BATTLE OF OPCROSS Operations case study

The case study is of iJeans styling Pvt Ltd. Participants

are requested to go through rules and follow

guidelines mentioned on the website.

Event Organizer :Jigar Gajjar Contact :94293 54863

DRISHTI 2015

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The spread of e-commerce and globalization has led to the rise of several niche

players who largely specialize their products around a specific theme. As many as 1,

06,086 websites are registered daily and more than 25% are for niche

businesses.”iJeans” is also one of those niche player. iJeans began to produce and

sell denim jeans in early 2002 for bigger players like “pepe jeans and levi’s on made

to order basis and was a major supplier for e commerce markets of these brands.

Looking at the potential and growth of the market in 2005 iJeans decided to launch

its own product line and introduced new product catalogue in 2005 and received

enormous growth. The success continued as iJeans focused more in strong brand

building and limited variety.

The catalogue is modified each season, but each style keeps its identity close to

unique iJeans styling which makes it comfortable to wear than other popular

western brands. iJeans brand strength is such that company can apply an average

retail price of Rs.2500.The high percentage sales is through selling in retail line

through departmental stores such as westside,Pantaloons,Shoppers stop etc.The

company maintains contact with these stores through middle men or agents.

Currently iJeans is handling its retail channel through 20 agents’ workforce. Each

agent or middle man is assigned particular state in India. On average each agent is

handling 8 retail channel partner except in metro cities where each city is having a

dedicated agent handling 7-12 stores. The agent meets each retailer on quarterly

basis in order to present new collection and take orders. Since retailer base is so

large that order taking is done through a common presentation in a hotel. Because

the order is so large, agents take orders for five months delivery. After iJeans

receives order, the retail partner is given only 1 week to cancel or change order since

it needs to place immediate firm orders to suppliers in China to meet delivery period.

Company has strict policy of not holding a large inventory of jeans. After an order is

received and confirmed, the rest of process up to delivery is administrated from

head office in Gurgaon. The status of order can be checked through website which

iJeans maintains. The order are sent to sourcing agent in China who arranges for

manufacturing of jeans. The sourcing agent handles all details associated with

material, knitting, fabrication and shipping of finished jeans to India. iJeans has a

team of in house designers who are responsible for understanding trends and

making new designs. The designers are involved in accompanying Chinese agent for

decision making in material selection, stitching as well as styling till final product is

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shipped. The team ensures jeans are up to the standards set by iJeans and are made

of highest quality material.

A recent independent feedback survey of retail partners pointed at some growing

problems. The independent praised quality of jeans and catalogue of iJeans. It was

stated that company’s unique styling, quality and strong brand base was giving key

advantage over the competition. However, retailers were unhappy with five weeks

advance with only one week for rendering which leads to possibility of stock out or

pile up in some categories. Retailers claimed such inflexible ordering system forced

them to order defensively.

The retailers expected to have some slow moving inventory, but five week lead time

made it difficult to accurately order and worsened the problem. Since fashion is very

impulsive and changing, the current favorites were often not in demand five weeks

later. On the other hand during festive seasons and other peak shopping period

demand exceeds expectations, it took a long time to fill the gap. On the other hand,

retailers wanted some method of limited returns, exchange or reordering to

overcome worst of these issues.iJeans understood the seriousness of situation as

many competitors were offering delivery in only few days.

iJeans has enjoyed considerable financial success with its current business model.

Sales last year were approximately Rs.10cr 76 lacs.Cost of sales was approximately

Rs.4,30,40,000 operating expenses were Rs.3,22,80,000 and profit before taxes was

nearly Rs.3,65,84,000.Company has very healthy cash position and no long term

debts.

iJeans was feeling pressure and felt that change is to be needed soon. In evaluating

Alternatives Company found that easiest way would be to work with China based

agent to strategically reduce lead time associated with orders. The agent agreed that

lead time could be shortened, possibly to one week. The sourcing agent claimed that

costs might go up to 20 percent if lead time is shortened to one week. Even with

significant increase in scope consistent delivery schedules would be difficult to keep.

The sourcing agent indicated iJeans should consider building finishing operations in

India. The agent indicated major brand in US has moved to this type of structure

with considerable success. The US operations took orders and shipped the orders.

The US firm found it could give two days response time to retail channels.

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The sourcing agent indicated that costs for basic jeans (jeans where wash is not

applied) could probably be reduced by 15 percent as volume will be higher. In

addition lead time for jeans can be reduced to approximately two weeks because

finishing step would be eliminated and orders would be larger.

The iJeans board liked this ideas so they visited the US operation to see how system

worked. They found they would have to keep five weeks’ supply of basic jeans on

hand in India and that will require to invest around Rs.5 crore worth of

equipments.They estimated it would cost around Rs.2 crore to operate facility each

year.

While management was considering different options they noticed the growth in

online segment. Normally in e Commerce Company had to establish only one agent

as most of the e commerce sites were having their own middle man and warehouse.

Since its inception company has seen continuous growth in e commerce sales,

although brick and mortar retailers had major chunk of sales the e retailers sales was

increasing continuously and may overtake physical retail sales in next 7 years. Due

to strong growth the company has additional office space in Gurgaon headquarters.

The company has option of leasing additional space as its current location in

Gurgaon for next 5 years, but after it will need to move to new building. Another

option is to considering moving entire operation to Bhiwadi, Rajasthan immediately.

Another option is to lease a new building in current location, it can at the end of five

years either lease a new building in Gurgaon or near small town.

Following are some additional facts about alternatives and current situation:

1. Leasing new space at current location in Gurgaon will cost company around

Rs 1 crore per year

2. Moving entire operation to Bhiwadi, Rajasthan would cost Rs 10 crore.

Leasing space would cost Rs.60 lac per year

3. Moving to a new location in Gurgaon would cost Rs.74 Lacs and leasing would

cost around Rs.98 lacs per year

4. The company has 90 percent chance of surviving next five years

5. The company can cancel lease at any time

6. Assume all other costs and revenues are same no matter where company is

located

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Questions:

A) What would you recommend that iJeans do? Given the data perform a financial

analysis to evaluate alternatives you have identified for reducing lead time in

ordering. Assume new inventory could be valued at five weeks’ worth of yearly cost

of sales. Use 30 percent inventory carrying cost. Calculate payback period for each

alternative that you present.

B) Are there other alternatives that iJeans could consider to improve business?

C) Which alternative is most suitable for iJeans to amongst three given in last

paragraph? Show your financial projections and deducting elements you considered

for decision making.