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because we deliver what we

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Engagement Report
Le Marais Apparel
October 28, 2016

Branzuela, Rhea Mae

Camasura, Carla
Duran, Anthony Al
Abstract
This study mainly targets on how Target Company helps Miranda, a budding
fashion retailer takes her apparel business to the next level with the her problems facing
related to working capital, supply chain, and social media marketing. Target Company,
as consultants would help Miranda formalize its formalizing its mission, vision, and
objectives. Accordingly, the company should make sure that the company sets its
strategies in reaching those objectives and that these strategies are communicated and
integrated into the companys annual operating plan and budget.

Statement of the Problem

Absence of Operational Planning
Absence of Strategic Planning
Lack of Company Mission, Vision,
and Objectives
Management and Governance
Working Capital Issues
The identification of the problem
areas in the business were based
on a risk analysis covering all the
aspects of the company, both
Business Risk
operational and strategic. It was

identified that the main problem,

Marketing and Competition
affecting all the other aspects of
Supply-Chain Management
the business was the style of
management and governance. This area covers the whole process of setting goals for
the company and translating it into operational strategies and working policies of the
company, the coordination of the companys departments, and the collective effort of all
the stakeholders of the company towards a common goal.

The lack of a formalized company mission, vision, and objectives was

identified to be a problem because, although the owner of the business has goals in her
mind, it is difficult to communicate these goals to the companys managers and
employees without these formalized statements. These statements act as the means of
communicating the goals of the owner to the employees.

The absence of both strategic and operational planning in the business would
prove to give the company difficulties in having congruent goals. Without a common goal,
the individual functions of the business would have diverging interests that could be
detrimental to the company as a whole.
 The working capital issues of the company was identified as a sub-problem
because liquidity concerns could pose a significant threat to the continued operations of
the business. This includes the issues on cash management and accounts receivable
collection. Alongside with this issue, is the problem concerning marketing and
competition. Since the industry is highly competitive, failing to maintain its market share
could greatly affect the financial performance of the business. Coupled with working
capital constraints, the risk of market share loss poses significant consequences to the
company.

Supply-chain management is also a concern that the company should take into
account. Because the product and the delivery service is identified as main value drivers
of the demand of the companys products, maintaining efficient supply-chain operations
should be considered. With the problems concerning where to supply its products, this
problem poses another significant risk to the position of the business in the industry.

Assumptions
The following are the key assumptions used in this engagement, along with
corresponding justification on their usage.
The economic condition of the Philippines will remain constant.
The Companys current target market comprises teens and young professionals.
There is no risk of new entrants of competitors.
All products manufactured are sold in the same year. Inventory levels remain the
same for the start of the year and for year-end.
The interest rate used for savings accounts in banks is 0.36%, which is the average
of the latest 2016 interest rates for savings accounts in leading Philippine banks,
viz, BPI, PSBank, Metrobank, BDO, Landbank and RCBC.
A 360-day and 52-week year is assumed. A 5-day work week and a 250-day work
year are also assumed.
The US dollar to Philippine peso exchange rate is assumed to be constant at Php
48 per $1. Thus, effects of foreign currency exchange risk are not taken into
account in this case study.
 Effects of income taxation are ignored since the Company, having Miranda as its
sole owner and having been registered only a year ago as an online apparel
company, is most likely a sole proprietorship that is subject to graduated income
tax. Thus, the applicable rate is difficult to obtain without knowing the income
bracket in which Miranda belongs, there being no data on the cost of goods sold
ratio and the income that Miranda earns besides the one from the Company.
For the sensitivity analysis on the payment options, it is assumed that the payment
options made available are equally used by the customers, in cases wherein more
than one payment option is made available by the Company. This equal allocation
of probability is brought about by the lack of reliable company or industrial data on
the payment preferences of the target market.

Analysis
Company Website
Table 1. Estimated Expenditure for Company Website for Year 1.
Start-up Small Store Unlimited
(100 products) (500 products) (unlimited products)
Initial Capital Outlay* 100,000 125,000 150,000
Annual Recurring Costs** 15,000 25,000 35,000
Monthly Recurring Costs*** 372,000 684,000 1,140,000
Total Costs for Year 1 487,000 834,000 1,325,000
*Design Cost + Customization Cost
**Domain Cost + SSL Certificate Cost
***Website Online Store Maintenance Cost + Search Engine Optimization Basics Cost + Payment
Integration Cost + Shipping Integration Cost
Working Capital Financing
The Company has three viable options to finance its working capital. The
Company may either avail of a short-term bank loan, speed up its sales and collections,
or defer its payments to its employees and suppliers to a later date.

