Levis Case Short Cycle Process

Short Cycle Process:        

• Who are you (role):                                        Financial Analyst
• When does the case occur (date):                                1994 to 1995        
• Where does the case take place (location):                In the U.S.

ISSUE #1:  

The company has a complex, expensive and slow supply chain from product design to retail sales that are mainly caused by demand uncertainty. The original Levi’s store channel has much longer days of inventory than the wholesaler channel.

ANALYSIS:

The company has an eight-month lag in the supply chain which is shorter than the industry average of 12 months, but it is still too long for the fashion industry. The days of inventory is 60 at retail outlets which indicates a higher inventory turnover of 6. However, the days of inventory for factory and distribution warehousing is totaled up to 152 days. This contributes most to the eight months lag and drags down the inventory turnover to 1.72. As the days of inventory in the factory warehouse is 49 days which is lesser than it is in retail outlets, it is to reduce the days in distributing warehouses.  

The original Levi’s store channel has a total of 240 days of inventory compared to the wholesaler of 163 days. Longer days means higher operating expenses and lower sales. It is to at least align with the wholesaler.

RECOMMENDATION:

It is better to reduce the days of inventory on hand to improve its turnover ratio and sales. It is to reduce the days of inventory in distributing warehouses which are caused by demand uncertainty and variation. To boost demand, it is to improve the efficiency at retail outlets (incentive programs), improve customer satisfaction (product quality and customer service) and branding (advertising).

ISSUE #2:

The personal pair system changes the value chain.

ANALYSIS:

The new personal pair system has a huge impact on the supply chains. It changes the production planning as it is pull-based. The company does not need to forecast demand. It changes production as it requires customizable cutting. The WIP might be longer than the traditional process. It skips the processes from factory warehousing to distributing warehousing as it is direct shipment from the factory to the customer. Therefore, the eight months lag is eliminated. It is more efficient in selling of product but less efficient in the production. It also reduces the $1 distribution cost and increases net profit margin.

On the other hand, it has a lower ROIC of 15.79%^[1] because of the higher operating expenses.

RECOMMENDATION:

It is a trend to customize products and to improve customer satisfaction. It is better to improve the customize production process and operation side to further reduce the complexity and cost.

ISSUE #3:

The wholesaler channel is less profitable than the original Levi’s store channel (official channel).

ANALYSIS:

The net profit for the wholesaler channel is $2 lesser than the official channel, but the ROCI of 30.77%^[2] is much higher than the official channel of 15.79%. This means that the wholesaler is a more efficient way to utilize investment. Also, the wholesaler contributes most part of the sales which indicates its importance and irreplaceable position. The wholesaler channel is also a mature and sophisticated way to market the jeans.

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