Big Business in England: the Board of Directors of the Company - Case Study Example

Executive summary Retailing of garments is a big business in England. There is also a lot of competition in this volatile market. The RLL Group is a mid sized chain of garment retailers with a variety of garments for men and women. They have a total number of 100 stores all having roughly the same area. Buying of products is an extremely important task for any organisation and the RLL Group is no different. This is a report on advising the board of directors of the company on a buying strategy. It will also include tips on choosing suppliers, pricing and mark down strategy, promotional strategy etc given in part 1. in part 2, a single product category will be selected along with a supplier. The proposed selling price, suggestions if any on changes in the annual trading plan, planned volume for each of its 13 periods, planned gross profit, the allocation and replenishment strategy etc will also be given. Table of Contents Part 1 Executive summary 1 Introduction 3 Buying and merchandising plan 3 Staffing ..4 Choosing suppliers .5 Pricing strategy ..6 Markdown strategy .7 Promotional strategy 7 Part 2 Choice of product .8 Proposed selling price ..9 Annual trading plan .9 Planned volumes of product purchase .....9 Planned gross profit 10 The allocation and replenishment process to stores 12 References .13 Report on buying strategy to the board of directors of the RLL Group: Part 1: Introduction: There is an erroneous way of thinking among some mangers that the business of selling is more important than that of buying. In fact, buying is as important as the selling process because if an organization buys good that are not needed or too highly priced, the whole selling process would collapse and result in huge losses. This is especially true in high risk field as garments since fashions and tastes change unexpectedly. This report to the board of directors will show how the correct buying function can be adopted and also how to choose the correct supplier. Buying and merchandising plan: Buying plan: As mentioned earlier, buying is a very serious activity and involves four steps namely "(1) the selection of kinds of goods, (2) the determination of quality or suitability, (3) the determination of quantities, and (4) the selection of sources of supply." (Beckman and Davidson 1967, P. 393). The company is actively engaged in retail sales of garment, hence what is required is the kind of garments that should be purchased. It is seen that the company has already prepared a sales target for the coming year and purchases be made depending on the targets and the stock of the item on hand. There would be need to diversify from this target and go for other types of garments since it could be risky. The quality expected from suppliers has also been established and should be used as a benchmark for selection of suppliers. It would not be advisable to go in for purchase of large quantities to reduce prices since the market is quite volatile. As for sources, the RLL Group already has a set of approved suppliers. Some suggestions as to choosing of suppliers will be given in the next section. Value analysis of the goods could be done and efforts can be made to increase functionality (for example, increasing number of pockets in jackets), but without increasing the purchase price. If possible the company can talk to its suppliers and see if an arrangement can be made in this regard. It would be better if the company can compute optimum order quantities (bearing risk factor of out of fashion stock in mind) to reduce cost. For this purpose, it should be ensured that the needs of all the 100 stores should be ordered at the same time. What is very important is that future trends in fashion and tastes be studied before ordering of each lot of goods. Merchandising plan: This is to ensure that purchases made are judiciously handled so that the company will not be straddled with unsold stock. It is imperative that a sales target be made and it is good that the company has already made one. Level of stock should be monitored and it should be seen there is no overstocking or shortage. Analysis of average stock and stock turnover should be regularly done. A plan of action that would ensure that the targets are reached should be formulated. It should be adhered to and periodic evaluation for any changes if required should be done. It would also be advisable to analyse the gross margin of the company. The flow of purchase should be regularly monitored since it is not good business sense to receive goods early or late. Receiving them early may result in unplanned expenditure of cost of goods, transportation, duties etc. This will cause the company to incur expenses earlier than planned. Staffing: It should be ensured that the purchase manager along should maintain a close association with purchasing staff. As mentioned earlier, buying is not an unimportant function and the company should maintain highly motivated and capable employees, especially those who are in direct contact with suppliers. Occasional visits to suppliers by members of top management will be advisable for improving relations and also in motivating purchase staff. Alternatively, select suppliers can be invited to the corporate office. In any case the suppliers should be made to feel welcome in case they visit England. Selection of staff for handling purchase is also very important. Personal visits to all suppliers are not feasible since they are scattered in many parts of the world. (China 27, England 16, India 12, Ireland 2, Israel 