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Pepe Jeans Case Study

Analysis, Recommendations, Key Performance Metrics

 Pepe Jeans

The Problem

Pepe has accrued several problems over a long period of time that is taking revenue away from their bottom line. Pepe needs to to shorten the time lead time of product hitting the market, reduce the already high warehousing and transportation costs all while continuing to provide a high quality and diverse product line in order to stay competitive. Pepe does not have an up to date warehouse management system which is a red flag that they are not abiding by proven supply chain principles.

Analysis

Operation at Large

Transportation

Pepe’s transportation expenses are too high and not uniform throughout each distribution center.Pepe delivers to customers typically utilizing FOB Origin, Prepaid. Split orders have been on the rise which are increasing company transfers by forcing other DC’s to ship their inventory to the needed location. The cumulative effect of this over the years is a 10% increase in intercompany transfers. In addition, Distribution centers are negotiating contracts (80 contracts) with a variety of transportaion carriers (65 unique carriers that include LTL, TL, Expedited Couriers and air) which yields the result of having a decentralized transportantion scenario. Finally Pepe imports 600 FEU’s (define)  a year which is costing them $3,000,000 anually. They order material from over 100 vendors around the world primarily in Asian countries. Labor is cheaper is these countries due to reduced labor laws. Pepe runs the foreign manufacturing facilities.

Warehousing

Pepe’s Distribution centers do not have lean processes or current warehouse management software. Their distribution center costs are $48,000,000 which is 10% higher than the industry average. This decreases their competitiveness over time by decreasing their overall profit and increasing the cost of goods sold. Clients are unhappy with having to place orders 6 months in advance because the industry is fast paced as fashion changes. It is estimated that sales would increase 5% with a flexible ordering system which Pepe’s is lacking. On the other hand if order time was reduced from 6 months to 6 weeks, supply chain costs may increase by 30%; a costly increase which needs to be taken into consideration. The sourcing agent pointed out that the cost of producing Jeans would decrease by 10% if stock jeans were standardized, but the adverse effect would be that variety would be reduced which is damaging in the retail industry where fashion is constantly changing. The average inventory per DC is $25 Million with 8 centers in the US. The current cycle time from receipt of an ocean container at the DC receiving dock to being put away in inventory is about 8 hours, or one shift. The DC’s have a fill rate of 95 percent.  But A items have the lowest fill rate of 80%. These are the most important SKU’s in the DC’s. This is a problem that needs to be mitigated. Industry Trends show that logistics costs in the retail apparel industry are on average about 10% of the total COGS.  Pepe’s is currently above the industry average by about $47 million dollars. Being such a large company, this is unacceptable.

  • 5% of orders are passed to the DC without the inventory on hand to fulfill the complete order.

 

Sales and Customer Service

The company headquarters is located in Boston Massachusetts. Pepe has 1,000 retail stores in the US as well as a few locations in high end stores such as bloomingdales. Typically, profit margins are higher in these high end stores. Pepe works with a sourcing agent in Hong Kong to ensure that the quality and materials are up to standard. 8 Agents are staffed to maintain customer relationships in the different US regions as well as Europe. This seems like a low number based on the large size of Pepe. There is a trend for customers to order smaller quantities due to reduced storage spaces. Retailers carry more SKU’s opposed to a large quantity of one SKU.

Recommendations

Implementation #1 – Tier 1 Warehouse Management Systems (Short Term)

Pepe’s Warehouses are cutting profit margins of the company due to their high operation costs. I recommend implementing a Tier 1 warehouse management system into each distribution center. Tier 1 WMS packages feature the newest technologies to make the process more lean and efficient. Radio Frequency Identification (RFID), wireless communication, automation support and other features. Pepe is spending $48,000,000 annually on warehouse related costs which is 10% above the industry average. A tier 1 warehouse management system will negate this 10%, and further lower costs over time. These systems cost on average $750,000 each but will reduce and eliminate many of the problems that have plagued Pepe in the past. Pepe’s problem of having 80% fill rate for A Items will be solved and I predict a new fill rate of 95%. Another problem that will be alleviated by installing the WMS is that when a product arrives in the headquarters in Boston, the other DC’s are unable to see the shipment in the ERP system. A tier 1 WMS allows for ERP system integration and will connect each DC.

Savings from WMS

Year

2013

2014

Warehouse Cost

$       48,000,000

$       43,200,000

Reduction

10%

10%

End Result

$       43,200,000

$       38,880,000

2013 Savings

$         4,800,000

2014 Savings

$         4,320,000

Total

$         9,120,000

Implementation #2 – Hire Six-Sigma Professionals for DC’s (Short Term)

Having a Six Sigma certified professional in each warehouse has both short term and long term benefits. These industry professionals achieved the highest level of knowledge in the best practices to make processes more efficient and effective. It will cost on average $95,000 a year for each professional hired. These trained professionals will fix the fill rate of “A” items in conjunction with the newly implemented warehouse management system. Is it also essential to have them work in the manufacturing facilities in Asia to make the process leaner from the manufacturing end because the savings will translate directly back to Pepe. A case study of the company Staples shows that implementing six-sigma processes yields quantifiable benefits. Over a 10 year span they saved $100,000,000, reduced lead time of opening a new location by 4 weeks, and streamlined order-cycle time which yielded savings of $3,000,000.  Also Staples used Six-Sigma principles to reconfigure the loading dock process, which increased on-time due date performance by 21%. According to the sourcing agent in Hong Kong, reducing the lead time from 6 Months to 1 month (6 weeks) a 5% increase in sales will occur. The follow chart estimates how a 4 week reduction in cycle time, similar to what occurred in staples will increase sales.

