The Party City franchise stores of San Diego and Northern Riverside Counties were founded in 1995, with a store in Mission Valley. There are fourteen Party City stores in San Diego; eight are owned by the parent corporation, six are owned by a single franchisee, who owns the rights to any additional franchise additions to San Diego or Riverside counties. Worldwide, the company has over 500 locations, with approximately half owned by franchisees. The company has become successful marketing itself as the "Halloween Superstore". Twenty-five percent of annual sales are made in the month of October nationwide; however, the stores also have strong foundations in other events such as Easter, Christmas, Graduation and Wedding planning (The A Team, February 5, 2004). The customers of a Party City store in San Diego County are typically young adults and families with young children from moderate and working class incomes. (The demographic does vary some by location however. For example in Carmel Mountain, the average income is higher for a typical shopper than in Lemon Grove.) The suppliers to Party City range from small, local vendors such as Party Star, a local piñata maker, to Amscan and Hallmark, some of the largest distributors of party supplies in the United States.

This paper intends to identify the existing supply chain management methods and processes used by Party City franchise stores and provide suggestions on ways to improve these processes.

The concept, supply chain management (SMC), was initially introduced in the wholesaling and retailing industry (Wisner & Tan, 2000), in order to reduce delivery lead-times through integration of logistic and physical distribution functions.

Intense global and local competition made many companies focus on creating cooperative and mutually beneficial partnerships with quality suppliers. SMC helps to create vertical integration, which allows independent organizations within the chain to compete against much larger organizations.

The theory of SCM is based on the principle of demand and supply, which are the main forces of any economy. In a perfect world, demand and supply intersect at one point, which remains stable over time. The suppler would then know exactly how much to supply and the retailers or wholesalers know exactly how much the customer will buy. However, the real world is much more complex and unstable. Organizations need to analyze and forecast their demand constantly – the slightest change in one variable could have a bullwhip effect along the supply chain.

According to Chase et al. (2004), there are four major types of supply chains. They are: Efficient supply chains, Risk-hedging supply chains, Responsive supply chains, and Agile supply chains. As the name implies, the Efficient Supply Chains try to achieve economics of scale by eliminating waste and optimizing techniques. The Risk-Hedging Supply Chains try to eliminate supply disruption by pooling and sharing resources in the supply chain. The Responsive Supply Chain utilizes strategies to become more responsive and flexible to the ever-changing needs and wants of the customer. Finally, the Agile Supply Chains try to combine the strengths of the other three supply chain techniques. They are called agile because of their flexibility, adaptability as well as risk-hedging capabilities.

Chase et al. (2004) talks about Hau Lee’s Uncertain Framework – examples of supply chain needed:

According to Hau Lee’s Uncertain Framework, Party City should fall into the efficient supply chain category. However, Party City's current supply chain is not as efficient as some dominant retailers like Wal-Mart. The reason is that currently the Party City franchise stores do not buy all their merchandise directly from the vendors; instead they send their order to the corporate buyers. Party City adopted this procedure in order to achieve greater buying power and receive bigger discounts. The corporate buyers have developed an integrated partnership with the large vendors and suppliers, who promise to provide highly discounted products to each store in return for higher purchasing guarantees. However, the problem with buying through corporate buyers is that the individual stores do not have the guarantee that the merchandise will be supplied from a local warehouse, in exactly the moment when they need them.

By plotting the pattern of individual store’s order to the vendors and customer sales, a clear Bullwhip Effect could be observed. This effect indicates the lack of synchronization among supply chain members (Chase et al., 2004). The following charts show that customer sales are less volatile than the retailer’s order. The extreme fluctuation during the month of September and October is due to Halloween season, when Party City makes most of its sales.

Source: Author’s own construction based on actual data

Source: Author’s own construction based on actual data

The supply chain is made of one or more links where the products flow only one way through the links from the sources of raw materials to finished goods for the customers. The product flow is controlled by the demand and supply transaction information flowing both ways, between customers, distributors, manufacturing raw material sources, etc. Therefore, a supply chain consists of two fundamental and functional flows: (1) The flow of transaction information and (2) the flow of material and product (Benton, 2004).

