analyzing sourcing and manufacturing strategies for better financial performance jim lovejoy...
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Analyzing Sourcing and Manufacturing Strategies
for Better Financial Performance
Jim LovejoyTextile/Clothing Technology Corp.
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Research Agenda
Compare Sourcing Strategies
Evaluate impact of Manufacturing Lead-time
Investigate the Impact of Forecast Error
Investigate the Impact of Collaboration
Identify top ten financial levers (other than price)
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Retail Performance Measures
In stockInventory turnsGross Margin
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Retail Performance Measures
In stockIn stock %, service level, lost sales
Inventory inventory turns, who owns inventory?
Gross marginGross Margin $, Gross Margin %, Adjusted
Gross Margin, Gross Margin Return on Investment (GMROI)
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Key Retail Planning Strategies
Plan assortment strategy
Plan merchandise pricing strategy
Plan delivery strategy
Evaluate vendor offerings
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Manufacturer Performance Measures
Service% shipped on time, % perfect orders% back orders, % back orders filled
InventoryTurnsUnits ordered, produced, shipped, residual
FinancialCost, revenue, gross margin, GMROI
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Strategies EvaluatedTraditional Build to Plan
Vendor Managed Inventory (VMI)
Quick Response (QR)
Newsboy
Model Stock
Target Weeks Supply
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Program Received in Advance of Season
Mix and Volume of Garments Based upon Buyer’s Plan
No reordering, no re-estimation of demand
Traditional Build to Plan
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Vendor Produces Buyer’s Plan40-50% of Program Shipped in
Advance of SeasonRetailer Makes Weekly POS-Based ReordersVendor Ships as Stock AllowsCan accommodate some increase in volume
Vendor Managed Inventory
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Similar to VMI
Stronger Partnership
Agile Manufacturing at Vendor
Re-estimate Demand by SKU Periodically
Shipments Match Demand Driven Reorders
Adjusts for error in previous forecast
Quick Response
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Newsboy
Similar to Quick Response
Reorder quantity based on target service level considering time until next reorder delivered or end of season
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Model Stock
No demand re-estimationReplenish to model stock quantities in
buyers planEquivalent to ordering to maintain a
presentation stock
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Target Weeks Supply
Re-estimate demand periodically based on POS
Order enough to satisfy demand for a fixed number of weeks after order is received
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Forecast Error
Volume Error - Difference between Total Demand and Forecast for the entire line
Mix Error - Difference in the Fraction of Demand for each SKU
“1% improvement in forecast accuracy can equal
a 2% inventory savings” Ernst & Young
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Forecast vs. Actual DemandSKU Mix Error
Forecast Actual AbsoluteSize DemandDemand Difference
S 10% 10% 0%
M 25% 35% 10%
L 35% 30% 5%
XL 30% 25% 5%
Total 100% 100% 20%
Example of a “20%” Size Error
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0.0%
2.0%
4.0%
6.0%
8.0%
1 3 5 7 9 11 13 15 17 19
Period
0.0%
2.0%
4.0%
6.0%
8.0%
1 3 5 7 9 11 13 15 17 19
Period
Seasonality Curves% of Total Sales
0.0 %
2.0 %
4.0 %
6.0 %
8.0 %
1 3 5 7 9 11 13 15 17 19period
0.0%
2.0%
4.0%
6.0%
8.0%
1 3 5 7 9 11 13 15 17 19
Period
% of Total Sales
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Importance of Speed & Flexibility
Cannot predict futureForecasting is based on historyPOS data is not 100% accurateConsumer is fickleBuyers have performance measuresOffshore sources are cheaper
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Simulation Analysis
INPUTS Buyer’s Plan Selling Price Cost Replenishment
Strategy Consumer
Demand and Behavior
OUTPUTS Sales Lost Sales Markdown Loss Gross Margin Service Level Inventory Turns GMROI
Demand
Season
Demand
Season
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Example Scenario
Children’s Twill CoverallRetail Price $30.00
Avg. Selling Price* $25.50
VMI/QR Cost $14.50
Traditional Cost $10.50
24 SKUs:
2 Styles
3 Colors
4 Sizes*Before End Of Season Markdown
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Performance Comparison for a 16 Week Season
Inventory % % Lost
Turns GMROI Markdowns Sales
Trad 100% 1.8 1.8 27% 23%
VMI 4.7 2.6 18% 24%
QR 5.7 3.7 11% 7%
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Performance Comparison for a 16 Week Season (cont.)
Service
Level Sales $ Gross Margin $
Traditional 71% $75,273 $38,749
VMI 70% $74,635 $27,356
QR 91% $90,070 $35,941
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Overall Service Level for Different Season Lengths
65
70
75
80
85
90
95
100
8 10 12 14 16 18 20
QR
Traditional
Season Length
ServiceLevel %
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Gross Margin for QRPerfect Volume Forecast
20000
30000
40000
50000
10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16
Traditional
GM$
Wholesale Price
QR
$13.65
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Gross Margin for QRForecast 25% Low
20000
30000
40000
50000
10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16
Traditional
QR
Wholesale Cost $
GM$$14.20
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Gross Margin for QRForecast 25% High
20000
30000
40000
50000
10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16
QR
Traditional
$16.00
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Are we using a complete scorecard in our sourcing
decisions?
