1. Analyzing Sourcing and Manufacturing Strategies for Better Financial Performance Jim Lovejoy Textile/Clothing Technology Corp.

2. Research Agenda  Compare Sourcing Strategies  Evaluate impact of Manufacturing Lead-time  Investigate the Impact of Forecast Error  Investigate the Impact of Collaboration  Identify top ten financial levers (other than price)

3. Retail Performance Measures  In stock  Inventory turns  Gross Margin

4. Retail Performance Measures  In stock  In stock %, service level, lost sales  Inventory  inventory turns, who owns inventory?  Gross margin  Gross Margin $, Gross Margin %, Adjusted Gross Margin, Gross Margin Return on Investment (GMROI)

5. Key Retail Planning Strategies  Plan assortment strategy  Plan merchandise pricing strategy  Plan delivery strategy  Evaluate vendor offerings

6. Manufacturer Performance Measures  Service  % shipped on time, % perfect orders  % back orders, % back orders filled  Inventory  Turns  Units ordered, produced, shipped, residual  Financial  Cost, revenue, gross margin, GMROI

7. Strategies Evaluated  Traditional Build to Plan  Vendor Managed Inventory (VMI)  Quick Response (QR)  Newsboy  Model Stock  Target Weeks Supply

8.  Program Received in Advance of Season  Mix and Volume of Garments Based upon Buyer’s Plan  No reordering, no re-estimation of demand Traditional Build to Plan

9.  Vendor Produces Buyer’s Plan  40-50% of Program Shipped in Advance of Season  Retailer Makes Weekly POS-Based Reorders  Vendor Ships as Stock Allows  Can accommodate some increase in volume Vendor Managed Inventory

10.  Similar to VMI  Stronger Partnership  Agile Manufacturing at Vendor  Re-estimate Demand by SKU Periodically  Shipments Match Demand Driven Reorders  Adjusts for error in previous forecast Quick Response

11. Newsboy  Similar to Quick Response  Reorder quantity based on target service level considering time until next reorder delivered or end of season

12. Model Stock  No demand re-estimation  Replenish to model stock quantities in buyers plan  Equivalent to ordering to maintain a presentation stock

13. Target Weeks Supply  Re-estimate demand periodically based on POS  Order enough to satisfy demand for a fixed number of weeks after order is received

14. Forecast Error  Volume Error - Difference between Total Demand and Forecast for the entire line  Mix Error - Difference in the Fraction of Demand for each SKU “1% improvement in forecast accuracy can equal a 2% inventory savings” Ernst & Young

15. Forecast vs. Actual Demand SKU Mix Error Forecast Actual Absolute Size DemandDemandDifference S 10% 10% 0% M 25% 35% 10% L 35% 30% 5% XL 30% 25% 5% Total 100% 100% 20% Example of a “20%” Size Error

16. Seasonality Curves % of Total Sales

17. Importance of Speed & Flexibility  Cannot predict future  Forecasting is based on history  POS data is not 100% accurate  Consumer is fickle  Buyers have performance measures  Offshore sources are cheaper

18. Simulation Analysis  INPUTS  Buyer’s Plan  Selling Price  Cost  Replenishment Strategy  Consumer Demand and Behavior  OUTPUTS  Sales  Lost Sales  Markdown Loss  Gross Margin  Service Level  Inventory Turns  GMROI Demand Season Demand Season

19. Example Scenario Children’s Twill Coverall Retail Price$30.00 Avg. Selling Price*$25.50 VMI/QR Cost$14.50 Traditional Cost$10.50 24 SKUs: 2 Styles 3 Colors 4 Sizes *Before End Of Season Markdown

20. Performance Comparison for a 16 Week Season Inventory % % Lost Turns GMROI Markdowns Sales Trad 100% 1.8 1.8 27% 23% VMI 4.7 2.6 18% 24% QR 5.7 3.7 11% 7%

21. Performance Comparison for a 16 Week Season (cont.) Service Level Sales $ Gross Margin $ Traditional 71% $75,273$38,749 VMI 70% $74,635$27,356 QR 91% $90,070$35,941

22. Overall Service Level for Different Season Lengths QR Traditional Season Length Service Level %

23. Gross Margin for QR Perfect Volume Forecast Traditional GM$ Wholesale Price QR $13.65

24. Gross Margin for QR Forecast 25% Low Traditional QR Wholesale Cost $ GM$ $14.20

25. Gross Margin for QR Forecast 25% High QR Traditional $16.00

26. Are we using a complete scorecard in our sourcing decisions?

27. Onshore/Offshore Example T shirt sold at mass merchant: Retail Price $ 3.00 Honduras 807 Cost$.96 QR (USA) Cost$ 1.50 35 SKUs: 1 Style, 7 Colors, 5 Sizes Plan 8000 dozen, 20 week season one 25% markdown in week 18

