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Analyzing Sourcing and Manufacturing Strategies for Better Financial Performance   Jim Lovejoy Textile/Clothing Technology...
Research Agenda <ul><li>Compare Sourcing Strategies  </li></ul><ul><li>Evaluate impact of Manufacturing Lead-time </li></u...
Retail Performance Measures <ul><li>In stock </li></ul><ul><li>Inventory turns </li></ul><ul><li>Gross Margin </li></ul>
Retail Performance Measures <ul><li>In stock </li></ul><ul><ul><li>In stock %, service level, lost sales </li></ul></ul><u...
Key Retail Planning Strategies <ul><li>Plan assortment strategy </li></ul><ul><li>Plan merchandise pricing strategy </li><...
Manufacturer Performance Measures <ul><li>Service </li></ul><ul><ul><li>% shipped on time, % perfect orders </li></ul></ul...
Strategies Evaluated <ul><li>Traditional Build to Plan </li></ul><ul><li>Vendor Managed Inventory (VMI) </li></ul><ul><li>...
<ul><li>Program Received in Advance of Season </li></ul><ul><li>Mix and Volume of Garments Based upon Buyer’s Plan </li></...
<ul><li>Vendor Produces Buyer’s Plan </li></ul><ul><li>40-50% of Program Shipped in  </li></ul><ul><li>Advance of Season <...
<ul><li>Similar to VMI </li></ul><ul><li>Stronger Partnership </li></ul><ul><li>Agile Manufacturing at Vendor </li></ul><u...
Newsboy <ul><li>Similar to Quick Response </li></ul><ul><li>Reorder quantity based on target service level considering tim...
Model Stock <ul><li>No demand re-estimation </li></ul><ul><li>Replenish to model stock quantities in buyers plan </li></ul...
Target Weeks Supply <ul><li>Re-estimate demand periodically based on POS </li></ul><ul><li>Order enough to satisfy demand ...
Forecast Error <ul><li>Volume Error - Difference between Total Demand and Forecast for the entire line </li></ul><ul><li>M...
Forecast vs. Actual Demand SKU Mix Error <ul><li>Forecast   Actual  Absolute </li></ul><ul><li>Size   Demand Demand Differ...
Seasonality Curves % of Total Sales % of Total Sales
Importance of Speed & Flexibility <ul><li>Cannot predict future </li></ul><ul><li>Forecasting is based on history </li></u...
Simulation Analysis <ul><li>INPUTS </li></ul><ul><li>Buyer’s Plan </li></ul><ul><li>Selling Price </li></ul><ul><li>Cost <...
Example Scenario <ul><li>Children’s Twill Coverall </li></ul><ul><li>Retail Price $30.00 </li></ul><ul><li>Avg. Selling Pr...
Performance Comparison  for a 16 Week Season <ul><li>  Inventory   %   % Lost  </li></ul><ul><li>  Turns   GMROI   Markdow...
Performance Comparison  for a 16 Week Season (cont.) <ul><li>  Service </li></ul><ul><li>  Level   Sales $  Gross Margin $...
Overall Service Level  for Different Season Lengths QR Traditional Season Length Service Level %
Gross Margin for QR Perfect Volume Forecast Traditional GM$ Wholesale Price QR $13.65
Gross Margin for QR Forecast 25% Low Traditional QR Wholesale Cost $ GM$ $14.20
Gross Margin for QR Forecast 25% High QR Traditional $16.00
Are we using a complete scorecard in our sourcing decisions?
Onshore/Offshore Example  <ul><li>T shirt sold at mass merchant: </li></ul><ul><li>Retail Price   $  3.00 </li></ul><ul><l...
Compare QR vs 807 Sourcing for Seasonal Garment  <ul><li>Quick Response </li></ul><ul><li>Initial Stocking 40% </li></ul><...
Compare QR vs 807 Sourcing for Seasonal Garment (20 weeks) <ul><li>Quick Response </li></ul><ul><li>Results </li></ul><ul>...
Compare QR vs 807 Sourcing for Seasonal Garment (20 weeks) <ul><li>Quick Response </li></ul><ul><li>Results </li></ul><ul>...
Compare QR vs QR/807 Blend Sourcing for Seasonal Garment (20 weeks) <ul><li>Quick Response </li></ul><ul><li>Results </li>...
QR vs. 807 Conclusions <ul><li>807 Sourcing produces more GM$, GM% </li></ul><ul><li>Quick Response  does better than  Hon...
Value of Collaboration  -  Case Study <ul><li>What is the value of reducing the lead times for raw materials and manufactu...
Collaborative  Supply Chain Results <ul><li>Best Lead Time </li></ul><ul><ul><li>Fabric 2 weeks + 1 </li></ul></ul><ul><ul...
Collaborative Supply Chain Results
Collaborative Supply Chain Results
Manufacturer’s Collaborative Results Best Case vs. Typical <ul><li>Total Revenue +20% </li></ul><ul><li>Gross Margin +66% ...
Research Results - General <ul><li>Replenishment increases Gross Margin $ </li></ul><ul><li>Speed of replenishment & flexi...
Top Ten Levers for Financial Performance (other than price) <ul><li>1.  Replenishment strategy </li></ul><ul><li>2.  Servi...
References <ul><li>King, Nuttle, Hunter, 1991,  A Stochastic Model of the Apparel-retailing Process for Seasonal Apparel ,...
Thank you!  Questions? <ul><li>Jim Lovejoy </li></ul><ul><li>[TC] 2 </li></ul><ul><li>919-380-2184 </li></ul><ul><li>Russ ...
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  • Transcript of "Analyse sourcing and manufacturing strategies"

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