The following assumptions are relevant to this section: The Company wishes to
raise Php 155,000 in order to increase its current ratio to a safer level of 2.5. The
interest rate of short-term bank loans is 3%. The effective rate of deferring credits for
36.86 days is 5.017% (from an assumed credit term of .5%/1, net 40). The cost of
speeding up sales uses the same assumptions with the payment method analysis using
all four available payment methods.

Short-term loan. This is the cheapest form of short-term financing. The net
proceeds of the loan amounts to Php 150,350.00. However, using short-term loans as a
financing method could give the Company difficulties in raising additional loans when it
is direly needed.

Speed up sales and collections. This is the most cost beneficial form of working
capital financing. By allowing more payment methods, the Company could increase its
total collections for the year by Php 1,142,900, or its monthly working capital by Php
95,242, or speed up its daily collections by Php 3,175. Although this may be difficult to
implement, the results could dramatically increase the working capital position of the
Company.

Defer payments to employees and suppliers. This is the costliest form of working
capital financing. With only having net proceeds of Php 147,223.65. Although this form
could potentially increase the Companys expenses, it still has the ease to raise more
funds by applying for a loan.

Finance
Table 2. Sensitivity Analysis for Sales and Costs from the Use of Various Payment
Methods in 2016.
Note: The following formulas are used in computing for the figures on the table.
Est. No. of Annual Sales Transactions or Sales = Ave. No. of Monthly Sales
Transactions or Sales x 12 months
Est. Losses from Theft = Annual COD Sales x 2%
Est. Cost of Collection Float = (Ave. Monthly Sales/30 days) x Annual COD Sales
x 0.36%
Est. Annual Cost for Card Swiping = (Annual Credit Card Sales x 3%) + (Annual
Credit Card Sales Transactions x 10)
Est. Annual Loss from Bad Debts = (Annual Account Sales x 50%)
Total Est. Costs incurred from Payment Methods (Php) = Est. Losses from Theft +
Est. Cost of Collection Float + Est. Annual Cost for Card Swiping + Est. Annual
Loss from Bad Debts
Total Est. Costs incurred from Payment Methods (%) = Total Est. Costs incurred
from Payment Methods (Php) / Est. Annual Sales
Table 2 shows how the use of the various payment methods enumerated in the
case affect the sale and cost figures for 2016. The case study introduced three other
payment methods that may be used by customers aside from the Companys current
practice of Cash on Delivery (COD), to wit: credit card, bank deposit, and
account/installment. The financial effects of the bank deposit option are not shown since
the extent to which new customers are discouraged by the option is not quantified; thus
financially, it is assumed that the income statement effect of the bank deposit option is
immaterial whether or not it is included as a payment option. However, it should be noted
that the inclusion of a bank deposit option would bring about a significant risk reduction
for the Company since it is basically a prepayment. It guarantees to the Company the
customers reliability and existence, which is especially important for an online
marketplace filled with bogus buyers. Furthermore, the risk of incurring the hesitation of
new customers in making purchases through bank deposits can be mitigated by making
available other payment options that are more agreeable to the new customers. This way,
despite not having any substantial income statement effects, the risk position of the
company can be substantially reduced.
The second out of five columns in Table 2 show the historical sales and the costs
incurred due to COD sales. Meanwhile, the third to fifth columns of the table show how
the incremental costs and total sales change if the credit card and account/installment
payment options were made available to and utilized by customers equally with the COD
option. As inferred therefrom, the increase in 2016 sales due to the use of all three
payment options (Php 2,250,000) has the greatest peso margin over the increase in
payment method costs (Php 726,134), which is equal to Php 1,523,866, as compared to
Php 413,419 for the use of both COD and credit card options and Php 900,162 for the
use of both COD and account/installment options. However, the highest incremental
margin percentage goes to the use of both the COD and credit card options with 91.87%,
as compared to the 67.73% of the use of all options and the 50.01% of the use of both
COD and account/installment options.
From this analysis, it can be seen that the use of both the COD and
account/installment option would bring about the greatest default risk and lowest gross
margin for the company, making it the least attractive option. The use of both the COD
and credit card option guarantees the highest and safest gross margin but has the lowest
peso return among all the options. On the other hand, the use of all three options could
bring about the highest peso return but is almost as risky as the use of both the COD and
account/installment option and also has a significantly lower gross margin percentage
than that of the all-three option.
Make or Buy Decision for Production
Table 3. Computation on Whether to Manufacture Products In-house or to Outsource
Production to China.

