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. It's 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. You're 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...
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