and extremely important for reducing costs in the supply chain. The two main factors to look at for determining the appropriate safety stock are 1) the uncertainty in both supply and demand, and 2) the desired level of product availability (1). For evaluating uncertainty in demand, companies look at average demand per period, the standard deviation of demand per period, and the lead time of the product. The three basic measurements of product availability are product fill rate, order fill rate, and cycle service level (1). The overall goal of managing uncertainty in demand with safety stock is to have enough inventory to deal with fluctuations in demand, but to reduce safety stock as much as possible to minimize holding costs.

The final key to inventory management is determining the optimal level of product availability. Product availability is measured by the cycle service level or the fill rate, which are metrics for fulfilling demand with available inventory (1). The optimal level of inventory management is one that balances the level of availability, the cost of inventory and maximizes supply chain profitability (1). Whether high or low, the optimal level is completely subjective and has to be individualized for each company and their idea of how to achieve the greatest profitability. There are two main costs that influence the optimal level, the cost of overstocking and the cost of understocking. The cost of overstocking is the loss incurred by a firm for each unsold unit at the end of a selling season and adversely, the cost of understocking is the margin lost by a firm for each lost sale because there is no inventory on hand (1). The manager then has multiple areas where improvements can be made: increasing the salvage value of each unit, decreasing the margin lost from a stockout, more accurate forecasts, using quick response and multiple orders to increase responsiveness, and/or finding a flexible short lead time supply source to serve as backup for a low-cost supply source (1). The objective is to balance the cost of overstocking and the cost understocking so that you maximize expected profit while minimizing total costs.

INVENTORY MANAGEMENT PRACTICES

                   Inventory is one of the main drivers of supply chain performance. It encompasses all raw materials, work-in-process and finished goods inventory. Changing inventory processing practices can dramatically alter the supply chain’s efficiency and responsiveness (1). It’s about understanding the industry and figuring out which one carries a higher priority in the company. Stocking large amounts of inventory helps overall customer responsiveness but harms efficiencies. This is often the case where there is a batch or lot sizing process in the company. However, having high inventory levels can be dangerous, especially in industries where inventory loses value relatively quickly with changing seasons and trends (1). This is where the company would shorten new product and replenishment lead times in order to be responsive while carrying low levels of inventory. This is often the case when the company has a make-to-order or just-in-time process.

Information processing is a basic but relevant practice in regards to inventory management. Companies often communicate and process information through fax, email or by phone which can cause many delays and inaccuracies. Inaccuracies result in uncertain forecasts which leads to high levels of inventory and safety stock. However, if the company can increase forecasting accuracy, the uncertainty in inventory levels decreases, which in turn decreases both the overstocking and understocking quantities and increases the firm’s overall profits without hurting product availability (1). Reduction of the uncertainty in the supply chain drastically reduces the safety stock levels. Other ways in which companies communicate is with a third party logistic or internet networks which decreases inaccuracies and delays, however the system that allows for the most readily available information today is the enterprise resource planning system, also known as ERP. This allows for instant and accurate information in regards to inventory tracking and order processing.

Although inventory management is mostly practiced internally, it is important to see the factors in which inventory management plays in an entire supply chain.  Only focusing on the company’s inventory levels, results in independent decision making which can lead to order fluctuation. Order fluctuation isn’t uncommon, however it can cause a bullwhip effect. This is where variability of orders increases as one moves up the supply chain (1). This has been observed in apparel and grocery industries, which can result in carrying higher levels of inventory in order to handle this variability. These higher levels of inventory levels causes inventory costs to raise not only at their company but in the entire supply chain. That is why it is important to build strategic partnerships and trust with the suppliers and the customers of the company. The challenge in today’s supply chain is to achieve coordination in spite of multiple ownership and increased product variety (1).

Implementation of Inventory Management

                In order to use inventory management effectively in an organization, it is important to have metrics to measure these improvement processes in order to know what changes improve the overall inventory management system. The company will need to come up with evaluation measurements as well as data recording points. This will give an organization a better understanding on where the greatest improvements exist within their company and to capitalize on cost savings.

