Deckers Outdoor Corporation’s footwear products are among some of the most well-known brands in the world. From UGG sheepskin boots and Teva sport sandals to Simple shoes, Deckers flip-flops, and Tsubo footwear, Deckers is committed to building niche footwear brands into global brands with market leadership positions. Net sales for fiscal year 2007 were close to $449 million. In addition to traditional retail store outlets for Deckers’ footwear styles, the company maintains an active and growing “direct to consumer” e-commerce business. Since most retail stores cannot carry every style in every color and size, the company offers the full line for each of its brands directly to consumers through the brands’ individual Web sites. Online sales at its virtual store are handled by its e-commerce group. Customers who want a pair of shoes not available at the retail store can always buy from the virtual store. A photo shows a man in an office cubicle wearing a headset and working with papers on the desk. Customer orders for Decker footwear are broken down by brand and sent to headquarters in Goletta, CA. where the order is entered into the system. Pearson Founded in 1973, the company manufactured a single line of sandals in a small factory in Southern California. The challenges of managing the raw materials and finished goods inventories were small compared to today’s global sourcing and sales challenges for the company’s various brands. Today, each brand has its own development team and brand managers who generate, develop, and test-market the seasonal styles that appear on the shelves of retailers such as Nordstrom, Lord & Taylor, REI, the Walking Company, and the company’s own UGG brand retail stores in the United States and Japan. At Deckers, forecasting is the starting point for inventory management, sales and operations planning, resource planning, and scheduling—in short, managing its supply chain. It carries a considerable amount of seasonal stock. Shoes with seasonal demand that are left over at the end of their season must be sold at heavily discounted prices. Its products fall into three categories: (1) carry-over items that were sold in prior years, (2) new items that look similar to past models, and (3) completely new designs that are fashionable with no past history. Twice a year, the brand development teams work on the fall and spring product lines. They come up with new designs about one year in advance of each season. Each brand (UGG, Teva, Simple, Tsubo, and Deckers) contains numerous products. The materials for new designs are selected and tested in prototypes. Approved designs are put into the seasonal line-up. Forecasts must be made at both the product and aggregate levels months before the season begins. “Bottoms-up” forecasts for each product begin by analyzing any available history files of past demand. Judgment forecasts are also important inputs, particularly for the second and third categories of shoes that are not carry-overs. For example, Char Nicanor-Kimball is an expert in spotting trends in shoe sales and makes forecasts for the virtual store. For new designs, historical sales on similar items are used to make a best guess on demand for those items. This process is facilitated by a forecasting and inventory system on the company’s Intranet. At the same time, the sales teams for each brand call on their retail accounts and secure customer orders of approved designs for the coming season. Then, the virtual store forecasts are merged with orders from the retail store orders to get the total seasonal demand forecasted by product. Next, the product forecasts are “rolled up” by category and “top down” forecasts are also made. These forecasts then go to top management where some adjustments may be made to account for financial market conditions, consumer credit, weather, demographic factors, and customer confidence. The impact of public relations and advertising must also be considered. Actually, forecasting continues on throughout the year on a daily and weekly basis to “get a handle” on demand. Comparing actual demand with what was forecasted for different parts of the season also helps the forecasters make better forecasts for the future and better control inventories. Based on initial demand forecasts, the company must begin sourcing the materials needed to produce the footwear. The company makes most of its products in China and sources many of the raw materials there as well. For UGG products sheepskin sourcing occurs in Australia with top grade producers, but the rawhide tanning still takes places in China. With potential suppliers identified and assurance from internal engineering that the footwear can be successfully made, the engineering and material data are handed over to the manufacturing department to determine how best to make the footwear in mass quantities. At this point, Deckers places a seasonal “buy” with its suppliers. The orders for each product are fed into the manufacturing schedules at the Chinese factories. All the products for a given brand are manufactured at the same factory. While Deckers agents negotiate the raw materials contracts early in the development process, the factories only place the orders for the raw materials when the company sends in the actual orders for the finished