PEPE JEANS - CASE STUDY
1. 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. Pepe Jeans has 3 options:
Decrease lead time to 6 weeks
Build a factory and decrease lead time to 3 months
Our calculations on the attached pages.
We would recommend that Pepe choose Alternative 2, given the increase in the yearly profits. Although alternative two has an initial investment of 1.3 million and 0.5 million in annual operating costs, it is still less costly then Alternative 1.
2. Are there other alternatives that Pepe should consider?
Pepe’s would first need to look at the “big picture”. They should take the holistic approach and look at the entire supply chain, not simply the production portion. They should look at the logistics for the movement of the jeans to the retailers and ultimately the customers. A review of the supply chain would be required to determine the need for buffers in the processes, to avoid blocking or starving the process. Reducing the lead time in either alternative may solve the lead time/inventory concerns, but it could create other problems, such as quality control issues.
Although reducing the lead time would mean the products are produced at a faster rate, it will draw attention to the issue of quality. If the jobs are rushed it can cause their product quality to be reduced, which could damage Pepe’s reputation for great quality. To mitigate the impact they will need to enforce their Costs of Quality, including the appraisal, prevention and internal costs. It is important to note that Pepe has built their image on good quality. Reducing lead time to 3 months, instead of 6 weeks...
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