Group 2 Levi Case PDF

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Levis Case...

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Strategic Management

Levi’s “Personal Pair TM” Jeans

Group 2 Agam Sachdeva (PGP/21/251) Arijit Goswami (PGP/21/259) Lohit Reddy (PGP/21/260) Manisha Dey (PGP/21/277) Manjusha B (PGP/21/262) Tamaghna Mandal (PGP/21/300)

Part A Answer 1: Wholesale Channel, ROIC

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4 6 =30.77 % & Original Levi’s Store, ROIC ¿ =15.79% 13 38

The Wholesale business is more profitable than OLS business. Notably, OLS has a higher gross margin (56%) than wholesale channel (41%). But due to higher SG&A expenses in OLS business, net profits have been lower. Furthermore, OLS business is capital intensive since it requires the setup and maintenance of retail stores. But operating OLS has benefits like: 

Customer interaction which helps gauge customer preferences and gather feedback

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Helps create a brand image through professional service and good ambience

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Can work as a distinguishing factor from competitors

Answer 2: The value chain can be reduced in size with elimination of factory warehouses, distribution warehouses and stocking at retail outlets. Effect on each of the elements is as shown below:    

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Production planning: It will get simplified as it will be based on real time order and the production will follow just in time system. Raw material logistics: Manufacturing and raw materials procurement cost will not change much. Just in time system will reduce the cost of raw material inventory. Production: Systems are heavily customized for a single customer. There is a need to keep the inventory low but sufficient. Labor should be specialized in jeans making art. Factory warehousing Earlier there was lag of almost 8 months between the ordering selling of finished jeans. Since the new system was customer demand driven and was specific to the exact needs of customers, asset investment can be reduced drastically. Shipping: Now delivery of the order has to be done within 3 weeks or money has to be returned to the customer. So the shipping has to be faster than before. Distribution warehouses: Here, the order is transmitted electronically and the final product is shipped directly to the customer at his/her expense. The distribution cost and distribution investment were eliminated. Sales and promotion: If the personal pair system works out as expected, then Levis will need to advertise and promote their use of IT to the customers in making operations efficient. The costs saved in inventory, shipping etc. can be utilized for promotion of modern technology. The technology has the potential to increase the sales manifold.

Answer 3: We suggest keeping the margin of 20-30%, because of the following benefits.    

Lowering prices will reduce the perceived brand image of Levi’s since customers are willing to pay higher. Levi’s must recover its expense on kiosks, additional salaries to personnel and acquisition of CCTC through premium pricing. Lowering of prices will make it difficult to justify a later hike in prices The advantage of customization subdues the inconvenience of waiting period, and this must be come with a premium.

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Levi’s investment into innovation for customization makes it a premium service, and hence, price reduction should not be an option.

Answer 4: Revenue Cost Working capital Property & Equipment Profitability Accounts receivables Inventory holding period Accounts payable Cash conversion cycle

Wholesale channel estimate 35 31 7 6 30.77 51 days (28.67 rs) 77 days 27 101 days

OLS channel estimate 50 44 11 13 23.07 0 0 27 -27 days

Personal Pair kiosk will translate into zero inventory cost, since the inventory holding period will be zero. The cost of setting up kiosk is assumed to same as before. The table above shows that kiosks lead to increase in profitability and a negative cash conversion cycle. This implies a cash surplus for future investment and innovations. This becomes an advantage considering that competitors have a slow cash conversion cycle. Answer 5: Extension to product lines: 25% of women’s jeans demand came from this program. The idea of Personal Pair TM must be extended to other products too, like tees a and tops, since this will bring out Levi’s brand image of fashion and style-oriented company. Geographical expansion: Since the idea has been successful in London and US, it must be taken forward in other countries too. Number of channels and outlets must be increased inside US too. Better technology: Endeavor to bring automation in the supply chain and leverage ERP systems for better management of factory to reduce lag from 3 weeks. Tie ups with 3 rd party stores can help to increase kiosks. Part B Answer 1: Personal Pair jeans Revenue Mean of 60 and 65 (62.5) Cost 34 (Distribution becomes 0) Working capital (Drastically reduced) assuming 4 Property & Equipment 27 Profitability 26/31 = 83.81 Accounts receivables 0 Inventory holding period 0 Accounts payable 27 Cash conversion cycle -27 days Answer 2: The following constraints exist in the regular value chain:

1. Stocking raw material increases inventory cost, since more raw materials have to be stored to meet invoice orders. To reduce asset investment costs, system must be responsive to customer demands and needs. 2. The 8 months lag between order placement and sale must be reduced. 3. Work in progress inventory has to be simplified and bulk production are not to be done for this category. 4. 76% women are dissatisfied with purchases and this is an area of concern and possible improvement....