Six Sigma Reduction (4 Weeks)

Months

% Profit Increase

Revenue

Profit

Current Lead Time

6 Months

0%

 $       2,000,000,000

 $        1,000,000,000

New Lead Time

5.2 Months

1.5%

 $       2,030,000,000

 $        1,015,000,000

Total Increase Increase

 $            30,000,000

 $              15,000,000

Implementation #3 – Negotiate a Contract with UPS (Short Term)

Pepe uses over 65 carriers to transport products. It is difficult to manage relationships and avoid problems with that many carriers. Currently Pepe is using UPS to take care of a small percentage of overnight freight. I recommend that a long term contract be negotiated with UPS to take care of all logistics. The major cost savings will be seen with the removal of expedited couriers. They are the most expensive mode of transportation. A case study by UPS demonstrates that when ocean freight was switched to air freight when imported from Asia, the cycle time was reduced by 4 – 6 weeks. In addition there was an increase in customer service, improved cash flow, lower inventory costs and a strengthened opportunity to expand market share. There will be an estimated reduction in cycle time from 6 months to 5 months for Pepe.

Savings From Removal of Ocean Freight (UPS Contract)

Revenue Lead Time at 6 Months (Current Yearly Revenue)

 $         2,000,000,000

Lead Time Reduced to 1 Month (5% Projected Increase in Sales)

 $         2,100,000,000

Lead Time Reduced to 5 Months (2% Projected Increase in Sales)

 $         2,040,000,000

Total Savings Lead Time Reduced to 5 Months

 $               40,000,000

  • $40 Million Increase In Revenue = $20 Million Increase in Profit.

Implementation #4 – Close the Chicago Distribution Center (Long Term)

The upkeep cost of the distribution centers are cutting into Pepe’s profit margins. The implementation of the Tier 1 warehouse management systems in each distribution center will make the supply chain run more efficiently and reduce the need for additional distribution centers. The other DC’s increase in productivity will bear the weight of closing down the Chicago center. The Chicago Distribution Center is located 297 miles away from the Saint Louis center. Eliminating this center will save Pepe $6,187,500 in costs annually between inventory holding cost and DC center costs.

Total/yr

1 DC Cost/yr.

Distribution Center Cost

$48,000,000

$6,000,000

Inventory Holding Cost

$15,000,000

$187,500

$6,187,500

Implementation #5 – Increase Standardization in Jeans (Long Term)

Staying competitive in today’s business environment requires manufactures to chase after producing their product at the lowest cost, while keeping customers satisfied with product quality. The cost of jeans will be reduced by 10% due to lower material costs and less vendors to purchase from. I project that customer sales will not decrease due to the loss of variety from standardization because the overall price can decrease and savings will be translated back to the customer, which they will appreciate. This decision must be carefully planned because it is a major change in the core business processes.

[Current Cost Of Goods Sold = 1,000,000,000 x (10% Reduction in Cost)] =    $100,000,000

[New COGS = $900,000,000]

[New Annual Profit $1,100,000,000]

 

 

 

Implementation #6 – Implement Better Forecasting Techniques (Long Term)

A case study by UPS demonstrates how a $500million dollar consumer goods company saved 9 million over several years by improving forecasting techniques. An analysis of each individual SKU was conducted to determine how much revenue and profit each one was contributing to the company. UPS categorized the products into A, B and C categories- a feature that Pepe is currently utilizing. $1.5 million was saved 1.5 in working capital.

UPS Case Study Revenue

Pepe Revenue (Projected Increase)

 $                          500,000,000  $            1,000,000,000

% of Total

0.3%

0.3%

Savings

 $                               1,500,000  $                    3,000,000

 

Total Savings

Implementation

2012

2013

WMS

$             4,800,000

$             4,320,000

Six Sigma

$           15,000,000

$           15,000,000

UPS Contract

$           20,000,000

$           20,000,000

Close DC

$             6,187,500

$                            -

Forecasting Techniques

$             1,500,000

$             1,500,000

Total Savings

$           47,489,512

$           40,822,013

$  88,311,525

 

Key Performance Metric’s

  1. % Reduction in Lead time: A central issue with the operation is that Pepe’s Lead time from manufacturer, to DC, to customer is way too long (6 months) this is especially concerning because the fashion industry is fast moving and not having products quickly and readily available causes various issues and reduces long term sustainability. Customer feedback should improve as the lead time is reduced as well as bottlenecks that make the process take so long.
  2. % Reduction in Transportation Expense: A second equally important problem with Pepe’s operation is how much they can reduce their transportation expense. Having 65 unique carries is a red flag that transportation is not centralized. Ideally as the system gets more efficient the expense should be charted and the expense should decrease each year. A reduction of carrier from a major UPS contract will be seen.

 

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