Assignment 3

CONTENTS

1. INTRODUCTION ......................................................................................................................................... 1

1.1 ANALYSIS OF ACTIONS TO BE TAKEN: ................................................................................................. 1

1.2 ANALYSIS OF UNPREDICTABLE EVENTS: ............................................................................................. 2

2. MARKET ANALYSIS OF YEAR 1: .................................................................................................................. 3

3.MARKET ANALYSIS OF YEAR 2: ................................................................................................................... 4




6. GRAPHS: .................................................................................................................................................... 8

7.CONCLUSION………………………………………………………………………………………………………………………………………..9

8.CITATIONS……………….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…….…..9

4/4/2014

SIMULATION GAME REPORT: TEAM 9

Submitted by

Dipika Berry.

Meenakshi Sundaram Saravanakumar.

Nagalingam Thiyagarajah Sancheev.

Santhosh Kumar Sampangi Ramasetty.

1

1. INTRODUCTION

CFC is a Singapore based company with businesses in clothing and fashion industry. It has its customer

base in Europe, US and Asia. Raw materials such as Cotton, Silk, polyester and dyes are obtained from

Southeast Asia and China. CFC has a large factory in Vietnam for mass production.

Strategies adopted for playing the simulation game:-

First we saw the opportunities and challenges being faced by this industry:-

n Large textile supply chain players such as Li&Fung and Esquel have got much larger scale and

global reach.

n New competitors are coming into the markets from developing countries in Asia.

n High cost of labor in Singapore and Malaysia.

n Ensuring quality control of outsourcing process in low cost countries.

n Volatility in the price of raw materials such as cotton.

n Slowing growth in Europe.

n Distribution of its products to new and growing markets in Asia.

n R&D for new materials and manufacturing for ethnic fashion.

1.1 ANALYSIS OF ACTIONS TO BE TAKEN:

- Introducing a new production site to increase the volume of goods produced. Manufacturing

facilities should be shifted to developed countries to promote high technology in clothes

manufacturing line and also to improve quality. Ensuring quality is also necessary to satisfy its

growing customer base in Asia. Increase in quantity as well as quality would help CFC grow its

customer base. Moreover, it will also mitigate the risk of controlling quality of goods processed

in low cost countries by shifting these processes to developed countries.

Actions relevant to the above strategy: 2 and 16

- Since cost of the labor is already high, It is not necessary to invest on labor training

Actions not to be taken: 15

- Storing more finished goods inventory can help CFC in mitigating risks related to demand

uncertainty and raw material availability. Moreover, going for risk sharing contracts with

customers would be helpful in mitigating the risk due to volatility in prices and demand

uncertainty.

Actions Relevant to the above strategy : 5 & 10

2

- CFC is supplying to major retail chains in US and Europe. But keeping in mind the slowing growth

in Europe it is necessary that its suppliers should be kept abreast of the demand of its final

customers.

This would help, especially, the raw material supplier to easily allocate required goods to CFC

when demand arises(VMI). This helps in reducing the amplitude of bullwhip effect in the supply

chain.

Actions Relevant to the above strategy: 12

Since CFC is expanding its customer base in Asia, planned and efficient distribution of products

to new and emerging markets is a prerequisite for CFC. Hence it should consider setting up

distribution centers which is closer to its customers. Since the demand is increasing we have

also considered increasing unit sales price for higher revenue generation.

Actions Relevant to the above strategy: 4 & 13

CFC is also trying to develop a new line of clothes and is looking for investing in new materials

and processes, i.e it should invest in R&D to expand its range of products.

Actions Relevant to the above strategy: 7

1.2 ANALYSIS OF UNPREDICTABLE EVENTS:

Secondly we analyzed the event list, on the basis of which we identified the actions we need to take

in order to mitigate the risks due to any future events. Accordingly we divided actions in to 3

categories depending on the probability of events:-

-Actions that must/must not be taken and the respective profit for events with high probability

(10-14%):

16- Will help if major developed countries introduce import quota for textiles

-If supplier in low cost countries is unable to supply due to labor strike.

-If oil price goes down.

10- If natural disaster causes disruption in cotton supply, then risk sharing contracts with

customers would help.

9- Should not take because if natural disaster causes disruption in cotton supply then

VMI with suppliers would lead to 10% reduction in sales.

