Kemilembe Mjungu

Christina Bills

Evelyne Ringia

Case-Study Overview

• Background• Statement of a problem• Alternative Solutions• Recommendations• Conclusion

1988 The song How Soon is Now? by The Smiths was used to advertise the brand.

1998 Tommy Hilfiger Canada Inc. acquired a portion of Pepe Jeans USA for $1.15 billion

2006 Pepe Jeans London has announced Sienna Miller, British actress and Hollywood superstar as new face of the brand.

2008 Pepe Jeans is now one of the most successful jean companies in history with sales in over 60 markets and locations all over the world.

Currently Pepe Jeans is present over 100 countries and employs more than 5000 employees all over the world. Pepe jeans has created a global brand awareness

1973 Pepe Jeans was established as a road side stall by three brothers Nitin Shah, Arun Shah and Milan Shah from Kenya at Portobello Road Market in West London’s trendy Notting Hill district.

1975 Pepe Jeans started becoming well known brand name in Europe. Due to this fact that Pepe was growing bigger it was necessary to open the boutiques and later warehouse, and offices in London.

In the 80s the brand grew even more and it became one of Europe's best clothing brands

Technology

•The main technological development in the Apparel Wholesaling has been the electronic management of the supply chain. Wholesalers do this through a number of technologies, including electronic data interchange (EDI), extensible markup language (XML) and radio frequency identification (RFID).

Revenue Volatility

•According to IBIS World report, during the five-year period to 2014, it is estimated that revenue for Global Manufacturing this industry has fallen at an annualized rate of 4.0% per year, to $4.6 billion.

Regulation and Policy

•Wholesalers must abide by UK Patent and Trademark laws, which relate to the protection of intellectual property rights. Penalties are imposed on the infringement of patents, such as patents for clothing designs.

Demand Determinant

•Demand for products within the Women's and Children's Apparel Wholesaling industry is influenced by per capita disposable income and consumers' feelings about their financial futures. When consumers' have high levels of disposable income and believe that they will have steady or higher levels of disposable income in the future, then they are more inclined to buy apparel.

Key buying

•Women’s clothing stores, department stores, family clothing stores, warehouse clubs and super centers etc.

Key Selling

•Cut and Sew manufacturers, General Apparel manufacturers

Denim Industry Overview.

Pepe jeans has been enjoying considerable financial success in its current business model. Last year the company made profit before taxes nearly 32% of sales as per the financial analysis below.

(Million ₤)

Sales 200

Cost of sales (80)

Gross Profit 120

Operating expenses (56)

Profit before taxes 64

Current Status.

• Majority of Pepe’s sales are through about 1500 independent outlets throughout UK. They maintain contact with its independent retailers via a group of approximately 10 agents who are self employed and work exclusively for Pepe and each of them is responsible for retailers in the particular area of the country

• Agents meet with each retailer 3 to 4 times a year to present new collections and take order Contact is done by holding presentation in a hotel for several retailers. Orders are taken for 6 months delivery.

•

• After Pepe receives an order a retailer has 1 week to cancel or make changes

• Pepe has long standing policy to not hold inventory

• After orders are placed status can be seen online

How Pepe manages its distributers

Pepe’s current supply chain

• A recent survey of independent retailers indicated some growing problems.

Complaints from Independent retailers• Pepe has become less of a trend setter than in the

early days

• Retailers are unhappy with Pepe’s requirements to place orders 6 months in advance with no possibility of amendments, cancellation, or repeat ordering.

• The inflexible order system forced retailers to order less resulting to stock outs of particular sizes and styles and they estimated that Pepe’s sales would increase by 10% in sales with a more flexible ordering system

(Current sales - £200 Mil. therefore 10% of would be £ 20 Mil. Profit before taxes (PBT) at the rate of 32 % would mean an increase in the PBT of £ 6.4 Mil. )

Why is Pepe Concerned?

