Operations and Supply Chain Management

Semester Case: Pepe Jeans

Evelyne Ringia, Kemilembe Mjungu, Christina Bills

May 5, 2014
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EXECUTIVE SUMMARY

Pepe Jeans has been receiving complaints from the retailers that carry their casual and denim

wear. The main complaint is that the lead time is 6 months, without any ability to alter the order

a week after the order is placed. This is mostly caused by the offshore production done in China.

In order to avoid losing their retailers to competitors, Pepe Jeans need to improve their supply

chain. It was suggested that they could just pay more for the suppliers to crash the lead time, but

it would be very expensive, without much improvement. Another suggestion was to bring the

finishing department to the United Kingdom. That proved to be much more profitable, with a

decreased lead time.

There are a few more options, that were identified by the team that Pepe Jeans could do such as

Get more suppliers from other countries including UK, having their own manufacturing facility,

either in the UK or somewhere else, or using an enterprise resource planning system.

Our recommendations were from the implementation perspective. Immediate solutions would be

getting more suppliers including the UK and crashing the lead time with present suppliers. The

next phase would be creating a finishing facility in the UK and for the long term, they would

implement the enterprise resource planning system as well as having their own manufacturing

facility so that they can control the whole of the supply chain. These solutions will not only solve

the problem with ordering system but will also help with the auxiliary problem of Pepe not being

as much of a trendsetter as in past years. Pepe Jeans will need to continue to monitor the market

and the retailers’ expectations in order to fulfill the needs and wants.
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Table of Contents
EXECUTIVE SUMMARY ............................................................................................................ 1
INTRODUCTION .......................................................................................................................... 3
Background ................................................................................................................................. 3
Pepe Jeans current supply chain .................................................................................................. 3
Pepe Jeans’ relationship with their independent retailers ........................................................... 4
The Company .............................................................................................................................. 4
The industry................................................................................................................................. 5
CASE ANALYSIS.......................................................................................................................... 6
Definition and scope of the problem ........................................................................................... 6
Purpose of the Study ................................................................................................................... 6
Summary of findings ................................................................................................................... 6
Desired Outcomes ....................................................................................................................... 7
Why Pepe Jeans should consider other solutions. ....................................................................... 7
What has been done (or is being done) to solve similar problems .............................................. 7
Alternative solutions. .................................................................................................................. 8
CONCLUSION AND RECOMMENDATIONS ......................................................................... 15
Summary of Recommendation .................................................................................................. 16
APPENDIX ................................................................................................................................... 17
REFERENCES ............................................................................................................................. 18
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INTRODUCTION

Background

Pepe Jeans is a denim and casual wear jeans brand that was established in the Portobello Road

area of London in 1973 by three brothers: Nitin, Arun and Milan Shah from Kenya. Pepe was

originally sold at a tiny market stall; it has now been transformed to more than half a US billion

dollar brand found throughout Europe.

Pepe Jeans is present over 100 countries and employs more than 5000 employees all over the

world. Pepe jeans has created a global brand awareness.

Pepe Jeans current supply chain

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Pepe Jeans’ relationship with their independent retailers

Majority of Pepe’s sales are through about 1500 independent outlets throughout UK. They

maintain contact with its independent retailers via a group of approximately 10 agents who are

self-employed and work exclusively for Pepe and each of them is responsible for retailers in the

particular area of the country

Agents meet with each retailer 3 to 4 times a year to present new collections and take order

Contact is done by holding presentation in a hotel for several retailers. Orders are taken for 6

months delivery. After Pepe receives an order a retailer has 1 week to cancel or make changes.

After orders are placed status can be seen online.