28. Compare QR vs 807 Sourcing for Seasonal Garment  Quick Response  Initial Stocking 40%  POS weekly order  3 week turnaround  12 reorders, start wk 2  Shipments 2% short  Wholesale price $1.50  Honduras 807  Initial Stocking 100%  No reorders  Transp cost $5000./cont.  Duty = 18% of VA + Assist  Wholesale price $.96

29. Compare QR vs 807 Sourcing for Seasonal Garment (20 weeks)  Quick Response  Results  Gross Margin 47%  GM $ 146,891.  Honduras 807  Results  Gross Margin 63%  GM $ 155,265.

30. Compare QR vs 807 Sourcing for Seasonal Garment (20 weeks)  Quick Response  Results  Gross Margin 47%  GM $ 146,891.  Inventory Turns 4.48  Service Level 97%  Sales $311,503.  Lost Sales 2%  GMROI 4.0  Honduras 807  Results  Gross Margin 63%  GM $ 155,265.  Inventory Turns 1.96  Service Level 68%  Sales $247,425.  Lost Sales 29%  GMROI 3.3

31. Compare QR vs QR/807 Blend Sourcing for Seasonal Garment (20 weeks)  Quick Response  Results  Gross Margin 47%  GM $ 146,891.  Inventory Turns 4.48  Service Level 97%  Sales $311,503.  Lost Sales 2%  GMROI 4.0  QR/ 807 Blended  Results  Gross Margin 55%  GM $ 171,629.  Inventory Turns 3.72  Service Level 97%  Sales $313,922.  Lost Sales 2%  GMROI 4.49

32. QR vs. 807 Conclusions  807 Sourcing produces more GM$, GM%  Quick Response does better than Honduras 807 Sourcing in several commonly accepted measures.  Quick Response dominates in terms of:  Service Level, Inventory Turns, Lost Sales  A blend of QR/807 sourcing performs well in all categories and has the best GM$ and GMROI

33. Value of Collaboration - Case Study  What is the value of reducing the lead times for raw materials and manufacturing process time in a textile supply chain?

34. Collaborative Supply Chain Results  Best Lead Time  Fabric 2 weeks + 1  Apparel 1 week + 1  Min Order  Fabric 1,000/500  Apparel 1/1  Typical Lead Time  Fabric 6 weeks + 1  Apparel 2 weeks + 1  Min Order  Fabric 10,000/5,000  Apparel 960/12

35. Collaborative Supply Chain Results

37. Manufacturer’s Collaborative Results Best Case vs. Typical  Total Revenue+20%  Gross Margin+66%  Inventory Turns(raw material) 7 vs. 4.8  Ship on Time93% vs. 63%

38. Research Results - General  Replenishment increases Gross Margin $  Speed of replenishment & flexibility increases GM$  Assortment diversity decreases Gross Margin $  Price sensitivity vs. markdown strategy  Not getting revenue return from markdowns  Better strategy to collaborate and replenish

39. Top Ten Levers for Financial Performance (other than price) 1. Replenishment strategy 2. Service level 3. Assortment strategy 4. Forecasting 5. Make to order/make to stock 6. Lead time 7. Initial inventory 8. Minimum order quantities 9. Collaboration 10. Supply chain inventory placement

40. References  King, Nuttle, Hunter, 1991, A Stochastic Model of the Apparel-retailing Process for Seasonal Apparel, Textile Institute  Whalen, Gilreath, Reeve, 1995, Time is Money, Bobbin March 1995  Hunter, King, 1997, Retail Performance Measures and the Sourcing Decision, National Textile Center  Pinnow, King, 1997, Break Even Costs for Traditional versus Quick Response Apparel Suppliers, North Carolina State University IE Technical Report #97-4  King, Hunter, 1997, Quick Response Beats Importing in Retail Sourcing Analysis, Bobbin March 1997  Koloszyc, 1998, Apparel Retailers Use Simulator to Improve Sourcing Decisions, Stores August 1998  Kunz, 1998, Merchandising Theory Principles and Practice, Fairchild Books  Maddalena, King, 1998, Replenishment Rules, Bobbin May 1998  Moon, Gokce, Maddalena, King, 1998, Proplenishment Makes a Payoff, Bobbin May 1999

41. Thank you! Questions?  Jim Lovejoy [TC] 2 919-380-2184  Russ King, NC State University 919-515-5186