8, Italy 6, Lithuania 7, Portugal 12, Romania 4, Scotland 8, Sri Lanka 8, Turkey 26, Vietnam 17). It can be seen that the highest number of overseas suppliers are in China followed by Vietnam and India. It would be feasible for having three purchase managers to be stationed in Asia (preferably of Asian origin) and another to three to handle markets in Europe. The total suppliers in UK come to 24 and this can be handled by two persons. Remuneration should be on par with or at least near to the best in the industry. It is important that staff selection in the purchase department by done according to capability. Select only staff who are capable and willing to make strategic purchasing decisions and assign the rest to other functions like invoicing etc. Choosing suppliers: It is seen that RLL Group has already evaluated their suppliers. This is a good practice since it is essential that quality alone cannot be a factor in choosing a supplier. But more information is given for consideration. The first factor is of course quality of the garments supplied. With high volatility and competition in the garment segment, quality is very important. Another factor that will help in choosing a supplier is the lead time offered by him. This is the time gap between placing the order and its execution and subsequent delivery. It can be seen that there is a maximum lead time of 56 days of a supplier in Vietnam (followed by China with 54 days). The shortest lead time is 7 days in followed by 10 days with three suppliers all within the UK. This could also be due to proximity and better technology. There are others that fall somewhere in the middle with average lead times of 25 days. What should be considered here is that the high lead time might also be due to the size, complexity and distance of the supplier from England. What is more important is that the suppliers are able to keep the lead time offered. In ordering of goods it should take into consideration the lead times of suppliers. As mentioned earlier, it is the reliability of the supplier in keeping his word and sending the order as per schedule. Flexibility of the supplier in changing certain product specifications after placing the order is also to be considered. A volatile and changing market might require such flexibility with production. It can be seen that this factor has not been considered by the company in their supplier evaluation. Transportation cost that may result in a higher price can also be avoided. Unless there is no difference in price and quality, it would be better to order from a closer supplier. Payment arrangements with suppliers are also to be taken into consideration. The supplier should offer competitive prices and should offer reasonable terms of credit that is at par or better than market practices. If other conditions like reliability, quality, price etc are strong enough, this factor may be overlooked. Technology available with suppliers is another factor that may help in choosing a supplier. Better technology will mean better quality, faster delivery and even a lower price. Another factor that could be considered is the assistance provided by suppliers in helping to promote the product. Examples are joint promotion campaigns or through advertisements given by the suppliers themselves Pricing strategy: Pricing is an important factor that has to be taken seriously unless the company is marketing products of exclusive brands or famous designers. Even then the price of the product has to be fixed. Apart from the cost of the product paid to the supplier, other direct and indirect cost incurred by the RLL Group has to be taken into account. The pricing strategy adopted should be in line with competitors who offer similar products in similar showrooms. It would be better if the prices are a bit lower. Markdown strategy: It can be seen from the trading profile that the maximum sales start from 10th period (8.2%) and peaks when it reaches 13th period (11.9%). Assuming that the accounting year of the company is from January to December, it is clear that this peak is due to the Christmas and New Year Seasons. It fall drastically to 6.5% by January until it climbs steadily till the peak in December. During the lean periods pricing markdown can be done to the extent of say 15% (moderate sales) to 50% (very weak sales). There is a reason behind this. Maximum sales will happen during the last few months of the year. The best designs and quality clothes would have been sold by this period. What is left unsold may not have a market even during high demand periods. It is better to sell the products at a high discount rather than risk it becoming unsold stock. As for peak periods it would be prudent to match or even better the offers of competitors. If possible instead of cutting down prices, free offers of clothes can be given. Even free offers of other accessories not dealt by the company can be offered (free waist-belts, wallets, vanity bags etc). Promotional strategy: The promotional strategy should be concentrated at the last quarter of the year. During earlier periods advertisements regarding the huge discounts could be done in a small way. By mid-year promotions should begin to increase and should peak by October. This should continue for the next two months. News about the free offers and discounts (if any) should also be promoted. Promotion can be done through all media like newspaper, TV and magazines. Focus on media that specially cater to women or men can be given more focus. Part 2: Choice of Product: The product selected here is the low priced smart shirts Product ID 1) from