The Company

 Pepe Jeans is present over 100 countries and employs more than 5000 employees all over
the world. Pepe jeans has created a global brand awareness.
 The brand is the fastest growing denim brand and is 500 million denim and casual wear
brand.
 The brand had a different view of selling jeans and was against hanging them and even
fought with the retailers to change this fashion, which was a big hit.
 The brand has entered the elite segment of the top four denim producers in the world.
 The brand has always been constantly producing unique silhouettes, which the brand is
very famous for across Europe.
 The brand uses extensive advertising where the brand often teased the boundaries of
acceptable social imaginary and norms, which had a big attraction among young
consumers.
 The brand has a strong brand following and is has a strong financial position in the denim
industry.
 The brand has signed international celebrity brand ambassadors which enhances the
brand equity.
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Currently Pepe Jeans has been enjoying considerable financial success in its current business

model. Last year the company made a profit before taxes of nearly 32% of sales as per the

financial analysis below.

Sales 200,000,000
Cost of sales 80,000,000
Gross Profit 120,000,000

Operating expenses 56,000,000

Profit before taxes 64,000,000

The industry

According to IBISWorld report, during the five-year period to 2014, it is estimated that revenue

in this industry has fallen at an annualized rate of 4.0% per year, to $4.6 billion. Most of this

decline can be attributed to the shifting of operations offshore to low labor-cost countries.

Furthermore, many appeal manufacturing companies have chosen to outsource manufacturing

activities to third-party operators in an attempt to reduce expenses. Meanwhile, Chinese apparel

manufacturers have expanded their operations over the past five years to include real estate

management and international trade activity in addition to garment production. As such, an

increasing portion of the domestic demand for women's and girls' apparel is being met by

imports; in 2014, IBISWorld estimates that 92.8% of demand will be satisfied by imported

goods.

Some major US retail chains have made the decision to move the finishing operations near their

retailers as a means of reducing lead time. This strategy has been working for them in

controlling the speed of which the product can be ordered to the time it is delivered to the

retailers.
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CASE ANALYSIS

Definition and scope of the problem

Pepe Jeans had recently conducted a survey with the independent retailers. From the survey,

Pepe has received a number of complaints from their retailers and this concerned Pepe Jeans.

The following were some of the retailers’ complaints:-

• Pepe has become less of a trend setter than in the early days

• Retailers are unhappy with Pepe’s requirements to place orders 6 months in advance with no

possibility of amendments, cancellation, or repeat ordering.

• The inflexible order system forced retailers to order less resulting to stock outs of particular

sizes and styles. The retailers estimated that Pepe’s sales would increase by 10% in sales

with a more flexible ordering system

Purpose of the Study

First is to find out how the retailers were affected by the current system and second is to find

alternative solutions to solve the retailers’ complaints and come up with recommendations for

Pepe Jeans to implement.

Summary of findings

• The six months ordering time made it difficult for retailers to accurately forecast and order.

• The fashion market is very impulsive and therefore the current favorites are not in vogue 6

months in the future

• When demand exceeded expectations it took a long time to fill the gap

• The retailers wanted some limited returns, exchange, or re-ordering to overcome the

problems.
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Desired Outcomes

• Reduced Lead Time

• Possibility of amendments, cancellation, or repeat ordering for the Retailers

• Have more robust designs that set trends like it used to be

Why Pepe Jeans should consider other solutions.

Pepe Jeans can continue using the current business model since they are still very successful and

economically strong. The problem with Pepe using the current system is knowing when this

model will stop being successful due to complaints that Pepe has received from their retailers

considering how fast the clothing industry changes this could occur over in such a short that Pepe

would not be able to reverse the situation. This could result to losing their market share, losing

the value of the brand, and losing the retailers which would make it difficult to do business in the

future. Immediate measures are appropriate to ensure the said possible consequences do not

occur to Pepe Jeans.

What has been done (or is being done) to solve similar problems

Looking at the history of business, it has proven that when business organizations do not adopt

changes in the environment, that organizations will almost always fail. Taking an example of a

company like Blockbuster LLC, this was one of the biggest American provider of home movie

and video game rental services. Blockbuster business model was based on providing these

entertainment content through their rental shop and later on through mail delivery. Because of

changes in technology, most of their customers started to demand faster access to the

entertainment contents as other content entertainment providers were doing. The new providers,
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the like of Netflix, started providing content entertainment to their customers on demand and in

the privacy of their own home. Customers were able to receive services at close to no lead time

at all. Blockbuster did not make a fast enough change into this new technology for delivering

services. As a result almost all of their clients left them. Blockbuster later on changed their

business model to include the on demand and video streaming services, but it was too late.