1/2-If there is a surge in demand due to economic growth then setting up of a new

production site or introducing new machinery would be profitable investment.

7- If there is a change in consumer taste then investing in R&D would lead to a 7%

increase in sales.

-Actions for events with low/medium probability (4-8%)

4/5/10 – If a new competitor enters the market then without this action demand would

drop by 10%.

6- Should not be taken because if the supplier in low cost countries is not able to supply

due to labor strike then sourcing from cheaper suppliers in low cost countries would

reduce sales by 15%.

- Also if the oil prices go up then the logistics cost would increase in this case by 15%.

3

Hence overall,

Actions to be taken: 1,2, 4,5,7,10,12,13,16

Actions not be taken: 6,9,15

2. MARKET ANALYSIS OF YEAR 1: Action Number Action Description Impact 1 Impact 2 Impact 3

5 Hold more finished goods inventory

Sales increase 8%

FG inventory increases by 5%

--

12 Share demand information with suppliers

Raw materials cost reduce by 20%

--

13 Increase unit sales price Cost increase by $10

Sales reduce by 5%

--

Revenue: 90,640,000

Gross Profit: 63,448,000

Operating Profit: 7,674,248

REASONS FOR THE ACTIONS TAKEN:

-Action 5: Holding more finished goods inventory, as evident leads to an increase in sales of 8%.

Moreover, this action would help in mitigating risks that may occur due to demand uncertainty.

Considering fluctuating price of cotton, silk and other raw materials, holding more inventories would

support increase in sales.

- Action 12: This action reduces the raw material cost by 20% thus increasing the profit. Since CFC has

non-uniform demand across its customers in different countries, sharing demand information with

suppliers is essential to ensure that raw material supply doesn’t get affected when there is a huge

demand.

-Action 13: would increase the revenue by increasing the unit sales price.

RESULTS AND OBSERVATION:

1) Overall profit increased from $ 6,920,000 to $ 7,674,248.

2) It is beneficial to take action which leads to increase in revenue. Also considering the rising demand

and inflation each year, it is better to take one action which would increase the unit price or sales.

3) Since CFC has just started its operations, it is good to invest in R&D or new plant. This would have

long term profitability.

4

3.MARKET ANALYSIS OF YEAR 2:

Action Number Action Description Impact 1 Impact 2 Impact 3

2 Introduce new production site.

Sales increase 20%

SG&A increases by 3%

--

7 Investing in R& D Sales increases by 7% over previous year from next year

R&D cost increases by 10%

--

16 Reshore manufacturing & distribution to developed countries

FG inventory reduces by 15%

Logistics reduces by 10%

SG&A increases by 8%

Revenue: 108,768,000

Gross profit: 76,137,600


REASON FOR THE ACTIONS TAKEN:

1) Since CFC is facing competition from many other textile industries, it has to ensure enough

supply of finished products to meet demand. Increasing production capacity would help

meeting demands for growing economy. Although the SG&A increases by 3% but the sales also

increase by 20%. Even though depreciation cost and SG&A expenses increase, sales increases by

20% which eventually increase profit.

2) Since CFC is planning to develop a new clothing line, It is better to invest in R&D in the

beginning. Moreover this action is suitable according to our strategy decided earlier. Although

an increase in R&D cost would be incurred this year, sales would increase by 7% from next year.

3) Action 16 was also one of the most important actions to be taken according to our strategy. This

would mitigate the risk of any disruption due to raw material unavailability in low cost

countries. Moreover, this would lead to an increase in the overall profit through reduction in FG

inventory and logistics cost.

RESULTS and OBSERVATIONS:

There was a reduction in operating profit from 7,674,248 to 6,432,239 due to two major investments-

R&D and setting up of new production site. But these actions would ensure long term profitability and

increase in market share.

Event Card Drawn: 9- This lead to further increase in sales by 10% as we had invested in R&D.

REALTIME EXAMPLES:

Prada , an Italian luxury fashion house ventured into installation of new plants to sustain growing

demands [1]

5

3. MARKET ANALYSIS OF YEAR 3:

Action Number Action Description Impact 1 Impact 2 Impact 3

5 Hold more finished goods inventory

Sales increase 8% FG inventory increases by 5%

--

10 Allow customers more flexible ordering and risk sharing contracts

Sales increase by 10%

Raw materials cost Increase by 10%.