goods. No footwear is made by the factories until orders are received. At the factories, finished goods footwear is inspected and packaged for the month-long ocean voyage from Hong Kong to ports in the United States. Deckers ships fifty containers a week from its Chinese manufacturing sources, each holding approximately 5,000 pairs of shoes. Ownership of the finished goods transfers from the factories to Deckers in Hong Kong. When the shipping containers arrive in the United States, the footwear is transferred to Deckers’ distribution centers in Southern California. Teva products are warehoused in Ventura, California; all other products are handled by the company’s state-of-the-art facility in Camarillo, California. Typically, Deckers brings product into the distribution centers two to three months in advance of expected needs so that the production at the suppliers’ factories and the labor activities at the distribution centers are leveled. There are definitive spikes in the demand for footwear, with Teva spiking in Quarter 1 and UGG spiking in Quarter 4. The leveling approach works to keep costs low in the supply chain. However, it also means that Deckers must maintain sizeable inventories. Most shipments from suppliers come in to the distribution centers and are stored in inventory for one to two months awaiting a customer order. By the time the footwear is stocked in the distribution center, the company knows which retail customers will be getting the various products, based on the orders booked months earlier. Then, according to delivery schedules negotiated with the customers, the company begins filling orders and shipping products to retail locations. The warehouse tracks incoming shipments, goods placed on the shelves for customers, and outgoing orders. The inventory system helps manage the customer order filling process. Because the booked orders are a relatively large proportion of the total orders from retailers, and the number of unanticipated orders is very small, only small safety stocks are needed to service the retailers. Occasionally, the purchase order from Deckers to one of its suppliers matches the sales order from the customer. In such a case, Deckers uses a “cross-dock” system. When the shipment is received at the distribution center, it is immediately checked in and loaded on another truck for delivery to customers. Cross docking reduces the need to store vast quantities of product for long periods of time and cuts down on warehousing expenses for Deckers. The company has been successful in turning its inventory over about four times a year, which is in line with footwear industry standards. The online sales traffic is all managed centrally. In fact, for ordering and inventory management purposes, the online side of the business is treated just like another major retail store account. As forecasted seasonal orders are generated by each brand’s sales team, a manufacturing order for the online business is placed by the e-commerce sales team at the same time. However, unlike the retail outlets that take delivery of products on a regular schedule, the inventory pledged to the online business is held in the distribution center until a Web site order is received. Only then is it shipped directly to the consumer who placed the online order. If actual demand exceeds expected demand, Char Nicanor-Kimball checks if more inventory can be secured from other customer orders that have scaled back. The forecasting and supply chain management challenges now facing Deckers are two-fold. First, the company plans to grow the brands that have enjoyed seasonal sales activity into year-round footwear options for consumers by expanding the number of products for those brands. For example, most sales for UGG footwear occur in the fall/winter season. Sales for Teva historically have been in the spring and summer. Product managers are now working to develop styles that will allow the brands to cross over the seasons. Second, the company plans to expand internationally, and will have retail outlets in Europe, China, and other Asian locations in the very near future. Company managers are well aware of the challenges and opportunities such global growth will bring, and are taking steps now to assure that the entire supply chain is prepared to forecast and handle the demand when the time comes. Questions How much does the forecasting process at Deckers correspond with the “typical forecasting process” described at the end of this chapter? Based on what you see in the video, what kinds of information technology are used to make forecasts, maintain accurate inventory records, and project future inventory levels? What factors make forecasting at Deckers particularly challenging? How can forecasts be made for seasonal, fashionable products for which there is no history file? What are the costs of over-forecasting demand for such items? Under-forecasting? What are the benefits of leveling aggregate demand by having a portfolio of products that create 365-day demand? Deckers plans to expand internationally, thereby increasing the volume of shoes it must manage in the supply chain and the pattern of material flows. What implications does this strategy have on forecasting, order quantities, logistics, and relationships with its suppliers and customers?