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