FG inventory increases by 5%


Sales reduce by 5%

--

Revenue: 154,252,800

Gross profit: 107,976,960



4) Actions 5 and 10 were taken for the same reasons as discussed earlier.

5) Though raw materials cost and FG increases, sales also increases by 10%. Hence, by taking

action 10, profit increased considerably. Further, Risk sharing contracts increases relationship

between CFC and its customers which would help in long term sales.

RESULTS and OBSERVATIONS:

Operating profit increased considerably due to actions taken in the previous years and this year.

Event Card Drawn: 10- Since we had already implemented risk sharing contracts strategy, demand was

consistent and didn’t drop.

This kind of risk sharing contracts is common in Abercrombie and Fitch, Tommy Hilfiger and Polo Ralph

Lauren Corp.


4 Create another distribution center to be closer to customers

Sales increase 10%

Logistics cost increase by 10%

--

9 Implement consignment / VMI with suppliers


--

--


Sales reduce by 5%

--

6 Revenues - 175,462,560

Gross Profit - 122,823,792

Operating Profit -8 ,632,242


1. Creating a distribution center closer to the customers increases sales by 10% and decreases

logistics by 10%. Since logistics cost is just a fraction of sales, this action helps us in increasing

profit. Moreover, creating a distribution centers for CFC near customer’s location in major Asian

countries like India and china has following advantages,

a) Timely delivery to customers .

b) More information about customer’s demand.

c) Increased ability to meet customer’s immediate demands.

d) Increased capability to store more inventories to manage market volatility.

2. Implementing VMI results in reduction of raw material cost by 10%. Implement VMI with

suppliers also have following benefits to CFC.

a) CFC would have better response from suppliers in terms of different types of raw material

inventory needs in both quantity and location.

b) Demand uncertainty for textiles can be considerably reduced since suppliers constantly

monitor raw material inventory levels.

c) Long term relationship with supplier.

3. Increasing unit price can yield more revenue even though sales is reduced.

RESULTS AND OBSERVATIONS:

1. Profit has increased from 8,308,328 to 8 ,632,242. Since we have created distribution centers

close to customer location , implemented VMI and increased sale price, positive effects on the

profit is higher than negative effects of the profit.

2. Event card 5: Since we had already taken action 16 in previous years, our sales didn’t reduce.


6 Source from cheaper suppliers in low-cost country

COGS costs Reduce by 10% over previous year

FG inventory increase by 10%

Logistics cost increases by 15%

11 Implement MOQ and strict order cut-off times for better coordination

Sales decrease by 3%


FG inventory decrease by 5%

14 decrease unit sales price Cost decrease by $5

Sales increase by 8%

--

7 Revenues - 177,149,700

Gross Profit - 129,319,281

Operating Profit -: 11,142,218

Adopting these strategies resulted in the following profitable ways.

SOURCING FROM A CHEAPER SUPPLIER:

This strategy was adopted mainly to bring down the COGS cost. It was identified that sourcing from low

cost countries resulted in a reduction In COGS cost of 10% which would be highly profitable for the

company. This strategy also results in increase in FG inventory and logistics of around 10% and 15%

respectively. But this cost can be borne as the reduction of COGS cost would be the main factor here.

Thus the increase in logistics and FG inventory is counterfeited by the reduction of COGS costs. Many of

the textile and fashion companies like Zara and Benetton adopt this strategy of off shoring from a

cheaper country and have gained significant profits. Low cost countries like India has restructured its

Foreign investment policies , reaffirmed strict labor and environmental laws[4] . Moreover labor wages

are still low in India when compared to china[5]. Hence, Instead of having facilities in low cost countries

like Bangladesh and Myanmar, India can be chosen as a manufacturing destination. This justifies our

move to shift manufacturing facilities from developed countries to low cost countries. Same quality can

be maintained in low cost countries with the use of high skilled manpower and latest technologies.

