Page 94 - DMGT525_MATERIALS_MANAGEMENT

Unit 6: Supply Chain Management

Notes
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Case Study Pepe Jeans

his is the story of Pepe Jeans, a company renowned for its range of Jeans styles,
offering a better fit than others, especially for its female customers. The company
Tbegan to produce and sell denim jeans in the early 70s in the United Kingdom.
Their range of basic styles was modified each season, in keeping with the fashion trends,
but each style maintained its identity.
Sales of Pepe jeans was primarily through its 1,500 independent outlets throughout the
United Kingdom. The company maintains contact with its independent retailers via a
group of approximately 10 agents who are self employed and work exclusively for Pepe.
Each agent is responsible for retailers in his area. Each agent takes orders from his retailers
for a six-month period. The retailer can, if he wants, modify/cancel the order but within a
week. After the orders have been transmitted to Pepe, they cannot be changed.
The orders are sent by Pepe to their sourcing agent in Hong Kong. The sourcing agent
handles all the details associated with materials, fabrication, manufacturing and shipping
the completed jeans to Pepe. Pepe has a very strong designing team which designs the
jeans and provides the complete specifications. They also ensure that the jeans are made
exactly as per these specifications and the material used is of the highest quality.
Of late there has been a slump is sales which has the Pepe management worried. They
have been told that they have become less of a trendsetter in recent times. An outside
consultant was engaged, who outlined the following scenario to the management:
Pepe has been enjoying considerable financial success in the past – the retail price of its
jeans was around $80, much higher than its nearest rival, Levi Strauss of USA. Sales last
year was approximately $320 million. Cost of sales was approximately 40%, operating
expenses 28% and the rest was profits. The company had no long-term debt and enjoyed a
healthy cash position.

After extensive dialogue, the consultant said that the lead times were very high. Fashion
industry is highly volatile and the six month order lead time was too long; this resulted in
the retailers having considerable non-moving inventory. They wanted a system of
exchange with Pepe to liquidate their non-moving and slow moving inventory.

The sourcing agent said that lead time could be shortened considerably, possibly to as low
as six weeks, but this would increase costs considerably. Currently, the agent collects
orders over a period of time and every two weeks, puts these orders out on bid to potential
suppliers. The suppliers are then selected and manufacturing process begins. By shortening
the lead time to six weeks, the price could go up by 30%. There would be a constant
pressure on delivery schedules too and failures could be ruled out.
The sourcing agent suggested to the consultant that Pepe should build a finishing operation
in UK. The basic jeans (where wash has not been applied) could be supplied from Hong
Kong and the finishing operation could apply the different washes to the jeans to get
different looks, and send them directly to the retailer.
The consultant found this to be an interesting idea. He felt that since the quantity of the
basic jeans would be increased, he could probably get a 10% reduction in price. But Pepe
would have to invest $1,600,000 worth of equipment. Even if the facility is located in the
basement of their headquarters, it would cost another $480,000 for installations, etc.

Contd...

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