The main advantage of Pepe not carrying inventory is obviously the cost savings, as it is usually not efficient or cost effective for that matter, to carry excess inventory. The downside is not having enough pairs of jeans on hand to ship to stores when demand is high. An inventory would help alleviate this. The six month lead time is both an advantage and disadvantage for Pepe. The long lead time is positive in that once a retailer places an order, they only have a week to cancel the order. Pepe is able to realize a profit after only ten days rather than months later.
The contract locked retailers in immediately and keeps them from reneging on the deal. The downside is that many stores may be turned off by the long lead. It was mentioned in the article that most manufacturers have lead times of a few months or less. The independent stores also tended to order less volume due to the inflexible order system, and the trouble with fashion is that items typically have a short wearable life before they go out of style. Corporate purchasers were worried that the jeans they ordered may go out of style before they even arrive.
If I were the manager of Pepe, I would assure my retail partners that every reasonable action was currently being taken to help reduce the current lead time. I would mention the options being considered and thank them for their partnership. I would then sit down with the CFO as well as the best analysts in the company and run reports to forecast the most efficient method of reducing lead time. The case mentions two alternatives to reduce lead time: working with a Hong Kong sourcing agent or building a finishing operation in the UK.
Without seeing the company’s financials, it is difficult to say which would be a better choice. The article does mention that Pepe has no long term debt and appears to have plenty of cash on hand. If that is truly the case, then the better option may be to invest in the finishing factory. There would be a large investment up front, but lead time could be cut in half while reducing costs by up to ten percent as well. On the other hand, the sourcing agent could possibly reduce lead time down to as little as six weeks. The problem with this option is that costs to soar by as much as thirty percent.
Courtney from Study Moose
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