Acting as an outside consultant,what would you recommend that Pepe do?Given the data in the case, perform a financial analysis to evaluate the alternatives that you have identified.(Assume that the new inventory could be valued at six weeks' worth of the yearly cost of sales.Use a 30 percent inventory carrying cost rate).Calculate a payback period for each alternative.
Option 2 with an ROI of 5 weeks and increased PBT would be the preferred alternative. (ROI financials will not not over)
Are there other alternatives that Pepe should consider?
I understand the Pepe has a long standing relationship with the agent in Hong Kong. However, I would first look to see what other agents could possibly offer. I know that most Hong Kong agents are using manufacturing facilities in China. There are other agents from other country’s that can source from other Asian countries for example India, Vietnam, Thailand, etc.
Looking at other agents and other country’s Pepe may be able to use a competitive bid process to speed up delivery as well as decrease expenses. Pepe could do nothing and keep their current arrangement with the Hong Kong Agent. Heck, their current financial picture is excellent. The negative is they could start to lose sells volume…The bigger question is if they do nothing now, how long it would take Pepe to rebound and make the manufacturing changes and operational changes to decrease lead time if they start to lose market share. I am a proponent of taking a proactive approach. Pepe could become a manufacturer. They would need to build a manufacturing plant in the UK and move all sourcing operations to that plant. This way they will control their entire destiny. Being debt free and having a nice financial picture gives them lots of possibilities when it comes to financing this move or any changes. I do not understand enough about the fashion world to make real good determinations. What I do know my 561 Levi’s I...