How were the retailers affected by Pepe’s ordering system?•The six months ordering time made it difficult for retailers to accurately forecast and order.

•The fashion market is very impulsive and therefore the current favorites are not in Vogue 6 months in the future

•When demand exceeded expectations it took a long time to fill the gap

Why is Pepe Concerned?

What retailers wanted:-• Some limited returns, exchange, or re-ordering

to overcome the problems.

• Pepe felt some pressure to respond because some of smaller competitors offered delivery in only a few days.

• The desired Outcomes

• Reduced Lead Time

• Possibility of amendments, cancellation, or repeat ordering for the Retailers

• Have more robust designs that set trends like it used to be

What Can Pepe Jeans Do to address complaints?

• Shorten the lead time to as little as six weeks with the current agent

Pros• The advantage in this alternative is that the company does not

have to make any initial investment but has to incur this additional cost every year. Since no investment is made , no payback period is calculated

Cons• Significant increase in costs to as much as 30%. Currently the yearly cost of sales is 40% of sales of £ 200 M that

is £ 80 000 000 ( 40%x £ 200 000 000) If the cost goes up by 30% it would mean 30% of £ 80 000 000M

that is £ 24 000 000  

In return for this increase in cost the company could make an approximate increase in the PBT of   £ 6 400 000 but it will cost extra £ 24 000 000 therefore the cost outweigh the profit by £ 17 600 000.

How can Pepe Jeans achieve the desired Goals

Solution 1:

• Building a finishing operations in the United Kingdom. According to the agent a retail chain moved to this type of structure and it was very successful

• Feasibility:

Solution 2:

Initial fixed cost for equipment £ 1,000,000

Renovations £ 300,000

Total Initial cost £ 1,300,000

Operations costs £ 500,000

Current COS (200M*40%) £ 800,000

Lead = 6 weeks (6/52 X £ 80,000,000) £ 9,230,000Inventory carrying cost is(30%x £ 9,230,000)

£ 2,769,000

Total recurring cost inventory carrying cost+ operations costs ( £ 2 769 000 + £ 500 000)

£ 3,269,000

Pros

•A US firm found that it could give a 2 day response time to retail stores.

•The costs for basic jeans reduced by 10 due to utilization of economies of scale

•Lead time reduced from 6 to 3 months

•It will increase inventory carrying cost by £3 269 000 and increase PBT by £ 6 400 000 .The benefit outweigh the cost by £ 6 400 000 – £3 269 000 = £  3 130 000

•Now, the fixed investment made by the company is £ 1 300 000 so the payback period is (1.3/3.13) x 52 = 21.6 weeks.

Cons

•It require a significant initial investment.

Solution 2: . . . continued

Sourcing from new suppliers overseas•From the research conducted, there are other suppliers who are able to make and supply jeans to Pepe’s customers.•There are suppliers using manufacturing facilities in China, Vietnam, Hong Kong, Thailand, Sri Lanka and Bangladesh. These countries have apparel manufacturers who are known for making cheap and quality clothing.

Pros•For Pepe Jeans to have this many choices, will automatically have more bargaining power and ultimately demand fast delivery of products to the retailers.•If Pepe Jeans take this option, they might be able to reduce the lead time to six weeks. This option might even lead to decrease in cost of sales and increase Pepe Jeans’ profit.

Cons•Quality control with new manufactures may be difficult•Will have to establish new supply chains and new business relationships which might prove to be costly.

Solution 3:

Use manufactures locally•There are still cloth manufacturers who are operating in United Kingdom that Pepe Jeans could start using. There are still cloth manufacturers in United Kingdom of the like of Cooper & Stollbrand, Johnstons of Elgin and Michael Edward Ltd

Pros•Reduce Lead time.•Easier to monitor quality

Cons•More expensive than the current option•Easier logistics

Solution 4:

Establish own manufacturing facility•Pepe Jeans can start doing their own manufacturing. Pepe currently is in a very strong financial position and has no debt. This position affords them a financial possibility of starting their own manufacturing facilities.  •Pepe Jeans could locate their facilities in countries which have low labor cost and low taxes like China, Hong Kong, Vietnam and others.

