Island Clothing
Case Study
Presented to Dr. Bruce Firestone
Due: Monday, April 9th, 2001
Entrepreneurial Culture 42.491
Catherine Cleary
* All the names of the staff and the island have been changed.
In January 2001, Susan Smith, manager of the company Island Clothing which currently owned four retail locations on a very popular summer resort island, had to make a decision regarding whether or not to implement a computerized inventory system to track the four stores inventory. She wondered what effect this would have on the production process as well as the employees. She also had to take into consideration the possibility of outsourcing the production of their inventory. She knew that it was too late to implement the inventory system for the upcoming summer season but wondered about the possibility for having it ready for January 2002.The implementation of an inventory system could have major cost savings but was it worth the effort?
Island Clothing entered the clothing business in 1985. The company began as one little store selling only t-shirts from one location. The owner had a vision to expand the stores but knew that it would require significant capital expenditures. By 1988, the owner had purchased two buildings and had expanded the business to two stores. In early 1989 the owner bought another piece of property so that a factory could be built. The factory would give them the opportunity to print all of their merchandise on island. By 1990, the company had expanded to four retail locations. Since 1990, the company has virtually eliminated the competition on the island. The company prides itself on being on target with fashion designs and trends and the business has been very successful. The company continues to own three of the locations and they rent one. The company employs around 35 employees at peak time during the summer months. The stores are open everyday for 14 hours a day. The stores are only open on the weekends from January to March but remain open everyday from April 1st to December 31st.
When the stores first opened they only sold various styles of t-shirts and sweatshirts, but as the island began to see an infusion of considerably wealthy vacationers, they decided to change their merchandise to higher ticket items such as leather jackets. The owner found it difficult to manage all of the different merchandise and keep track of the various suppliers. The profit margins on these high tickets items were minimal and turnover was low. By 1989, the owner knew that notably higher profit margins could be made returning to the company’s original focus of lower priced merchandise, such as t-shirts, hats and sweatshirts. As well the turnover rate on these garments were significantly higher. The construction of a factory would allow them to keep costs under control and would allow them to react to market demand very quickly.
Island Clothing is located on an island in the United States, which is known as a summer vacation spot for people of considerable wealth. The island has a huge summer population and the average house sells for over a million dollars. The company does around 90% of its business between June and September. In the past few years, the island has seen some important changes as the island has become more accessible. More airlines are flying into the island as well as the implementation two high-speed ferries. This enables people to come to the island for day trips where as 10 years ago it was not possible. The average housing rental for a week in the summer months is $3,000 so many people can’t afford to vacation on the island during the summer months so they have no choice but to come in off-season. This has also allowed for a lengthening of the peak season.
Who are the customers?
Island
clothing customers tend to be affluent people with a significant amount of
education and income. As much as 50% of the customers are repeat customer and
they range in all ages. They tend to be middle and upper class and many of them
are tourists to the island. Some of the customers are island residents.
What do they want from this
service?
The
customers are looking for a large selection of high quality clothing. They are
looking for new and unique styles, as many of them are repeat customers. They
are looking for price ranges from affordable to expensive. Many of them are
looking to buy the garments as they are looking to achieve the image associated
with the apparel. They are looking for friendly service and they want
convenient shopping hours. The four stores are open for 14 hours a day to
ensure that customers can shop whenever they feel the need.
Why do they want to shop with
us?
Customers shop at Island Clothing
because they have in the past or because they have heard through word of mouth.
The company has never done any form of advertising. Many of the customers also
tend to be loyal to island owned businesses and they want to support the
natives. Customers also know that they are guaranteed to get the widest
selection available on island.
When do they make their
purchase?
Most of the
customers make their purchases in the summer months. The stores are also very
busy around special occasions such as Christmas and Easter when people use
their “summer houses”.
Island Clothing has two direct competitors. The first competitor is located right beside one of our stores. They have been in. business for 12 years and have therefore made a mark for themselves on the island. They offer sweatshirts and t-shirts for both adults and children. They do a significant amount of advertising and many people are aware of their stores and as they are in a good location they have considerable walk by business. They have many strengths going for them but significant weaknesses. They have a limited variety and they offer the same styles year after year which tends to push away a large segment- the summer residents.
