Analyzing Sourcing and Manufacturing Strategies for Better Financial Performance Jim Lovejoy Textile/Clothing Technology Corp.

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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 stock
• Inventory turns
• Gross Margin

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Retail Performance Measures

• In stock
• In stock , service level, lost sales
• Inventory
• inventory turns, who owns inventory?
• Gross margin
• Gross 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
• Inventory
• Turns
• Units ordered, produced, shipped, residual
• Financial
• Cost, revenue, gross margin, GMROI

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Strategies Evaluated

• Traditional Build to Plan
• Vendor Managed Inventory (VMI)
• Quick Response (QR)
• Newsboy
• Model Stock
• Target Weeks Supply

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Traditional Build to Plan

• Program Received in Advance of Season
• Mix and Volume of Garments Based upon Buyers
  Plan
• No reordering, no re-estimation of demand

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Vendor Managed Inventory

• Vendor Produces Buyers Plan
• 40-50 of Program Shipped in
• Advance of Season
• Retailer Makes Weekly POS-Based Reorders
• Vendor Ships as Stock Allows
• Can accommodate some increase in volume

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Quick Response

• 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

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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-estimation
• Replenish to model stock quantities in buyers
  plan
• Equivalent 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 Absolute
• Size Demand Demand 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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Seasonality Curves
of Total Sales
of Total Sales
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Importance of Speed Flexibility

• Cannot predict future
• Forecasting is based on history
• POS data is not 100 accurate
• Consumer is fickle
• Buyers have performance measures
• Offshore sources are cheaper

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Simulation Analysis

• INPUTS
• Buyers Plan
• Selling Price
• Cost
• Replenishment Strategy
• Consumer Demand and Behavior

• OUTPUTS
• Sales
• Lost Sales
• Markdown Loss
• Gross Margin
• Service Level
• Inventory Turns
• GMROI

Demand
Demand
Season
Season
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Example Scenario

• Childrens Twill Coverall
• Retail 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
QR
Service Level
Traditional
Season Length
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Gross Margin for QRPerfect Volume Forecast
QR
13.65
GM
Traditional
Wholesale Price
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Gross Margin for QRForecast 25 Low
QR
GM
14.20
Traditional
Wholesale Cost
25
Gross Margin for QRForecast 25 High
QR
16.00
Traditional
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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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Manufacturers Collaborative Results Best Case
vs. Typical

• Total Revenue 20
• Gross Margin 66
• Inventory Turns(raw material) 7 vs. 4.8
• Ship 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 markdowns
• Better 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
• TC2
• 919-380-2184
• Russ King,
• NC State University 919-515-5186