The following are some solutions that Pepe Jeans could implement to solve the retailers

complaints.

Alternative solutions.

i. Shorten lead time with the current suppliers

Pepe Jeans sourcing agent sitting in China where they manufacture their jeans suggested an

option of reducing lead time while using the same suppliers. Implementing this option will

increase the cost by 30% above the current cost. If Pepe Jeans decides to take up this option, lead

time will be reduced to as little as six weeks. This reduction of lead time will most definitely

solve the problem which are faced with the local retailers in United Kingdom.

While this option may lead to revenue increment of 10% the extra crush cost will be recurring

with each placed order. Currently the yearly cost of sales is 40% of sales of £ 200 M that is £ 80

Million (40%x £ 200,000,000). If the cost goes up by 30% it would mean 30% of £ 80 Million

which is £ 24,000,000. In return for this increase in cost the company could make an

approximate increase in in revenue of 10% will be £ 20, 000 000 (10%x £ 200 000 000) and the

PBT of £ 6,400,000 (32% of sales). For this option, cost outweigh benefit by £ 17,000,000 each

year.
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ii. Moving finishing facility to United Kingdom

The Agent in China suggesting the second option, establishing a finishing operation in United

Kingdom. The agent said with this option , Pepe will be able to reduce lead time to

approximately three months and Pepe would need to keep about six’s week supply of basic jeans

on hand in United Kingdom.

This will involve transforming the basement of the current Willesden Office building to a

finishing facility. This will need a new equipment and renovation. The operating cost will be

reduced by 10% due to utilizing economies of scale in the manufacturing process. This will also

solve the complaint of Pepe not being a trend settler as before because now Pepe designers will

be equipped to respond to fashion changes faster.

Financial feasibility:

Costs for establishing the finishing facility in the UK

Initial fixed cost for equipment £ 1,000,000

Renovations £ 300,000

Total Initial cost £ 1,300,000

Operations costs £ 500,000

Current COS (200M*40%) £ 800,000

Lead = 6 weeks (6/52 X £ 80,000,000) £ 9,230,000

Inventory carrying cost is (30%x £ 9,230,000) £ 2,769,000

Total recurring cost inventory carrying cost+ operations £ 3,269,000

costs ( £ 2 769 000 + £ 500 000)

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The following table show the possible outcomes of establishing a finishing facility in UK.

Old Model New Model

Sales 200,000,000 220,000,000
Cost of sales 80,000,000 72,000,000
Gross Profit 120,000,000 148,000,000

Operating expenses 56,000,000 61,600,000

Inventory holding costs 2,769,231
Facility operating costs 500,000

Profit before taxes 64,000,000 83,130,769

* For the basis of this analysis we have assumed minimum 10% sales increase from the retailers’ survey in the case.

The facility would lead to an annual increment of approximately £ 4.7M (£ 68.7M less £ 64M).

Pepe jeans would have had to invest £ 1.3M initially, of which the excess annual return would be

used to pay back the investment. Based on the increment expected, the initial investment should

be expected to be paid pack in approximately 4 weeks.

1,300,000x52 = 3.5 weeks

19,130,769

This option is very advantageous for both Pepe Jeans and the retailers. Pepe Jeans would be able

to increase revenue, reduce lead time to three months and respond to fashion changes quickly.

iii. Sourcing from new suppliers overseas or in the UK

From the research conducted, there are other suppliers who are able to make and supply jeans to

Pepe’s customers. There are suppliers using manufacturing facilities in China, Vietnam, Hong

Kong, Thailand, Sri Lanka and Bangladesh. These countries have apparel manufacturers who

are known for making cheap and quality clothing. Having more suppliers to choose from will
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give Pepe Jeans more bargaining power and ultimately demand fast delivery of products to the

retailers.