Pros•No Middle Man, Pepe will have full control on all of the supply chain•There will be optimum flexibility with their retailers•It will be easier to expand their operations and take advantage of export business•Guarantee sustainability and quality

Cons•It will require a huge initial investment

 

Solution 5:

Example: According to Forbes magazine, Inditex, owner of fast-fashion emporium Zara, manufactures almost all of its goods in La Coruña, Spain. “The clothes reach the sales floor more quickly and efficiently, thus serving more consumers. (Zara’s clothes hit the floor so quickly that for the first few hours they are kept on cheap plastic hangers to indicate that the items arrived that morning.)” (Forbes)

 

The use of Enterprise Resource Planning system (ERP)•Pepe Jeans should start the use of ERP system. The system will be integrated with the retailers, the suppliers and all the departments in Pepe Jeans which deals with inventory movements. This integration will enable the retailers to place their orders in the ERP system and make sure the person who is responsible with that order receives it instantly without any delays. That person can also send request to another person in the supply chain instantly without any delays as well. The system also sends requests automatically to the next person in the supply chain so as to eliminate delays. The system will act as a reminder of the process to all the people who are involved in the supply chain.

Pros•Reduce Lead time.•Give Retailers more controls over their merchandize

Cons•The system, deploying it and training can be expensive given the

big number of retailers

Solution 6:

• Study: • There is an Empirical study performed on the lead time improvement from

the implementation of ERP system done by Cotteleer and Bendoly. The study was based on a company called Tristen Inc. information was collected from this company before the company installed the system and after the company installed the system. The result obtained showed that lead time was reduced by at least 28%. The study further reveal that there is a strong correlation between reduction of lead time and increase in revenue.

Solution 6: . . . continued

 •The use of ERP system will come with a certain financial cost as well as time investment in training. However, from the empirical study, it has been proven that the use of ERP comes with a financial return which is worth the investment.

• Solutions 1: Shorten the Lead time with current suppliers

• Solution 2: Building a finishing operations in the United Kingdom

Financial comparisons between solution 1, 2 and the current situation

Old Model Solution 1 Solution 2

Sales

200,000,000

220,000,000 220,000,000

Cost of sales

80,000,000

104,000,000 72,000,000

Gross Profit

120,000,000

116,000,000 148,000,000

Operating expenses

56,000,000

56,000,000 56,000,000

Inventory holding costs 2,769,231

Facility operating costs 500,000

Profit before taxes

64,000,000

60,000,000 88,730,769

Recommendations

From the 6 solutions we came up with there are some that can be used as a temporary measure and others for long term considerations

TemporarySolution 1: Shorten the Lead time with current suppliersSolution 3: Sourcing from new suppliers overseasSolution 4: Use local manufacturers (can be used t fill the demand gaps)

Medium termSolution 2: Building a finishing operations in the United Kingdom

Long termSolution 5: Establishing own manufacturing facility (smooth transition from the finishing operation that they will already have up and running)Solution 6: ERP system

Questions? Comments?

References

• Robert, J & R, B Chase Operations and supply chain management book

• Pepe Jeans official website retrieved from http://www.pepejeans.com/en_gb/

• IBISI World report on the global Apparel industry retrieved from http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=349

• Top 10 destination for clothing manufacturers retrieved from http://www.thesourcingplace.com/top-sourcing-destinations-for-clothing-manufacturers/

• Who Makes The Clothes On Your Back? retrieved from http://www.forbes.com/2008/05/25/style-clothes-foreign-forbeslife-cx_ls_outsourcing08_0529offshore.html

• Cotteleer M and Bendoly E, (2005) Order Lead-time Improvement Following Enterprise-IT Implementation: An Empirical Study.