Abc Apparel Case
ABC Apparel Case | | | | |Questions | | | | | | | |1 |What are the respective amounts and percentages of Materials, Labor, Overhead and Other in total COGS for ABC? | |* Illustrate on an Excel pie chart showing amounts and percentages for each slice. | | | | |[pic] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |2 |What percentage of total COGS is represented by what Mr. Price called “full package” (purchased finished goods)? | | | | | |“Finished Garments” represent $647 Million. This assumes the purchased finished goods are supplied freight and duty paid; otherwise, applicable freight and duty| | |costs would have to be added.
Note that not all freight and duty can be added to this category, since freight and duty must also support the owned supply chain | | |operations. | | |$647 / $2528 = 25. 6% | | | | |3 |Where do you see the largest opportunities for cost reduction? List your Top 3, with strategies to pursue each one. | | |* Explain your selections. | | |Purchase price or cost of supply (TCO) reductions in purchased finished goods. At 38% of COGS, these represent the largest single opportunity for cost | | |management / reduction. | |Material price reductions (30% of COGS) through supply chain procurement practices. | | |Other Costs. Freight and Duty represent almost 10% of COGS, which is probably ripe for improvement. Evaluate reducing carriers from 4-5 to fewer. | | |Labor – At 20%, Labor is a substantial percentage of cost but has probably already given up the “low hanging cost fruit” in the relocation to offshore | | |geography, and would probably be difficult to further reduce. | | | | |4 |Which functional areas would you prioritize in your cost reduction efforts? Why? | | | | |Following the same priorities in Question 3: | | |Purchase price or cost of supply (TCO) reductions in purchased finished goods. Apply supply chain procurement practices such as negotiated price reductions, | | |reverse auctions, global sourcing, target costing, centralizing procurement, spend analysis or supplier rationalization. | | |Material price reductions. Apply supply chain procurement practices such as negotiated price reductions, reverse auctions, global sourcing, target costing, | | |centralizing procurement, spend analysis or supplier rationalization. | | |Other Costs Reduction.
Freight and Duty represent almost 10% of COGS, which is probably ripe for improvement. | | |Labor Cost Reduction. At 20%, Labor is a substantial percentage of cost but has probably already given up the “low hanging cost fruit” in the relocation to | | |offshore geography, and would probably be difficult to further reduce. | | | | |5 |Which internal manufacturing processes would you prioritize for improvement? Why? | | |Evaluate moving the textile manufacturing processes (yarn through Fabric Finishing) from US to offshore, preferably close to the cutting operations.
If the key | | |materials could be sourced in-region, this would eliminate the cost, risk and lead time of shipping these products from the US to Central America / Caribbean, | | |reducing the high freight costs. | | |Evaluate Supplier Relationship Management programs with Asia garment suppliers. Objective would be to fully identify and reduce “hidden” costs of supply from | | |this region through collaborative problem-solving and joint incentives (“gainsharing”) for improved performance. | | |Pursue lead time reductions and reduced lead time variability through improved logistics practices. Seek use of technologies to identify logistics wait times | | |and unplanned delays.
Consider use of a 3PL to become accountable for coordinating all Western Hemisphere logistics, negotiating with the major carriers to | | |reduce costs, pre-clearing all shipments through customs, etc. | | | | |6 |What is the ratio of internal manufacturing cost to purchased garment cost? | | | | | |Ratio, internal to external costs | | |275% | | | | | Internal $1,881 | | |External | | |$647 | | | | | | | | | | | | | |7 |Assuming a SG&A rate of 24% and a gross margin of 35%, what annual revenue would you estimate for ABC? Show your calculations. | | | | | |[pic] | | | | |8 |What is ABC’s net profit margin, in dollars and percent? | | | | |11% | | |$428 | | | | | | | | | | | | | |9 |What is ABC’s “profit leverage effect” of reducing purchased item costs? How much additional revenue would be required to equal a 5% reduction in purchased | | |prices paid? | [pic] | | | | | | | | | | | | | • 5% of 1404 = $70 Million. So, reducing purchased costs by 5% reduces COGS and increases profit by $70M. • To yield an equivalent increase through sales, sales must increase by ($70/. 35) = $200 Million (6%).