Anderson. According to your supplier profile, Anderson has a 'very good' reputation, have 'good' supplier reliability and quality and 'average' promotional support. They give a maximum discount of 3.5%, have a credit period of 50 days and have a lead time of just 7 days. Comparing the economics with other suppliers it can be seen that the discount of 3.5% is the second high offered after a high of 4%. This supplier offers the highest time in terms of credit and has the lowest lead period of just seven days. Moreover other suppliers of this product category require a higher number of minimum orders (or example, Silver of China with 120,000 units and Lendera of Sri Lanka with 72,000 units) than Andersons (24,000 units). Buying from others will result in a larger investment and stock. If the product does not sell, the risk to the company is greater. The idea behind the selection is that shirts are something that is worn everyday and hence demand will exist throughout the year (with variations). During peak season, if the product moves quickly, ordering another batch takes just seven days. The credit period offered will enable RLL Group to pay other fast moving goods suppliers with low credit periods more than once. For example, Georgise of Italy (credit period of 15 days) can be paid for three orders with the money saved (for the time being) on paying Anderson. Men are less finicky as to fashion less than women and hence would not mind the range available with Anderson even during lean times. Moreover shirts are worn more out of a necessity than as a fashion statement. Some good like knitwear will only have a demand during the colder seasons where as it is not the case with shirts. Proposed selling price: The starting price of shirts in the UK is 2 and above and moves on to 10 and above. The mid range starts from 20 and extends up to 70 per piece. The selected product from Anderson is in the first category. Since Anderson has very good reputation and good quality, RLL Group can price these shirts starting from 5 to 10 per piece during peak periods and at 3 to 5 per piece during lean periods. Offers like a free shirt with purchase of three shirts can also be considered. Annual trading plan: The annual trading plan for a garment company will have moderate fluctuations with demand peaking during festive seasons where presentations and self purchase will increase. It is common to give presentations during these times and also both men and women will want to look their best in new clothes. This fluctuation will be more for the tourism industry. Winter sports tourism is an example. The fluctuation in this industry will be extreme with peak periods coming during the winter and snow. During lean season the occupancy in this sector will be near to zero with few tourists coming to enjoy the place rather than for sports activities. The annual trading plan of RLL Group seems to reflect the trend in the clothing industry and needs no changes at present. Planned volumes of product purchase: The target for smart low priced shirts for the RLL Group is 4,812,500 pounds. There are four suppliers of this category product (Product ID 1) including Andersons. If the RLL Group plans Andersons to have a share of 25%, total value will be 25% of 4,812,500 which will come to 192,500 units. We can project the period requirements according to the trading profile Table 1: Planned volume of purchases: Periods % Annual sale Monthly product requirement for Anderson's shirt 1 6.5 12,512 units 2 5.9 11,357 " 3 5.2 10.010 " 4 6.4 12,320 " 5 6.5 12,512 " 6 7.1 13,667 " 7 7.6 14,630 " 8 7.6 14,630 " 9 7.9 15,207 " 10 8.2 15,785 " 11 8.2 15,785 " 12 11 21,175 " 13 11.9 22,907 " 52 weeks 100 % 192,500 " Planned gross profit: As mentioned earlier the shirts can be sold for 3 to 7 pounds during the lean season and 5 to 10 pounds during the peak season. The planned gross profit can be calculated from the table below. The allowances will be made after obtaining total gross profit. Table 2: Planned gross profit Period No of units sold Planned selling price per unit Planned Gross profit per unit. (Selling price - 2.5 unit price) Total gross profit (Rounded off) 1 12,512 units 3 0.5 6,256 2 11,357 " 3 0.5 5,679 3 10.010 " 3 0.5 5,005 4 12,320 " 4 1.5 18,480 5 12,512 " 4 1.5 18,769 6 13,667 " 5 2.5 34,169 7 14,630 " 5 2.5 36,575 8 14,630 " 5 2.5 36,575 9 15,207 " 7 4.5 68,434 10 15,785 " 7 4.5 71,032 11 15,785 " 7 4.5 71,032 12 21,175 " 10 7.5 158,812 12 22,907 " 10 7.5 171,806 52 weeks 192,500 " 702,625 The planned gross profit is 702, 625 pound. It is assumed that in addition to reductions during the lean season, free offers of shirts and other accessories will be given during the peak season starting from period 9 onwards. It is estimated that the total free offers will be 55,000 pounds. So the planned gross profit after deductions will be 702,625 - 55,000 = 647,625 pounds. The allocation and replenishment process to stores: The total number of 192,500 units of Anderson's low priced smart shirts will be divided equally among all the 100 stores of the RLL Group. Hence, each store will get 1,925 shirts. Stores have been given directions that as soon as stocks fall below 100 units during lean times and 200 units during peak times, replenishment requests have to be given, with just 7 days of lead time, it would be sufficient to keep the stores in stock until new stocks arrive. Bibliography BECKMAN, Theodore N., and DAVIDSON, William R. (1967). Marketing: What Buying Involves. [online]. Ronald Press Co., P. 393. Last accessed 8 August 2008 at: http://www.questia.com/read/101977059 Read More