IMPLEMENTING MOQ AND STRICT ORDER CUT OFF TIME:

MOQ allows the customer to have long production runs so that he can realize the economies of scale,

have a sustainable production and helps maintain lower levels of inventory. Procuring the products in

bulk has many advantages by reducing the costs in shipping, warehousing, taxes and interest. Assuring

the new low cost suppliers that they won’t be stuck with any inventory they will be offering good

arrangements for shipping and be competitive in pricing which helps in reducing the cost of the product

and thereby increasing the profit indirectly. This strategy also helps in improving the relationship with

the supplier which is beneficial for both the sides for the following years to come.

DECREASING UNIT SALES PRICE:

As the product was sourced from a cheaper supplier in a low cost country, it was decided to reduce the

unit cost of the product. Taking into account the economies of scale As the cost is reduced the sales are

expected to go higher. The item cost was decreased by 5 dollars as a result the product sales got up by

8% resulting in substantial profits for the company.

8

-

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1,400,000.00

1,600,000.00

1 2 3 4 5

100.00

105.00

110.00

115.00

120.00

125.00

130.00

135.00

1 2 3 4 5

$-

$50,000,000.00

$100,000,000.00

$150,000,000.00

$200,000,000.00

1 2 3 4 5

$-

$20,000,000.00

$40,000,000.00

$60,000,000.00

$80,000,000.00

$100,000,000.00

$120,000,000.00

$140,000,000.00

1 2 3 4 5

6. GRAPHS:

A .Number of units sold for every year B. Unit price of products for every year

C. Revenues for every year D. Gross profit for every year

7. CONCLUSION: Textile industry adopts push-pull system with the push-pull boundary towards later part of the supply

chain. Considering the entire scenario, we had emerged as a company with highest revenue and gross

profit. But, our profits are not high as compared to some other teams. This is due to high COGS and

SG&A costs. SG&A costs increased considerably due to installation of new production line and shifting

manufacturing facilities to developed countries. But, chances of disruptions that may arise due to

various reasons were avoided. Hence, to high revenues may not actually lead to high profit. This

situation was experienced by e- shopping giant Amazon. For first few years since its inception, Amazon

didn’t make much profit even with $1 billion revenue. We have increased product costs in consecutive

years. We have taken this particular action to increase profit in simulation game context. This kind of

continuous price rises can be seen in many textile industries due to various reasons like inflation,

fluctuating exchange rates, black markets, high demand for raw materials etc. Moreover, we had

invested in R&D to increase our product line [2][3]. Moreover, our manufacturing operations are shifted

back to developed countries. Hence, continuous price increase is justifiable. We learnt management

techniques that could reduce bull whip effect and generate more sales. Those are creating distribution

9 center closer to customers, holding more FG inventory, implementing VMI, implementing risk sharing

contracts with customers and sharing demand information with suppliers. As time increases, every

company adopts its own strategy for maximizing profits by overcoming various risks. Finally, Returns

may be low for first few years, but companies have to cross a transition phase to become a market

leader and generate high profits.

7.CITATIONS: 1. http://online.wsj.com/news/articles/SB10001424052702303847804579476881929691764

2. http://www.businessoffashion.com/2013/08/fashion-inflation-why-are-the-prices-of-designer-

goods-rising-so-fast.html

3. http://www.cnbc.com/id/41575599

4. http://articles.economictimes.indiatimes.com/2014-02-22/news/47581783_1_oecd-pier-carlo-

padoan-labour

5. http://businesstoday.intoday.in/story/india-benefits-china-begins-to-lose-manufacturing-

edge/1/203040.html

http://online.wsj.com/news/articles/SB10001424052702303847804579476881929691764

http://www.businessoffashion.com/2013/08/fashion-inflation-why-are-the-prices-of-designer-goods-rising-so-fast.html

http://www.businessoffashion.com/2013/08/fashion-inflation-why-are-the-prices-of-designer-goods-rising-so-fast.html

http://www.cnbc.com/id/41575599

http://articles.economictimes.indiatimes.com/2014-02-22/news/47581783_1_oecd-pier-carlo-padoan-labour

http://articles.economictimes.indiatimes.com/2014-02-22/news/47581783_1_oecd-pier-carlo-padoan-labour

http://businesstoday.intoday.in/story/india-benefits-china-begins-to-lose-manufacturing-edge/1/203040.html

http://businesstoday.intoday.in/story/india-benefits-china-begins-to-lose-manufacturing-edge/1/203040.html

Documents

Assignment 3