operations management

1. Kemilembe Mjungu
Christina Bills
Evelyne Ringia

2. Case-Study Overview
• Background
• Statement of a problem
• Alternative Solutions
• Recommendations
• Conclusion

3.  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
 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 successful jean
companies in history with sales in over 60 markets and
locations all over the world.
 Currently Pepe Jeans is present over 100 countries and
employs more than 5000 employees all over the world.
Pepe jeans has created a global brand awareness
 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

4. Technology
• The main technological development in the Apparel Wholesaling has been the
electronic management of the supply chain. Wholesalers do this through a
number of technologies, including electronic data interchange (EDI), extensible
markup language (XML) and radio frequency identification (RFID).
Revenue Volatility
• According to IBIS World report, during the five-year period to 2014, it is
estimated that revenue for Global Manufacturing this industry has fallen at an
annualized rate of 4.0% per year, to $4.6 billion.
Regulation and Policy
• Wholesalers must abide by UK Patent and Trademark laws, which relate to the
protection of intellectual property rights. Penalties are imposed on the
infringement of patents, such as patents for clothing designs.
Demand Determinant
• Demand for products within the Women's and Children's Apparel Wholesaling
industry is influenced by per capita disposable income and consumers' feelings
about their financial futures. When consumers' have high levels of disposable
income and believe that they will have steady or higher levels of disposable
income in the future, then they are more inclined to buy apparel.
Key buying
• Women’s clothing stores, department stores, family clothing stores, warehouse
clubs and super centers etc.
Key Selling
• Cut and Sew manufacturers, General Apparel manufacturers
Denim Industry Overview.

5. Pepe jeans has been enjoying considerable
financial success in its current business
model. Last year the company made profit
before taxes nearly 32% of sales as per the
financial analysis below.
(Million ₤)
Sales 200
Cost of sales (80)
Gross Profit 120
Operating expenses (56)
Profit before taxes 64
Current Status.

6. • Majority of Pepe’s sales are through about 1500
independent outlets throughout UK. They
maintain contact with its independent retailers via
a group of approximately 10 agents who are self
employed and work exclusively for Pepe and
each of them is responsible for retailers in the
particular area of the country
• Agents meet with each retailer 3 to 4 times a year
to present new collections and take order Contact
is done by holding presentation in a hotel for
several retailers. Orders are taken for 6 months
delivery.
•
• After Pepe receives an order a retailer has 1
week to cancel or make changes
• Pepe has long standing policy to not hold
inventory
• After orders are placed status can be seen online
How Pepe manages its distributers

7. Pepe’s current supply chain
Retailers have to
place orders 6
months before
they arrive
•1 weeks to
amend
Pepe takes the
orders to the
agent in china
The agent
conduct a bidding
to about 1000
potential
supplier’s
•Every 2
weeks
weeks
The winner works with Pepe
Jeans designers for
specifications and quality
assurance
Production starts
Manufacturers
transport Jeans
from China to
Retailers
•Total Lead Time is 6
months

8. • A recent survey of independent retailers
indicated some growing problems.
Complaints from Independent retailers
• Pepe has become less of a trend setter than in the
early days
• Retailers are unhappy with Pepe’s requirements to
place orders 6 months in advance with no possibility
of amendments, cancellation, or repeat ordering.
• The inflexible order system forced retailers to order
less resulting to stock outs of particular sizes and
styles and they estimated that Pepe’s sales would
increase by 10% in sales with a more flexible ordering
system
(Current sales - £200 Mil. therefore 10% of would be
£ 20 Mil. Profit before taxes (PBT) at the rate of 32 %
would mean an increase in the PBT of £ 6.4 Mil. )
Why is Pepe Concerned?

9. How were the retailers affected by Pepe’s ordering system?
• The six months ordering time made it difficult for retailers to accurately forecast and
order.
• The fashion market is very impulsive and therefore the current favorites are not in
Vogue 6 months in the future
• When demand exceeded expectations it took a long time to fill the gap
Why is Pepe Concerned?
What retailers wanted:-
• Some limited returns, exchange, or re-ordering
to overcome the problems.
• Pepe felt some pressure to respond because
some of smaller competitors offered delivery in
only a few days.

10. • The desired Outcomes
• Reduced Lead Time
• Possibility of amendments, cancellation,
or repeat ordering for the Retailers
• Have more robust designs that set
trends like it used to be
What Can Pepe Jeans Do to address
complaints?

11. • Shorten the lead time to as little as six weeks with the
current agent
Pros
• The advantage in this alternative is that the company does not
have to make any initial investment but has to incur this
additional cost every year. Since no investment is made , no
payback period is calculated
Cons
• Significant increase in costs to as much as 30%.
Currently the yearly cost of sales is 40% of sales of £ 200 M 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 but it will cost
extra £ 24 000 000 therefore the cost outweigh the profit by
£ 17 600 000.
How can Pepe Jeans achieve the desired Goals
Solution 1:

12. • Building a finishing operations in the United Kingdom.
According to the agent a retail chain moved to this type of
structure and it was very successful
• Feasibility:
Solution 2:
Initial fixed cost for equipment £ 1,000,000
Renovations £ 300,000
Total Initial cost £ 1,300,000
Operations costs £ 500,000
Current COS (200M*40%) £ 800,000
Lead = 6 weeks (6/52 X £ 80,000,000) £ 9,230,000
Inventory carrying cost is
(30%x £ 9,230,000)
£ 2,769,000
Total recurring cost inventory carrying cost+
operations costs ( £ 2 769 000 + £ 500 000)
£ 3,269,000

