Analyzing Sourcing and Manufacturing Strategies

for Better Financial Performance

Jim LovejoyTextile/Clothing Technology Corp.

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)

Retail Performance Measures

In stockInventory turnsGross Margin

Retail Performance Measures

In stockIn stock %, service level, lost sales

Inventory inventory turns, who owns inventory?

Gross marginGross Margin $, Gross Margin %, Adjusted

Gross Margin, Gross Margin Return on Investment (GMROI)

Key Retail Planning Strategies

Plan assortment strategy

Plan merchandise pricing strategy

Plan delivery strategy

Evaluate vendor offerings

Manufacturer Performance Measures

Service% shipped on time, % perfect orders% back orders, % back orders filled

InventoryTurnsUnits ordered, produced, shipped, residual

FinancialCost, revenue, gross margin, GMROI

Strategies EvaluatedTraditional Build to Plan

Vendor Managed Inventory (VMI)

Quick Response (QR)

Newsboy

Model Stock

Target Weeks Supply

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

Vendor Produces Buyer’s Plan40-50% of Program Shipped in

Advance of SeasonRetailer Makes Weekly POS-Based ReordersVendor Ships as Stock AllowsCan accommodate some increase in volume

Vendor Managed Inventory

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

Newsboy

Similar to Quick Response

Reorder quantity based on target service level considering time until next reorder delivered or end of season

Model Stock

No demand re-estimationReplenish to model stock quantities in

buyers planEquivalent to ordering to maintain a

presentation stock

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

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

Forecast vs. Actual DemandSKU Mix Error

Forecast Actual AbsoluteSize DemandDemand 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

0.0%

2.0%

4.0%

6.0%

8.0%

1 3 5 7 9 11 13 15 17 19

Period

0.0%

2.0%

4.0%

6.0%

8.0%

1 3 5 7 9 11 13 15 17 19

Period

Seasonality Curves% of Total Sales

0.0 %

2.0 %

4.0 %

6.0 %

8.0 %

1 3 5 7 9 11 13 15 17 19period

0.0%

2.0%

4.0%

6.0%

8.0%

1 3 5 7 9 11 13 15 17 19

Period

% of Total Sales

Importance of Speed & Flexibility

Cannot predict futureForecasting is based on historyPOS data is not 100% accurateConsumer is fickleBuyers have performance measuresOffshore sources are cheaper

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

Example Scenario

Children’s Twill CoverallRetail 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

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%

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

Overall Service Level for Different Season Lengths

65

70

75

80

85

90

95

100

8 10 12 14 16 18 20

QR

Traditional

Season Length

ServiceLevel %

Gross Margin for QRPerfect Volume Forecast

20000

30000

40000

50000

10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16

Traditional

GM$

Wholesale Price

QR

$13.65

Gross Margin for QRForecast 25% Low

20000

30000

40000

50000

10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16

Traditional

QR

Wholesale Cost $

GM$$14.20

Gross Margin for QRForecast 25% High

20000

30000

40000

50000

10.5 11 11.5 12 12.5 13 13.5 14 14.5 15 15.5 16

QR

Traditional

$16.00

Are we using a complete scorecard in our sourcing

decisions?

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

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

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.

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

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

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

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?

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

Collaborative Supply Chain Results

Collaborative Supply Chain Results

Manufacturer’s Collaborative Results Best Case vs. Typical

Total Revenue +20%Gross Margin +66%Inventory Turns(raw material) 7 vs. 4.8Ship on Time 93% vs. 63%

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 markdownsBetter strategy to collaborate and replenish

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

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

Thank you! Questions?

Jim Lovejoy

[TC]2

919-380-2184 Russ King,

NC State University 919-515-5186