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Onshore/Offshore Example
T shirt sold at mass merchant:Retail Price $ 3.00
Honduras 807 Cost $ .96
QR (USA) Cost $ 1.50
35 SKUs:
1 Style, 7 Colors, 5 Sizes
Plan
8000 dozen, 20 week season
one 25% markdown in week 18
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Compare QR vs 807 Sourcingfor Seasonal Garment
Quick Response Initial Stocking 40% POS weekly order 3 week turnaround 12 reorders, start wk 2 Shipments 2% short Wholesale price $1.50
Honduras 807 Initial Stocking 100% No reorders Transp cost $5000./cont. Duty = 18% of VA +
Assist Wholesale price $ .96
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Compare QR vs 807 Sourcingfor Seasonal Garment (20 weeks)
Quick Response Results Gross Margin 47% GM $ 146,891.
Honduras 807 Results Gross Margin 63% GM $ 155,265.
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Compare QR vs 807 Sourcingfor Seasonal Garment (20 weeks)
Quick Response Results Gross Margin 47% GM $ 146,891. Inventory Turns 4.48 Service Level 97% Sales $311,503. Lost Sales 2% GMROI 4.0
Honduras 807 Results Gross Margin 63% GM $ 155,265. Inventory Turns 1.96 Service Level 68% Sales $247,425. Lost Sales 29% GMROI 3.3
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Compare QR vs QR/807 Blend Sourcingfor Seasonal Garment (20 weeks)
Quick Response Results Gross Margin 47% GM $ 146,891. Inventory Turns 4.48 Service Level 97% Sales $311,503. Lost Sales 2% GMROI 4.0
QR/ 807 Blended Results Gross Margin 55% GM $ 171,629. Inventory Turns 3.72 Service Level 97% Sales $313,922. Lost Sales 2% GMROI 4.49
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QR vs. 807 Conclusions
807 Sourcing produces more GM$, GM%Quick Response does better than
Honduras 807 Sourcing in several commonly accepted measures.
Quick Response dominates in terms of:Service Level, Inventory Turns, Lost Sales
A blend of QR/807 sourcing performs well in all categories and has the best GM$ and GMROI
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Value of Collaboration - Case Study
What is the value of reducing the lead times for raw materials and manufacturing process time in a textile supply chain?
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Collaborative Supply Chain Results
Best Lead Time Fabric 2 weeks + 1 Apparel 1 week + 1 Min Order Fabric 1,000/500 Apparel 1/1
Typical Lead Time Fabric 6 weeks + 1 Apparel 2 weeks + 1 Min Order Fabric 10,000/5,000 Apparel 960/12
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Collaborative Supply Chain Results
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Collaborative Supply Chain Results
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Manufacturer’s Collaborative Results Best Case vs. Typical
Total Revenue +20%Gross Margin +66%Inventory Turns(raw material) 7 vs. 4.8Ship on Time 93% vs. 63%
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Research Results - General
Replenishment increases Gross Margin $ Speed of replenishment & flexibility increases GM$ Assortment diversity decreases Gross Margin $ Price sensitivity vs. markdown strategy
Not getting revenue return from markdownsBetter strategy to collaborate and replenish
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Top Ten Levers for Financial Performance(other than price)
1. Replenishment strategy
2. Service level
3. Assortment strategy
4. Forecasting
5. Make to order/make to stock
6. Lead time
7. Initial inventory
8. Minimum order quantities
9. Collaboration
10. Supply chain inventory placement
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References King, Nuttle, Hunter, 1991, A Stochastic Model of the Apparel-retailing Process
for Seasonal Apparel, Textile Institute Whalen, Gilreath, Reeve, 1995, Time is Money, Bobbin March 1995 Hunter, King, 1997, Retail Performance Measures and the Sourcing Decision,
National Textile Center Pinnow, King, 1997, Break Even Costs for Traditional versus Quick Response
Apparel Suppliers, North Carolina State University IE Technical Report #97-4 King, Hunter, 1997, Quick Response Beats Importing in Retail Sourcing
Analysis, Bobbin March 1997 Koloszyc, 1998, Apparel Retailers Use Simulator to Improve Sourcing
Decisions, Stores August 1998 Kunz, 1998, Merchandising Theory Principles and Practice, Fairchild Books Maddalena, King, 1998, Replenishment Rules, Bobbin May 1998 Moon, Gokce, Maddalena, King, 1998, Proplenishment Makes a Payoff, Bobbin
May 1999
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Thank you! Questions?
Jim Lovejoy
[TC]2
919-380-2184 Russ King,
NC State University 919-515-5186