13. Pros
• A US firm found that it could give a 2 day response time
to retail stores.
• The costs for basic jeans reduced by 10 due to
utilization of economies of scale
• Lead time reduced from 6 to 3 months
• It will increase inventory carrying cost by £3 269 000
and increase PBT by £ 6 400 000 .The benefit outweigh
the cost by £ 6 400 000 – £3 269 000 = £ 3 130 000
• Now, the fixed investment made by the company is
£ 1 300 000 so the payback period is (1.3/3.13) x 52 =
21.6 weeks.
Cons
• It require a significant initial investment.
Solution 2: . . . continued

14. Sourcing from new suppliers overseas
• From the research conducted, there are other suppliers who
are able to make and supply jeans to Pepe’s customers.
• There are suppliers using manufacturing facilities in China,
Vietnam, Hong Kong, Thailand, Sri Lanka and Bangladesh.
These countries have apparel manufacturers who are known
for making cheap and quality clothing.
Pros
• For Pepe Jeans to have this many choices, will automatically
have more bargaining power and ultimately demand fast
delivery of products to the retailers.
• If Pepe Jeans take this option, they might be able to reduce
the lead time to six weeks. This option might even lead to
decrease in cost of sales and increase Pepe Jeans’ profit.
Cons
• Quality control with new manufactures may be difficult
• Will have to establish new supply chains and new business
relationships which might prove to be costly.
Solution 3:

15. Use manufactures locally
• There are still cloth manufacturers who are
operating in United Kingdom that Pepe Jeans
could start using. There are still cloth
manufacturers in United Kingdom of the like of
Cooper & Stollbrand, Johnstons of Elgin and
Michael Edward Ltd
Pros
• Reduce Lead time.
• Easier to monitor quality
Cons
• More expensive than the current option
• Easier logistics
Solution 4:

16. Establish own manufacturing facility
• Pepe Jeans can start doing their own manufacturing. Pepe
currently is in a very strong financial position and has no debt. This
position affords them a financial possibility of starting their own
manufacturing facilities.
• Pepe Jeans could locate their facilities in countries which have low
labor cost and low taxes like China, Hong Kong, Vietnam and
others.
Pros
• No Middle Man, Pepe will have full control on all of the supply chain
• There will be optimum flexibility with their retailers
• It will be easier to expand their operations and take advantage of
export business
• Guarantee sustainability and quality
Cons
• It will require a huge initial investment
Solution 5:
Example: According to Forbes magazine, Inditex, owner of fast-fashion emporium Zara,
manufactures almost all of its goods in La Coruña, Spain. “The clothes reach the sales floor
more quickly and efficiently, thus serving more consumers. (Zara’s clothes hit the floor so quickly
that for the first few hours they are kept on cheap plastic hangers to indicate that the items
arrived that morning.)” (Forbes)

17. The use of Enterprise Resource Planning system (ERP)
• Pepe Jeans should start the use of ERP system. The system will be integrated with the
retailers, the suppliers and all the departments in Pepe Jeans which deals with inventory
movements. This integration will enable the retailers to place their orders in the ERP system
and make sure the person who is responsible with that order receives it instantly without any
delays. That person can also send request to another person in the supply chain instantly
without any delays as well. The system also sends requests automatically to the next person
in the supply chain so as to eliminate delays. The system will act as a reminder of the
process to all the people who are involved in the supply chain.
Pros
• Reduce Lead time.
• Give Retailers more controls over their merchandize
Cons
• The system, deploying it and training can be expensive given the
big number of retailers
Solution 6:

18. • Study:
• There is an Empirical study performed on the lead time improvement from
the implementation of ERP system done by Cotteleer and Bendoly. The
study was based on a company called Tristen Inc. information was
collected from this company before the company installed the system and
after the company installed the system. The result obtained showed that
lead time was reduced by at least 28%. The study further reveal that there
is a strong correlation between reduction of lead time and increase in
revenue.
Solution 6: . . . continued
• The use of ERP system will come with a certain
financial cost as well as time investment in
training. However, from the empirical study, it has
been proven that the use of ERP comes with a
financial return which is worth the investment.

19. • Solutions 1: Shorten the Lead time with current suppliers
• Solution 2: Building a finishing operations in the United Kingdom
Financial comparisons between solution 1, 2 and the current situation
Old Model Solution 1 Solution 2
Sales 200,000,000 220,000,000 220,000,000
Cost of sales 80,000,000 104,000,000 72,000,000
Gross Profit 120,000,000 116,000,000 148,000,000
Operating expenses 56,000,000 56,000,000 56,000,000
Inventory holding costs 2,769,231
Facility operating costs 500,000
Profit before taxes 64,000,000 60,000,000 88,730,769

20. Recommendations
From the 6 solutions we came up with there are some that can be used as a
temporary measure and others for long term considerations
Temporary
Solution 1: Shorten the Lead time with current suppliers
Solution 3: Sourcing from new suppliers overseas
Solution 4: Use local manufacturers (can be used t fill the demand gaps)
Medium term
Solution 2: Building a finishing operations in the United Kingdom
Long term
Solution 5: Establishing own manufacturing facility (smooth transition from the
finishing operation that they will already have up and running)
Solution 6: ERP system

21. Questions? Comments?

22. References
• Robert, J & R, B Chase Operations and supply chain management book
• Pepe Jeans official website retrieved from
http://www.pepejeans.com/en_gb/
• IBISI World report on the global Apparel industry retrieved from
http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?e
ntid=349
• Top 10 destination for clothing manufacturers retrieved from
http://www.thesourcingplace.com/top-sourcing-destinations-for-clothing-
manufacturers/
• Who Makes The Clothes On Your Back? retrieved from
http://www.forbes.com/2008/05/25/style-clothes-foreign-forbeslife-
cx_ls_outsourcing08_0529offshore.html
• Cotteleer M and Bendoly E, (2005) Order Lead-time Improvement Following
Enterprise-IT Implementation: An Empirical Study.