                The first step to start measuring these metrics is optimizing warehouse organization. That means organizing the flow of inventory within the warehouse so that all inventory can be effortlessly accounted for. Raw materials, work in process, and finished goods inventory should have a designated location to see inventory levels in real-time. This allows the company to stay organized so tracking is an ease and maximizes the company’s warehouse capacity. Warehouse optimization can allow for additional space to become available which creates the opportunity for further growth in the organization.

                After the warehouse is well organized, the second step is to make a decision as to which inventory-related metrics would be most beneficial to the company. Some metrics often calculated is the average inventory level, this measures the amount of inventory carried either in units, days of demand, or financial value. Inventory turns are also a beneficial metric to have, which measures the number of inventory turns over a year. It is the ratio of average inventory to the cost of goods sold or revenue (1). Another measurement to help with inventory management is identifying the products for which the firm is carrying a high level of inventory. This tool can be used to isolate products that are in oversupply or find justification for having high inventory levels. Average replenishment batch is another prime metric, it can be assessed by averaging over time the difference between the maximum and the minimum inventory on hand (1). Average safety inventory is another commonly used measurement, this is done by averaging over time the minimum inventory on hand in each replenishment cycle (1). A company could also calculate fill rate which measures the fraction of orders or demand that were met on time from inventory by averaging over a specified number of units of demand (1). With these calculations come both positives and negatives in an organization. With more information a company can now make better inventory management decisions, however this comes with a cost. Manual tracking is not only error prone but it’s also time consuming and therefore can be less effective than anticipated. An organization has to weigh the costs and benefits in order to justify each metric the company wants to track and manage.  

BACKGROUND INFORMATION OF BLUE COLLAR SKATEBOARDS

Originally started in 2002 by owner Blake Owens as Spectrum skateboards, Blue Collar Skateboards (BCS) has its roots planted deep (4). Spectrum was a first step towards the DIY spirit that guides BCS. It however was not enough.  Faced with increasing costs and lack of funds, Spectrum was shuttered eventually and laid by the wayside. What makes contemporary BCS so different is a decade of experience and production potentials. The result is Blue Collar can make nearly everything onsite, decreasing costs and increasing creative freedoms (5). This is setting new ground for skateboard companies due to the fact that most skateboard companies still outsource most of their production needs instead of producing in-house. Blue Collar main operations are held in a small warehouse on Irongate road in a industrial complex between Hannegan road and Bakerview road in Bellingham, WA, current staff are partners Blake Owens and Chasey Rigney, two interns from WWU, one designer, and three other employees that work in the screen printing department.

Blue Collar's mission is to promote skateboarding in all shapes and forms (4). Blue Collar's intentions are to push for more municipal skate parks and actively create DIY underground spots. In addition, BCS hopes to promulgate skateboarding in the atypical populations by sharing, fostering and rekindling the love of skateboarding to all ages/genders. To achieve this goal, Blue Collar is always participating in the skate community (5). By sponsoring riders, contests and giveaways. Assisting nonprofit companies, especially those geared towards skateboarding, with merchandise such as shirts, stickers, banners, etc. completely free of charge in some cases. Blue Collar places a high priority on contributing its community in hopes that it can benefit from such acts and such a community will expand and grow into something much greater.  

Blue Collar possesses all the necessary comprehensive means of production including textile and graphic screen printing, cut and sew capabilities, die cutting of stickers’ fabrics and other materials, full color signs and banners, unique packaging and graphic design at a small to medium scale. In addition, BCS prints their own skateboard decks using screen printing technologies similar to the apparel screen printing process, hand painting, and heat transfer graphics (and sometimes all three together) (5). Everything BCS makes is hand printed at the bare minimum and they go out of our way to ensure that fact. In some cases, printing ends up taking more time and being costlier than if they had it done through a middleman, but they stay true to their DIY sensibilities and print the orders themselves anyway (5).  Having complete control over their creative freedom and not having to conform to some other screen printer’s norms is what drives Blue Collar.

