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Acting as an outside consultant, what would you recommend that Pepe do? Provided the data in the case, carry out a monetary analysis to evaluate the alternatives that you have identified. (Assume that the new inventory could be valued at six weeks’ worth of the annual expense of sales. Use a 30 percent inventory carrying expense rate.) Determine a repayment period for each alternative. Pepe Denim has 3 choices: Not do anything Decline preparation to 6 weeks Develop a factory and reduce preparation to 3 months Our calculations on the connected pages.
We would recommend that Pepe pick Alternative 2, provided the boost in the yearly revenues. Although alternative two has a preliminary investment of 1. 3 million and 0. 5 million in yearly operating expense, it is still less costly then Alternative 1. 2. Are there other options that Pepe should think about? Pepe’s would first need to take a look at the “big image”. They must take the holistic method and look at the whole supply chain, not simply the production portion.
They should take a look at the logistics for the movement of the denims to the sellers and eventually the consumers.
An evaluation of the supply chain would be required to figure out the requirement for buffers in the procedures, to prevent obstructing or starving the procedure. Lowering the preparation in either alternative might fix the lead time/inventory concerns, however it might develop other problems, such as quality control issues. Although minimizing the lead time would mean the products are produced at a faster rate, it will draw attention to the concern of quality.
If the jobs are rushed it can trigger their product quality to be lowered, which could harm Pepe’s track record for terrific quality.
To reduce the impact they will require to impose their Costs of Quality, consisting of the appraisal, prevention and internal costs. It is essential to keep in mind that Pepe has developed their image on good quality. Lowering preparation to 3 months, instead of 6 weeks will increased sales due to more pattern specific inventory being offered from retailers and as they will not be rushing the process it will less jeopardize the expenses of quality. As Pepe’s item is ingenious, they need the need for their product to be able to maintain their revenue.
To keep their competitive advantage they must reduce their lead time, to be able to keep up with fashion trends. Pepe jeans can stay with its current situation and continue the success they are having, but eventually competition will erode their advantage. Pepe’s current process is vulnerable from a marketing standpoint, as the world of fashion is trendy and seasonal, thus making the six month lead time uncompetitive in the long term and Pepe would not be able to stay on top of what customers actually want in a fluctuating industry.
Having the new facility will allow them to design the basic jeans to match the fashion industries at that time, and customized them afterwards. They need to be flexible to meet customer’s every changing diverse needs Alternative 2 would mean moving basic jeans to the Willesden facility, however, they would need to know if they would require a larger storage facility if the basic jeans are produced more rapidly than the finished goods.
Another alternative for Pepe would be to consider Outsourcing their production activities to another country where cost advantages and flexibility can be greater. There are many other countries like India that thrive on the textile industry. Finding another country that has cost benefits and flexibility can decrease Variable cost (cost of goods sold) and improve Pepe’s gross margin ratio. Pepe should do a more specific financial analysis of how the costs changes (COGS and Operating Expenses) with each week the lead time is reduced.
For example, if the current lead time is 6 months (approximately 24 weeks) they should review the numbers at 18 weeks, 12 weeks, and 6 weeks and compare the costs. They do not necessarily need to build a facility, which is the alternative we chose, because they might be able to reduce the costs and the lead time enough to make Alternative 1 more profitable. In the end there are many options for Pepe to consider.
They need to ensure that whatever alternative they choose matches their competitive strategy. They need to know that the final product will still meet their standards, and build their brand. They might consider doing a survey of customers to determine if they are happy with the products and ensure Pepe is listening to the “voice of the customer” before they make any drastic changes. The last thing they need are additional external costs of quality with the customers finding problems.
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