Their second direct competitor is located right behind two of their stores. Their biggest strength is that they do a significant amount of advertising and discounting, which targets day-trippers. They are not an island firm and are new to the island. For day-trippers this is not an issue but for island and summer residents with high loyalty to island businesses it is one.
The company has one main indirect competitor, a sports shop located in close proximity to all of Island Clothing locations. They carry a significant number of brand names and offer a wide variety of clothing and accessories. Their weakness is that most of there brand name clothing can be bought elsewhere and is not unique to the island. Island Clothing offers similar products but all of their apparel features the island name on it rather than Nike, which most vacationers are looking for.
Exit Strategy
The owners could sell the business
and the real estate or they could sell just the real estate and close the
company down. Many buyers would be interested in buying the real estate, as it
is all located right in the heart of the island.
Island Clothing and Company currently has no form of inventory tracking system and they therefore carry a significant amount of inventory. Due to the fact that the company doesn’t track what they sell, the ordering is usually based on perception and not on real numbers. As well, due to the lack of inventory system, they often don’t have enough of the high demanded merchandise as they have no real way of figuring out if it selling. In the past this wasn’t much of a problem but as the season gets longer and sales continue to increase, a monitored inventory system could help to reduce costs as well as allow them to respond to market demand much faster.
Island Clothing has no form of inventory system at all. Everyday staff members have to go through each garment and write down all the sizes and colours that are missing. This process is laboured intense and it takes a considerable amount of time to go through all the merchandise in the store two or three times a day. Due to the fact that the entire inventory stocking process is handwritten there are significant chances that errors will occur. The process is also extremely costly as they have to have many staff members working at all times to ensure that stores remain stocked and that customers are looked after. The company is also incurring significant costs because there is no way of tracking what is selling or how much has sold. Ordering is merely done on perception and not on any sound numbers. It is also very difficult to forecast demand, as there is no tracking to see how mush sold. As well, the merchandise is costly to warehouse.
Susan Smith’s job as manager is to come up with a proposal that would be presented to the owners with her recommendations as to what could be done to implement some sort of inventory control system. The main considerations that she had to consider were whether it was feasible to implement an inventory control system and if so what type of system would be optimal for the size of the organization? She also had to ensure that the system could handle the hundreds of transactions that occurred on busy days. In addition she had to approach different companies to figure out the costs associated with implementing the system. Once these issues were taken care of she had to prepare a recommendation to the owners.
After doing research on a few similar companies, it became evident that it was definitely feasible to implement an inventory control system. The systems that were researched have backup requirements so that if something were to happen on a busy day it could be fixed almost immediately. The bar code system would be the most appropriate system for the size of the company. As well, with the increase in business-to-business operations, in a few years time she thought the retail industry would be moving toward almost exclusive computerized ordering. All of the merchandise would be bar coded and a computer would be installed in each of the four retail locations, the office and the factory. Susan contacted many of the company’s suppliers who said that they actually bar code the inventory before they ship it to Island Clothing. The system would enable the managers and employees to have immediate access to what has sold and they therefore would only have to print out a list to do the stocking. The cost of the system would be around $80,000 US (see appendix C) and could be implemented in the next year. A cost analysis showed that the payback of the costs associated with the implementation would be made in the next year. The implementation of a computerized inventory system would also enable the company to minimize the inventory shrinkage that occurs.
The company could continue to run operations the current way with no form of inventory system. The company has been very successful and it is definitely feasible to maintain current procedures.
Susan had to put together a list of the benefits that the company would occur by implementing an inventory control system and prepare a recommendation to the owners.
In 1988, Island Clothing built a factory that enabled them to print and warehouse their own merchandise. The necessary equipment cost the company around a million dollars but the cost benefit that they incurred by printing there own merchandise was well worth it. The increase in popularity of t-shirts and sweatshirts in the past ten years has had a significant change on the competitive landscape of the market. Whereas 15 years ago there were only a few t-shirt manufacturers, there are now thousands. This increase in competitors has driven down the price that manufacturers can charge to print the t-shirts and merchandise. Island Clothing wondered if it was still cheaper to continue to operate the factory or whether they should use the factory for warehouse space and change the operating space into apartments that could be rented out for on average $25,000 a season. The company could put 4 apartments in the extra space at a cost of around a million dollars. The factory currently operates for 4 months out of a year and shuts down for the other 8 months.
After doing a cost analysis, it costs Island Clothing approximately $4 a shirt to print in house and it costs them $8 a shirt to outsource it (See appendix D). Every season they print about 400,000 shirts.