INVENTORY MANAGEMENT AT BLUE COLLAR SKATEBOARDS

As far as inventory management systems are concerned, Blue Collar Skateboards would not be considered very sophisticated. Because of the the size of the company and the number of customer orders they receive throughout the year, they do not really have much of a need to implement a highly sophisticated system which may provide better organization. Essentially, how it all works is the company, or in this case the owner, receives an order from a customer with the design they want screenprinted on apparel, this is done through fax, email, and phone calls. Once the order is placed, they check to see if they have the appropriate number of t-shirts to fulfill the order, if they do they start the order, if not they order more t-shirts in order to satisfy the order plus some extra to ensure they will have some more t-shirts on hand for later orders (5). As the finished t-shirts come off the screen printing process they are immediately packed in shipping boxes and placed in the shipping area. This allows them to not worry, or deal with, designating areas throughout the building to hold finished goods. This may seem like a informal way to track and store inventory, but the owner noted that they are at about a 95% on-time delivery rate (5), so this system works for them, this is largely in part because they often do not have to coordinate multiple orders as they receive very few at a time.

Made-to-Order System

        Though the way Blue Collar Skateboards manages their inventory is somewhat informal, the made-to-order nature of what they produce helps greatly in managing the finished goods inventory. When it comes to screenprinting for other customers, Blue Collar only produces something when a customer places an order. This is huge for them because they are not having to forecast how much they need to produce based on the customer behavior, as they know for certain everything they are making is going to a customer. Because of this, there is almost no need to manage uncertainty once something is produced, as the customer is going to take all of what was made. Though this made-to-order system is beneficial when managing finished goods, it becomes a challenge managing the raw materials, or plain t-shirts, as it is not known when customers will come to the company with an order and with what size of an order. As it stands now, Blue Collar simply keeps a level of inventory that is consistent with the average number of shirts they go through in a given period, they use an average level of inventory of 450 shirts per month (5). Along with this, they don’t necessarily have a set reorder volume or set ordering time that they use when reordering, but will instead monitor what they have on hand and order accordingly. They will order only up to what they have needed on average in the past, and not much higher, so in a way they have a very loose EOQ that limits the amount of shirts they will need to keep on hand. This strategy to order based on past levels of customer demands becomes troublesome when more orders than what they are used to are placed.

Sourcing, Inventory Turnover, Cycle Time - Multiple Colors vs. Single Colors

Sourcing for the majority of the raw materials that are used in their operations are predominantly sourced domestically, but originally are sourced from Chinese manufacturers. Domestically the suppliers he uses are: Hanes, Gilden, Port authority, American Apparel, Independent trading Co,  Sportek, KBethos, and Rothco. The main modes of transportation are usually shipped by truck, directly to the production warehouse. Blue Collar remains true to their current raw materials suppliers as they still meet their main criteria of high quality, low costs, and quick reliable delivery. The inventory turnover has some variation, as it does depend on the amount of orders we are receiving from clients, but the usual inventory turnover that they see is about 450 shirts per month on average throughout the year for client orders. While for their own production with Blue Collar Merchandise we usually turnover about 200 additional shirts per month on average for the year. Below is a walk through the fundamental steps involved in the screen printing process as well task times that were measured for each of the steps.

TABLE 1. Screen Printing Process

TABLE 2. Description of Printing Process Steps

Managing Numerous Orders

        When Blue Collar does get more orders at a time than what they are used to, this puts a bit of a strain on their operations. In an instance where they receive more t-shirts orders than what they have on hand, they must order the necessary shirts, and then some, to cover the order. This slows the processing time of the jobs making it more difficult to meet ship dates. When reordering, they make sure to order more than what the order needs to protect them from realizing the same fate of not having enough materials if another order were to be placed during or soon after the processing of the current order. Although they might receive more orders than what they normally get, they are still able to handle the extra capacity because they were not previously operating at full capacity (5). Where this might become an issue is in the future when they start to accumulate more customers, or even start to build the Blue Collar brand itself.