Pepe Jeans can also decide to use apparel manufacturers who are closer to their retailers. Since

most of the Pepe Jeans’ retailers are in United Kingdom, then Pepe could start using

manufacturers located in United Kingdom as well. The use of manufacturers who are very close

to retailers will most definitely reduce the lead time since the transportation time will be reduced

considerably. There are still cloth manufacturers who are operating in United Kingdom that Pepe

Jeans could use. These cloth manufacturers in United Kingdom are of the like of Cooper &

Stollbrand, Johnstons of Elgin and Michael Edward Ltd. These manufacturers might be more

expensive than the Hong Kong manufacturers, but they also guarantee more quality on the

products. When it comes to sustainability, it is better to pay extra and keep or increase the

current share than keep using the current business ordering system and run out of business in the

near future. If Pepe Jeans take this option, they might be able to reduce the lead time to six

weeks. This option might even lead to decrease in cost of sales and increase Pepe Jeans’ profit.

iv. Pepe Jeans doing their own manufacturing

Pepe Jeans can start doing their own manufacturing. From the case study Pepe has no debt

currently and earning a decent PBT. This financial position allow for establishment of a

manufacturing facility of acquire an established apparel manufacturer. This will cut the middle

man and give Pepe a full control of their product delivery processes.

Pepe Jeans could locate their facilities in countries which have low labor cost and low taxes like

China, Hong Kong, Vietnam and others.

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According to Forbes magazine, Inditex, owner of fast-fashion emporium Zara, manufactures

almost all of its goods in La Coruña, Spain. “The clothes reach the sales floor more quickly and

efficiently, thus serving more consumers. (Zara’s clothes hit the floor so quickly that for the first

few hours they are kept on cheap plastic hangers to indicate that the items arrived that

morning.)” (Forbes)

The example of Inditex, shows that it is possible to cut cost and control quality and delivery

process by becoming your own manufacturer.

There are other apparel brands that have proven to have short lead time while using manufacturer

facilities from locations like Vietnam or Istanbul. Some of those brands includes H&M and

billionaire Philip Green‘s Top Shop.

J. Barbour & Sons Ltd has been successful using the business model which gives them full

control of their supply chain management. Barbour designs, manufactures and markets clothing

for men, women and children in England. This model make it easier for Barbour to control the

lead time as well as delivery time with their retailers as well as wholesalers.

In order to reduce the lead time further, Pepe could opt to have the finishing facilities close to the

retailers or having the full manufacturing process close to the retailers. With any of these

options, Pepe would most definitely reduce the lead time and have full control of the sourcing

process.

v. The Use of Enterprise Resource Planning system (ERP)

Pepe Jeans should start the use of ERP system. The system will be integrated with the retailers,

the suppliers and all the departments in Pepe Jeans which deals with inventory movements. This

integration will enable the retailers to place their orders in the ERP system and make sure the
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person who is responsible with that order receives it instantly without any delays. That person

can also send request to another person in the supply chain instantly without any delays as well.

The system also sends requests automatically to the next person in the supply chain so as to

eliminate delays. The system will act as a reminder of the process to all the people who are

involved in the supply chain.

The most benefits which can be achieved with the use of ERP apart from general saving of time

and reduction of expenses include:

 Sales forecasting, which allows inventory optimization.

 Chronological history of every transaction through relevant data compilation in every

area of operation.

 Order tracking, from acceptance through fulfillment

 Revenue tracking, from invoice through cash receipt

 Matching purchase orders (what was ordered), inventory receipts (what arrived), and

costing (what the vendor invoiced)

Pepe Jeans will be most benefited with the sales forecasting tools which is in the ERP system.

With the use of this feature, Pepe could estimate with a certain accuracy the coming needs of

their retailers. Pepe will then be able to start the production of the apparels even before orders

have been made. The use of this tool will be most helpful in the reduction of lead time.

