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Analyse sourcing and manufacturing strategies

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    • 1. Analyzing Sourcing and Manufacturing Strategies for Better Financial Performance Jim Lovejoy Textile/Clothing Technology Corp.
    • 2. 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)
    • 3. Retail Performance Measures
      • In stock
      • Inventory turns
      • Gross Margin
    • 4. 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)
    • 5. Key Retail Planning Strategies
      • Plan assortment strategy
      • Plan merchandise pricing strategy
      • Plan delivery strategy
      • Evaluate vendor offerings
    • 6. 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
    • 7. Strategies Evaluated
      • Traditional Build to Plan
      • Vendor Managed Inventory (VMI)
      • Quick Response (QR)
      • Newsboy
      • Model Stock
      • Target Weeks Supply
    • 8.
      • 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
    • 9.
      • Vendor Produces Buyer’s 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
      Vendor Managed Inventory
    • 10.
      • 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
    • 11. Newsboy
      • Similar to Quick Response
      • Reorder quantity based on target service level considering time until next reorder delivered or end of season
    • 12. Model Stock
      • No demand re-estimation
      • Replenish to model stock quantities in buyers plan
      • Equivalent to ordering to maintain a presentation stock
    • 13. 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
    • 14. 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
    • 15. Forecast vs. Actual Demand SKU 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
    • 16. Seasonality Curves % of Total Sales % of Total Sales
    • 17. 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
    • 18. 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
    • 19. Example Scenario
      • Children’s 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
    • 20. 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%
    • 21. 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 $35,941
    • 22. Overall Service Level for Different Season Lengths QR Traditional Season Length Service Level %
    • 23. Gross Margin for QR Perfect Volume Forecast Traditional GM$ Wholesale Price QR $13.65
    • 24. Gross Margin for QR Forecast 25% Low Traditional QR Wholesale Cost $ GM$ $14.20
    • 25. Gross Margin for QR Forecast 25% High QR Traditional $16.00
    • 26. Are we using a complete scorecard in our sourcing decisions?
    • 27. 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
    • 28. Compare QR vs 807 Sourcing for 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
    • 29. Compare QR vs 807 Sourcing for Seasonal Garment (20 weeks)
      • Quick Response
      • Results
      • Gross Margin 47%
      • GM $ 146,891.
      • Honduras 807
      • Results
      • Gross Margin 63%
      • GM $ 155,265.
    • 30. Compare QR vs 807 Sourcing for 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
    • 31. Compare QR vs QR/807 Blend Sourcing for 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 $313,922.
      • Lost Sales 2%
      • GMROI 4.49
    • 32. QR vs. 807 Conclusions
      • 807 Sourcing produces more GM$, 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
    • 33. 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?
    • 34. 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
    • 35. Collaborative Supply Chain Results
    • 36. Collaborative Supply Chain Results
    • 37. Manufacturer’s 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%
    • 38. 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
    • 39. 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
    • 40. 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
    • 41. Thank you! Questions?
      • Jim Lovejoy
      • [TC] 2
      • 919-380-2184
      • Russ King,
      • NC State University 919-515-5186

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