The costs associated with printing in house are about 4$ a t-shirt. While looking at these costs Susan also had to take into consideration the staffing requirements that she would need to run the factory. It is extremely timely to train staff and because of the high cost of living on the island, wages have to compensate employees for their living costs. If the company were to continue to print in house there are significant management requirements. It is very time consuming to manage and coordinate the operations of the stores with the factory. Printing in house does allow for excellent quality control and allows the company to have control over their costs.
The costs associated with outsourcing the companies printing requirements are 8$ a t-shirt. Susan had to consider that if the company began to outsource they would be some variability in the quality of what they would receive. They would also have much less control over costs. The lead-time for ordering from a supplier would be around a week while the lead-time for in house printing was 1 day. Outsourcing all the printing requirements would allow for management to focus more on the retail side of operations than trying to coordinate both manufacturing and retail. If the company decided to outsource their printing requirements they could use the space to build apartments. Susan thought that the owners didn’t really want to get into the rental business but she wanted to present them with this idea so that they could make the decision. The costs associated with building the apartments would be around a million dollars but each apartment could rent for around $25,000 for a season.
Susan Smith had to come up with the strengths and weaknesses of the alternatives and then finalize her recommendations so that they could be presented to the owners.
Susan Smith had to prepare her recommendations to present to the owners. She also wondered whether there were any other alternatives that she might be missing. The owners then wanted her final recommendations and her justification behind her decision.
Appendix A
Consumer Analysis
Who are the consumers?
·
Affluent people with a significant amount of
education
·
As much as 50% of consumers are repeat customers
·
Range in all ages
·
Middle to upper class
·
Tourist and residents
What do they want from this
service?
·
A large selection of high quality clothing
·
New and unique styles
·
Price ranges from affordable to expensive
·
The image associated with the apparel
·
Friendly service
·
Convenient shopping- long hours so that they can shop
whenever they feel the need
Why do they want to shop with
us?
·
Because they have in the past
·
Because they have heard through word of mouth
·
They are loyal to island owned business and therefore
want to support us
·
They are guaranteed to get the widest selection
available on island
·
They can get something unique that can not be bought
elsewhere
When do they make their
purchase?
·
Summer months
·
Whenever convenient- sunny days at night- rainy days
during the day
·
Special Occasions E.g. Christmas
·
Tourists and students- once a summer /Residents- a
few times a year
Where do they buy the product?
·
Any one of our four stores
·
Over the phone
How do they buy the product?
·
First the consumer must be aware and knowledgeable
about our stores
·
They must have a favourable attitude
·
They have to be happy with the service and quality of
clothing so that there will be a repeat purchase.
·
They base their actual decision on the uniqueness of
style, the price, the convenience and the service
Appendix B
Competitive Analysis
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Strengths |
Weaknesses |
Direct Competitors
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Competitor #! |
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Competitor #2 |
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Indirect Competitors |
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Indirect Competitor #1 |
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Appendix C
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Description* |
Costs |
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InStock
Software |
$2,250 |
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Portable
Terminal Software |
$495 |
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Portable
Bar Code Terminal |
$1,600 |
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Cabling,
Power supplies ect |
$980 |
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On site
training/ Installation |
$1,320 |
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Modification
to specifications |
$520 |
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Barcode
printer/labels/ribbon |
$2,000 |
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5
computers |
$30,000 |
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Set up
costs |
$40,000 |
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Total
costs |
$79,165 |
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* All
costs were taken from contacting a supplier from ASAP Systems, Data
Collection |
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and
Management |
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Cost analysis In House Printing vs. Outsourcing
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Outsource |
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Average
cost of garment |
$7.50 |
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Shipping
costs |
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$.50/unit |
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Lead
Time |
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7 days |
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Holding
costs |
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25% cost unit |
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Cost
to outsource |
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$8.00/unit |
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In
House |
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Cost or
garment |
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3$ |
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Printing
capabilities |
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2000/day |
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Overhead
per t-shirt |
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Labour |
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0.25 |
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Taxes |
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0.10 |
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Insurance |
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0.11 |
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Utilities |
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0.20 |
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Supplies |
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0.34 |
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Total
Overhead |
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$1.00/unit |
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Cost
to print in house |
$4.00/unit |
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Lead
Time | ||||||