There is an empirical study performed on the lead time improvement from the implementation of

ERP system done by Cotteleer and Bendoly. The study was based on a company called Tristen

Inc. Information was collected from this company before the company installed the system and
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after the company installed the system. The result obtained showed that lead time was reduced

by at least 28%. The study further revealed that there is a strong correlation between reduction

of lead time and increases in revenue.

The use of ERP system will come with a certain financial cost as well as time investment in

training. However, from the empirical study, it has been proven that the use of ERP comes with

a financial return which is worth the investment.

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CONCLUSION AND RECOMMENDATIONS

Pepe Jeans has created a very good relationship with their currently Hong Kong sourcing agent

which is a good thing as far as supply chain management is concerned. For Pepe Jeans to switch

to new suppliers will be a good strategy in the long run. However, it will take some time to

establish the best system that will be beneficial to both Pepe Jeans as well as the new suppliers.

With new suppliers, the initial production might take longer time since they will need some time

to adjust their activities to get close lean manufacturing.

The use of these suppliers/manufacturers will help reduced lead time, however there will be no

guarantee of exactly how consistent the lead time will be. Since Pepe Jeans does not have any

control over the manufacturing and supply of their products, the suppliers/manufacturers might

promise six weeks and end up delivering later than six weeks. This inconsistence would not sit

well with the retailers. It would be very helpful if Pepe Jeans made an agreement with the

suppliers about a late delivery penalty of a certain amount. This penalty will provide a better

guarantee that the suppliers will make sure they deliver the products in a timely manner.

However, our recommendation is Pepe should still utilize the current relationship it has built

with the current sourcing agent. They should just change the finishing and move that part to

United Kingdom. Pepe should operate this facility and according to the abstract financial

statement on this model, Pepe will reduce lead time to thirty days guaranteed and start to learn

the manufacturing trade. After acquiring enough information, knowledge and ideas, Pepe should

think about doing their own manufacturing, either overseas or in the United Kingdom. Pepe

Jeans would save considerable amount of money and time from manufacturing their own
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products. Pepe Jeans would also acquire full control of the quality of their product when they do

their own manufacturing.

Pepe should also start using the ERP system regardless of which business model they end up

deciding to use. The ERP system has been proven to reduce lead time and increase revenue.

Apart from those two benefits, ERP system helps in the creation of lead and sustainable supply

chain within and outside the organization. The system will contribute to quality improvement as

well as reduction in working capital investment.

Summary of Recommendation

From the 6 solutions we came up with there are some that can be used as a temporary measure

and others for long term considerations

Temporary

Solutions 1: Shorten the Lead time with current suppliers

Solution 3: Sourcing from new suppliers overseas

Solution 4: Use local manufacturers

Medium term

Solution 2: Building a finishing operations in the United Kingdom

Long term

Solution 5: Establishing own manufacturing facility

Solution 6: ERP system

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APPENDIX

Solutions 1: Shorten the Lead time with current suppliers

Solution 2: Building a finishing operations in the United Kingdom

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REFERENCES:

Cotteleer, Mark and Elliot Bendoly, “Order Lead-time Improvement Following Enterprise-IT
Implementation: An Empirical Study.” September 2005.
“IBISWorld Industry Report C1311-GL: Global Apparel Industry” web:
<http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=349>
Jacobs, F. Robert and Richard B. Chase. Operations and Supply Chain Management: Thirteenth

Edition. McGraw-Hill/Irwin, New York, NY, 2011.

Sherman, Lauren. “Who Makes The Clothes On Your Back?” Forbes, May 2008. Web:
<http://www.forbes.com/2008/05/25/style-clothes-foreign-forbeslife-
cx_ls_outsourcing08_0529offshore.html>
Pepe Jeans Official Website web: <http://www.pepejeans.com/en_gb/>

“Top 10 Destinations for Clothing Manufacturers.” September 2013. Web:

<http://www.thesourcingplace.com/top-sourcing-destinations-for-clothing-
manufacturers/>