Walmart Pepe Jeans Operations Essays

Walmart Pepe Jeans Operations Essays Walmart Pepe Jeans Operations Essay Walmart Pepe Jeans Operations Essay Case: Pepe Jeans Pepe Jeans began to produce and sell denim jeans in the early 1970s in the United Kingdom and has achieved enormous growth. The company maintains contact with its independent retailers via group of 10 agents and each agent is responsible for retailers in a particular area of the country. Pepe is convinced that a good relationship with the independent retailers is vital to its success. The survey of the independent retailers indicated some problems. It was felt that Pepe’s variety of styles and quality was the company’s key advantage over the competition. However the independents were unhappy with Pepe’s requirement to place firm orders six months in advance with no possibility amendments, cancellation, or repeat ordering. Some claimed that the inflexible order system forced them to order less, resulting in stock outs. Pepe felt that a change was going to be needed soon. The easiest solution would be work with the Hong Kong sourcing agent to reduce the lead time associated with orders but this was going to increase the cost significantly. Even with the significant increase in cost, consistent delivery schedules would be difficult to keep. Another suggestion was to build a finishing operation in United Kingdom. Pepe was interested to see how system worked at U. S. operations. They found that they would have to keep about six weeks’ supply of basic jeans on hand in the United Kingdom and they have to invest ? 1,000,000 worth of equipment. They also estimated that it would cost about ? 500,000 to operate the facility each year. They could locate the facility in the basement of current office building, and the renovations would cost ? 300,000. Today’s operations management many companies outsource. Companies have variety of reasons for outsourcing but primarily the reasons are to reduce costs and create a competitive advantage. Companies tend to outsource in logistics area. This includes complete cycle of material flow; from the purchase and internal control of production materials to the planning and control of work-in-process; to the purchasing, shipping, and distribution of the finished product. Pepe Jeans outsourced in logistics area. Even though the company was successful and profitable doing so, this resulted in inefficient delivery time and unhappy retailers due to the restrictions of the outsourced company asking for six month lead time in ordering products. Now company faced with changing the way the production flow works in order to respond the retailers and independent agents’ complaints. As it indicates at themanager. org companies that rush overseas in search of low production costs may be walking into a strategic trap. Its easy to underestimate the hidden costs in long supply chains and their impact on profitability. Customers in outsourcing transactions face both direct and indirect risks. If your outsourcing vendor fails to perform, you may suffer direct damages in the form of out-of-pocket expenses incurred to perform the function yourself or hire another vendor, and lowered profits caused by lost business and harm to your reputation. Strategically, a main goal of outsourcing has always been to shift risk from the customer to the vendor. But while the risks arising from implementing new technologies and labor markets can be shifted in this way, CIOs know that not all risk can be handed off. A broad spectrum of risks involving finances and goodwill can arise from failures in outsourced functions. Simply put, operational risk always remains with the customer. Youre always responsible to the marketplace for your own performance. As the articles above indicate risks of outsourcing, we see this very example with Pepe Jeans. The restrictions of outsourced company in Hong Kong made it very hard for Pepe jeans to respond customer needs and made them very inflexible to its customers (retailers). It seems like Pepe Jeans may lose its profitability with outsourcing where the initial purpose was to save money. Sourcing company in Hong Kong agreed to shorten the lead time to 6 weeks instead of 6 month, but the company indicated that this would increase the cost significantly. If I was the CEO of Pepe Jeans, I’d look at what is beneficial for my company. I’d try to sit down with the sourcing company to renegotiate the contract to be able to make both sides happy. What I understand from the case study is that there are only couples of options laid out for Pepe Jeans. One is the renegotiating with Hong Kong based sourcing company and it seems like they offered a lead time of 6 weeks but a significant increase in cost but the case does not indicate how much. Other option is to move the finishing operations to United Kingdom. The case indicates that this will be very costly for Pepe Jeans. They will have to invest enormous amount of money for both purchasing the equipment and operating the facility. This will benefit the company in a way that it would reduce the cost by some percentage because the volumes would be higher. The last option is to locate the facility in the basement of current office building which would save Pepe Jeans about ? 