The current supply chain network of Party City can be described by the following basic flow chart:

Before the supply chain flow starts, demand management or demand forecasting takes place. At Party City, the demand forecasting occurs at two levels. Initially, the corporate Party City forecasts the overall demand for all of its 500 stores based on sales, economic and social conditions. At franchise store level, the demand is calculated and forecasted based on two major factors: competition and demographic concerns.

Competition

Other stores in the area carry similar or identical merchandise at similar prices. Therefore, the local Party City calculates its market share based on price, service and selection. In addition, the San Diego market is different than the rest of the country because of long summers, more "beach" emphasis, large Hispanic population, tourism, etc. Therefore, the corporate demand projections are not always effective for the San Diego stores.

San Diego and Riverside Counties contain large Hispanic and military populations. Some holidays (like, Cinco de Mayo, Veterans/Memorial day, 4^th of July, Halloween/Day of the Dead) draw greater attention in San Diego than in many other parts of the nation. Therefore, the forecasting techniques or models need to pay special attention to these holidays and not just Christmas, Easter and Halloween.

As mentioned above, the most of the partners in the supply chain for the franchise stores are chosen by the corporate Party City. The individual supplier partners that the franchise stores choose are based on special needs and local customer demand. However, currently there is no efficient and effective inventory management system in place for the franchise Party City stores. Therefore, the absence of a just-in-time inventory management system is one of the main impediments to Party City's supply chain management system.

There are two ways to measure the effectiveness of a supply chain: inventory turnover and weeks of supply. The basic formulas for inventory turnover and weeks of supply are:

Inventory turnover = (Cost of goods sold) / (Average aggregate inventory value)

Weeks of supply = (Average aggregate inventory value) / (Cost of goods sold) * 52

These measures are important because inventory is considered as tied up funds that could be invested in other places to make more money. Therefore, organizations invest a great deal in devising strategies to increase inventory turnover rate and reduce weeks of supply. Dell Computers has achieved the benchmark in inventory turnover rate (51.78 turns per year) and weeks of supply (1 week). Following is Party City’s present inventory turnover rate and weeks of supply:

Source: Author’s own calculation based on actual data

The major objective in managing a company's inventory chain is to ensure the chain has the optimum level and mix of inventory required at every link in the supply chain to meet strategically targeted customer service levels. The targeted service level must be met through identifying optimum inventory policies to ensure the lowest possible cost while maintaining necessary stock levels.

In order to manage a supply chain effectively, it is recommend that Party City implements an efficient Enterprise Resource Planning (ERP) system. Before implementing the ERP system, it is important to design a process flow diagram to depict a process and elapsed time require doing certain tasks. It is also important to analyze and identify inconsequential activities in the process and eliminate them as much as possible. After a streamlined process flow diagram is designed, the next step is to implement the ERP system. For Party City, the ERP system will come in between the stores and the Tomax system, which is an inventory management system implemented by the corporate Party City. This ERP system will monitor local demand, store level inventory and establish a just-in-time partnership with local vendors.

According to Schmenner (1998), "When it comes to change, systems lag behind people, procedures, and machines". What Schmenner means is, it is easy to change a procedure, most employees are also adaptable to a changing environment; but systems of business like performance measuring, hiring, advancement, and management information are not as flexible as people and machines. Therefore, it is also important to improve different systems within the organization, in order to receive the full benefit of the ERP system. Following is the Party City’s new inventory turnover rate and weeks of supply, after synchronizing inventory with the demand or current sales:

Source: Author’s own calculation based on actual data

The table shows that there is a significant improvement of inventory turnover rate by reducing the inventory level. The following graph also shows that the bullwhip effect is reduced substantially because of this measure. This is achieved by reducing inventory level to the demand level, without implementing any sophisticated ERP system. Therefore, if an efficient ERP system could be implemented along with an effective just-in-time inventory control system, the inventory turnover rate will be much higher.

Source: Author’s own construction based on actual data 

The current supply chain management system of Party City failed to achieve efficiency because it is torn by two extremes. The operations manager and the corporate buyers want to order huge quantities of merchandise infrequently to reduce order cost and the accounting department wants minimum inventory in order to reduce carrying cost and waste. In order to be successful and efficient the operations manager needs to understand the financial aspect and impact of the present inventory management system.

The suggested ERP system will not be fully effective unless the operations manager changes his policy on employee training, capacity management, scheduling and other procedures. Finally, the management needs to understand that although customers are the final component of supply chain, everything starts with customers; therefore they require special attention.

References