The Next Step for Blue Collar

        For where Blue Collar is at right now in their growth as a company, their system of managing inventory works for them, as customers enjoy working with them, not only because of their quality, but because of the consistent and reliable delivery of product. As they look to grow the Blue Collar brand in business-to-consumer markets rather than business-to-business, they will face more challenges with responding to customer demands. Because of this, they will have to use more accurate measures of inventory management and demand forecasting to ensure they are not producing too little or too much. Although this is different from what what most of their business makes up, the owner invites the challenge as he has already made huge strides since the company was re-established  in 2012.

RECOMMENDATIONS FOR IMPROVEMENT AT BLUE COLLAR

       It is Blue Collar’s long term goal to become a main distributor to local retail stores in Bellingham, Washington.  At the present time, Blue Collar is operating on a small scale.  A gradual expansion of their operations is needed in order to work towards their long term goal.  For future expansion, we have two major recommendations that will aid in the growth of their company.

                Firstly, we recommend that Blue Collar begin utilizing inventory metrics so they can track and measure their performance. Metrics are important to decision making within a business.  They help to eliminate processes or decisions that decrease supply chain performance.  Without metrics, a company has no basis to compare daily, weekly, or monthly operations.  In essence, they provide a framework for business decisions.  Blue Collar currently does not utilize formal metrics and we believe it would be a beneficial tool for the company.

                Decisions regarding inventory of a company can greatly affect the performance of the supply chain.  The way inventory is managed can influence the “cost of goods sold, the cash-to-cash cycle, and the assets held by the supply chain and its responsiveness to customers” (1).  Blue Collar can begin utilizing cycle time and inventory turnover as basic inventory metrics.  Cycle time measures how long it takes for an order to be fulfilled (6); this is the time it takes from customer order placement to order completion.  Inventory turnover is a metric that tracks how quickly it takes a business to replace inventory.  Higher inventory turns signifies efficient use of inventory assets.  These simple metrics can provide benchmarks for performance and thus help to manage efficiencies of processes.

      Secondly, it is imperative that Blue Collar look into implementing an ERP or MRP system.  Implementing an information system is a very large investment, and does not financially make sense to employ while operating at their current size.  This investment is something to seriously consider when they begin to expand, and is justifiable in the future if the company forms more partnerships.  Forming partnerships with local businesses to help other companies grow is another goal that Blue Collar has. An information system would be beneficial for Blue Collar’s management, as well as for their direct suppliers and customers.  If Blue Collar creates more partnerships with local businesses, they will all reap the benefits as well as share the system’s costs.  An ERP or MRP system would improve information processing within their inventory management practices.  As we have learned throughout the course, this would in turn increase overall efficiency and responsiveness of the supply chain.  Another benefit to Blue Collar is that an information system would further increase the accuracy of demand forecasting and make order quantities more consistent.

       Implementing basic metrics into Blue Collar’s operations will help them become more efficient in managing their inventory.  An ERP or MRP system would be extremely beneficial if they decide to expand in the future.  Although it is a large investment, the benefits that the information system provides outweighs its cost.  Further, these recommendations will help Blue Collar align their company so that they can one day become a main distribution center for Bellingham skater stores.

REFERENCES

MLA Reference Style

1.Chopra, Sunil, and Peter Meindl. Supply Chain Management: Strategy, Planning, and Operation. Upper Saddle River, NJ: Pearson Prentice Hall, 2007. Print.

2. Malakooti, Behnam. "Inventory Planning and Control." Operations and Production Systems with Multiple Objectives. John Wiley & Sons, 2014. Print.  

3.Wikipedia contributors. "Inventory." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 3 Jun. 2015. Web. 5 Jun. 2015.

4. "Blue Collar Skateboards." Blue Collar Skateboards. Web. 2014.

5. Blake Owens, personal interview, May 15, 2015.

6.  Cecere, Lora M. Supply Chain Metrics That Matter. Hoboken, New Jersey : Wiley. Print.