200,000 a year. I would definitely suggest keeping the facility in the basement. Thinking out of the box, I would suggest them to use web based ordering system among retailers, agents, and the sourcing company. Having accurate and up to date visibility of stock means that customer orders can be checked on site and processed immediately, significantly improving the overall fulfillment rate. This would enable the real-time visibility of what is available from the customers’ stand point. I think this would be a least costly solution. Of course the cost would involve designing and implementing this IT solutions and also the training the end-users. Another benefit may be cost savings as a result of fewer order entry errors, increased revenues as a result of fewer lost sales due to poor stock visibility. Reference: 1)www. themanager. org 2)www. outsourcing-legal. com 3)www. optimizemag. com Case 2: Wal-Mart There are other secrets to Wal-Marts leverage in the marketplace. One is that, far better than its competitors, Wal-Mart understood the power of information. It revolutionized the retail industry by blazing a new trail with information technology. Wal-Mart exploited the magic of the information hidden in the barcode. This move put Wal-Mart ahead of the curve, and ahead of its suppliers, in terms of understanding exactly what consumers want and are buying. Wal-Mart is known with its supply chain from factory floor to store shelf, insisting on just-in-time deliveries from its suppliers to cut waste and down-time in warehouses. Wal-Mart has great power on manufacturers and suppliers; process of production, movement of the goods, warehousing of the goods, making sure that it arrives at the right place at the right time. This way Wal-Mart has power to play with the price. So they insist that it be done cheaply, it be done accurately, it be done quickly. Wal-Mart knows what it wants, when it wants, and where it wants it. The bar-coding revolution makes this possible. As an example, the company knows what size shirt, what color, long-sleeves, short-sleeves – a precise description of the product. When a store scans an item when it is bought, the information is immediately collected. So Wal-Mart knows where you bought it, the brand name and so forth. When the sales are recorded, an order is generated. An order is automatically generated that evening at midnight, when the home office pulls that information through their data ports. Then that order goes to the distribution facilities throughout the company, and that distribution facility, the warehouse, fills that order, and the order is sitting back on the shelf the next night or the following night. They also know what prices are popular, so they are able to say: We want to sell this at a certain price. You make it at a certain price, or were not going to work with you. This gives Wal-Mart an incredible leverage and buying power in the marketplace and over its competitors. Wal-Mart’s Vice President for Federal and International Corporate explains the company’s success with these words. Sam Walton started the process of saying you dont become successful by creating a process to have larger margins. What you do is you work on supply-chain efficiencies in many ways. You pass those savings on to the customer; you dont put them in your pocket. You pass them on to customers. That volume makes up for the item-by-item lower margin, if you will, and that volume allows you to grow and succeed and prosper. It creates also customer loyalty, knowing they can come to us every time and find the lowest price. And so our global sourcing is not to create higher margins. Thats not what its there to achieve. Its there to achieve having low-priced goods so we can pass those low-priced goods on to our consumers† The cornerstone of Wal-Marts increased efficiency was its trend-forecasting software, which tracked consumer behavior. In 1985, Sam Walton and his chief lieutenant, David Glass, began developing a program called Retail Link. The software, and the hardware that went along with it, took years to perfect, eventually costing $4 billion. This revolutionary system delivered sophisticated information on consumer behavior, drawn from the data imbedded in the barcodes that passed through checkout counters. Wal-Mart shared this revolutionary software with suppliers at no cost, in order to help them meet the retailers needs more efficiently. If vendors wanted their products on Wal-Marts shelves, they had to implement Wal-Marts customized business plans. Each year, the big retailer handed its suppliers detailed strategic business planning packets. Wal-Mart would grade them on weekly, quarterly and annual report cards. And when it came to discussions of price, there was no real negotiation, even for household brands. Thus, Wal-Mart used its buying power and its information about consumer buying habits to force vendors into squeezing their costs and keeping their profit margins low. Over time, some suppliers especially middle-sized and smaller firms were bankrupted; and major firms moved production overseas and increasingly to China. Here are some interesting statistics and facts about Wal-Mart: 100 million: The number of people who shop at Wal-Marts 3400 American stores every week. 50 million: The amount of square footage Wal-Mart plans to add this year, including 50-55 new Wal-Mart stores, 220-230 new Supercenters, 35-40 new Sams Club and 130-140 new international stores. 1. 2 million: The number of Wal-Mart associates in the U. S. Any full- or part-time Wal-Mart employee, up to and including the CEO, is considered an associate, in Wal-Mart parlance. Internationally, Wal-Mart employs an additional 330,000 associates. 600,000: The number of new employees Wal-Mart hires each year. The companys turnover rate is 44 percent close to the retail industry average. 1979: The year Wal-Marts sales first top $1 billion. $256 billion : Wal-Marts sales in 2003. In the words of Wal-Mart CFO Tom Schoewe, Wal-Marts sales are equal to one IBM, one Hewlett Packard, one Dell computer, one Microsoft and one Cisco System and oh, by the way, after that we got $2 billion left over. 35: The number of Wal-Mart Supercenters in China. $15 billion: The amount of Chinese products Wal-Mart estimates it imports each year; others suggest the number may be higher. $120 billion: The U. S. trade deficit with China in 2003. 8 percent: The amount of total U. S. retail sales, excluding automobiles, accounted for by Wal-Mart. $9. 98: The average full-time hourly wage for a Wal-Mart employee. The average full-time hourly wage in metro areas (defined as areas with a population of 50,000 or more) is $10. 38. In some urban areas it is higher: $11. 03 in Chicago, $11. 08 in San Francisco, and $11. 2 0 in Austin Reference: 1)Always Low Prices by Sam Hornblower 2)Secrets of Wal-Mart’s Success www. pbs. org 3) michaelbergdahl. net