Pepe Jeans_Operations Management

Pepe Geans.

Case-Study Overview
History:
- Key dates
Solution:
- Financial analysis

1973 Pepe Jeans was established as a road side stall by three brothers Nitin Shah, Arun Shah and Milan Shah from Kenya at Portobello Road Market in West London’s trendy Notting Hill district.
1975 Pepe Jeans started becoming well known brand name in Europe. Due to this fact that Pepe was growing bigger it was necessary to open the boutiques and later warehouse, and offices in London.
In the 80s the brand grew even more and it became one of Europe's best clothing brands.
1988 The song How Soon is Now? by The Smiths was used to advertise the brand.
1998 Tommy Hilfiger Canada Inc. acquired a portion of Pepe Jeans USA for $1.15 billion.
HISTORY

2006 Pepe Jeans London has announced Sienna Miller, British actress and Hollywood superstar as new face of the brand .
2008 Pepe Jeans is now one of the most succesful jean companies in history with sales in over 60 markets and locations all over the world.
HISTORY www.pepejeans.com

Flexible system would lead to an increase in the sales of about 10%.
Current sales - £ 200 000 000
10% of £ 200 000 000 would be £ 20 000 000
Profit before taxes(PBT) at the rate of 32 %
would mean an increase in the PBT of
£ 6 400 000 ( 32% x £ 20 000 000)

First alternative
Decrease of lead time would lead to an increase in costs by 30%.
Currently the yearly cost of sales is 40% of sales of £ 200 000 000 that is
£ 80 000 000( 40%x £ 200 000 000)
If the cost goes up by 30% it would mean 30% of £ 80 000 000M that is
£ 24 000 000
In return for this increase in cost the company could make an approximate increase in the PBT of £ 6 400 000 that would still mean (24 000 000 – 6 400 000) = £ 17 600 000 additional burden on the company.
The advantage in this alternative is that the company does not have to make any initial investment but has to incur this additional burden every year. Since no investment is made , no payback period is calculated.

Second Alternative
Initial fixed cost for equipment £ 1 000 000
Renovations £ 300 000
Total £ 1 300 000
Operations costs £ 500 000
Lead time 6 weeks
40%x £ 200 000 000= £ 80 000 000 yearly cost of sales at 40%
6/52 X £ 80 000 000 = £ 9 230 000
Inventory carrying cost is 30% of £ 9 230 000 that is
£ 2 769 000(30%x £ 9 230 000)
Recurring cost= inventory carrying cost+ operations costs=
£ 2 769 000 + £ 500 000= 3 269 000

Second Alternative
£ 6 400 000 – £ 3 270 000= £ 3 130 000
we get an increase in the yearly profit before taxes
Now, the fixed investment made by the company is £ 1 300 000
(calculated above) so the payback period is (1.3/3.13) x 52 = 21.6 weeks .
This is the preferred alternative and should be recommended to Pepe.

Other alternatives
The other alternative that Pepe could consider could be to continue with the current arrangement. It is excellent from the financial point of view but it is vulnerable from the marketing point of view. If Pepe continues to insist on requirements to place firm orders six months in advance with no possibility of amendment, cancellation, or repeat ordering, it is a matter of time before the retailers turned to other manufacturers who allowed more flexibility.
Some other alternatives that Pepe could consider could include sourcing its jeans in some other country where there were more cost advantages and greater flexibility. Finally, Pepe could consider the case where the entire manufacturing was transferred to UK, the financial strength of the company could finance it and this step would provide it with great flexibility and responsiveness to independents.

Thank you!
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Pepe Jeans_Operations Management

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