Transcript Evaluation of Sourcing Strategies for Apparel Russell E
Analyzing Sourcing and Manufacturing Strategies for Better Financial Performance
Jim Lovejoy Textile/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 stock Inventory turns Gross Margin
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)
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 Inventory Turns Units ordered, produced, shipped, residual Financial Cost, revenue, gross margin, GMROI
Strategies Evaluated
Traditional Build to Plan Vendor Managed Inventory (VMI) Quick Response (QR) Newsboy Model Stock Target Weeks Supply
Traditional Build to Plan
Program Received in Advance of Season Mix and Volume of Garments Based upon Buyer’s Plan No reordering, no re-estimation of demand
Vendor Managed Inventory
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
Quick Response
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
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-estimation Replenish to model stock quantities in buyers plan Equivalent 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 Demand SKU Mix Error
Size S M L XL Total Forecast Demand 10% 25% 35% Actual Demand 10% 35% 30% Absolute Difference 0% 10% 5% 30% 25% 5% 100% 100% 20% Example of a “20%” Size Error
8.0% % of Total Sales
Seasonality Curves
% of Total Sales 8.0 % 6.0% 6.0 % 4.0% 4.0 % 2.0% 2.0 % 0.0% 1 3 5 7 9 11 Period 13 15 17 19 0.0 % 1 3 5 7 9 11 period 13 15 17 19 8.0% 8.0% 6.0% 6.0% 4.0% 4.0% 2.0% 2.0% 0.0% 1 3 5 7 0.0% 1 3 5 7 9 11 Period 13 15 17 19 9 11 Period 13 15 17 19
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
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
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
Performance Comparison for a 16 Week Season
Trad 100% Inventory Turns 1.8
GMROI 1.8
% Markdowns 27% % Lost Sales 23% VMI QR 4.7
5.7
2.6
3.7
18% 11% 24% 7%
Performance Comparison for a 16 Week Season (cont.) Service Level Sales $ Gross Margin $ Traditional 71% VMI QR 70% 91% $75,273 $74,635 $90,070 $38,749 $27,356 $35,941
Service Level %
Overall Service Level for Different Season Lengths
100 95 90 85 80 75 70 65 8 10 12 14
Traditional
16 QR 18 20
Season Length
Gross Margin for QR Perfect Volume Forecast
50000
GM$
40000 30000
QR Traditional
$13.65
20000 10.5
11 11.5
12 12.5
13 13.5
14
Wholesale Price
14.5
15 15.5
16
Gross Margin for QR Forecast 25% Low
GM$
50000 40000 30000
QR Traditional
$14.20
20000 10.5
11 11.5
12 12.5
13 13.5
14 14.5
Wholesale Cost $
15 15.5
16
Gross Margin for QR Forecast 25% High
50000
QR
40000 $16.00
30000
Traditional
20000 10.5
11 11.5
12 12.5
13 13.5
14 14.5
15 15.5
16
Are we using a complete scorecard in our sourcing decisions?
Onshore/Offshore Example
T shirt sold at mass merchant: Retail Price Honduras 807 Cost QR (USA) Cost 35 SKUs: $ 3.00
$ .96
$ 1.50
1 Style, 7 Colors, 5 Sizes Plan 8000 dozen, 20 week season one 25% markdown in week 18
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
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.
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
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 $313,922.
Lost Sales 2%
GMROI 4.49
QR vs. 807 Conclusions
807 Sourcing produces more GM$, 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 Gross Margin +20% +66% Inventory Turns(raw material) 7 vs. 4.8
Ship 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 markdowns Better 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