Note: The following formulas are used in computing for the figures on the table.
 Cost to Buy from China = Purchase Price ($) x Minimum Pieces per Order x Average
Exchange Rate x (30 Days/Lead Time in Days) x 12 Months
Direct Materials = Purchase Price per Garment x Ave. Garments produced per Person per Day
at Full Capacity x 250 Working Days x 8 Hours per Day
Direct Labor = Personnel Salary per Day x Lead Time in Days x 250 Working Days
x 8 Hours per Day
Factory Overhead = Variable Rate x 250 Working Days x 8 Hours per Day
Maintenance Costs = Fixed Rate x Ave. Garments produced per Person per Day
at Full Capacity x 250 Working Days x 8 Hours per Day
Shipping Costs = Fixed Rate per Month x 12 Months
Table 3 shows the differential analysis of whether to outsource or not the
manufacture of the products of the Company after its local supplier has shut down. The
differential analysis has shown that outsourcing the production would save the Company
Php 2,738,000. If the Company chooses to manufacture the products in-house, it has
substantial discretion over its costs but this power doesnt necessarily lead to a reduction
of costs and even come with a huge capital outlay. This could also be an opportunity to
extend its product line or diversify its products but new technological advancements may
threaten this competitive advantage. Furthermore, if the client chooses to outsource its
production, it can focus more on its core competencies, which, in this case, is the design
of fashion-forward bags, shoes and apparel, and it can also gain access to skilled
resources. However, the quality of the products cannot be controlled and the prices are
dictated since it is merely acquired from a third party.
Sales Forecast for the Next Five Years
Table 4. Sales Forecast.
The ff. are the formulas used for the computation:
Sales per day = Annual Sales / 360 days
Designs = Annual Sales/ minimum capacity to produce (50)
Design/product = Number of designs (6) / lead time of production
COGS = Number of designs (43.20) x min. capacity to produce (50) x ($5)/ piece x
average peso conversion (P48)
This Sales Forecast helps the company to estimate the amount of COGS to be
incurred each year and how sales affect the increase/decrease of COGS and the cost to
produce the different designs per product.

Recommendations
Management and Governance

The company should consider formalizing its mission, vision, and objectives. Accordingly,
the company should make sure that the company sets its strategies in reaching those
objectives and that these strategies are communicated and integrated into the companys
annual operating plan and budget. The management should also consider establishing
policies that are in line with those stated objectives and strategies. In order to monitor the
effectiveness of these proposed measures, the company should conduct performance
appraisal for the management to identify points to improve and establish controlling
measures accordingly.

Working Capital Financing

The company should try to defer its payments to its suppliers and employees to a later
date. Although this is more costly than a normal loan, this gives the company more
flexibility in its working capital financing needs. Accordingly, the company should also
speed up its sales and collection by adding more payment options. This strategy would
give the company ready access to loans when it badly needs it. To monitor this measure,
the company should evaluate monthly whether the measures were able to raise the
current ratio of the company to a safer level.

Make or Buy Decision for Production

The client should outsource manufacture of its products to China because it will be able
to save Php 2,738,000, focus on its core competencies and establish a good working
relationship with an international business in the same industry.
Payment Options
Considering the individual and collective income statement effects and the risk
implications of the four payment options enumerated in the case study, it is recommended
to the client to make available all the payment options in order to increase its gross
margin, mitigate its risks and build goodwill with its customers.
Areas of Improvement and Focus Areas of Stakeholders
Current Practices Areas of Improvement
of the Company
Social Media
Too many social Proper Delegation of Task
media accounts The Company has to assign a specific personnel who is going to
manage the order taking process and consolidation of orders so
that there will be a centralized processing of information and avoid
double orders and the like.
No system to detect Proper Delegation of Task and Security Check
bogus customers The Company has to assign a specific personnel who is going to
verify the security information of the customers. He must have
Security check controls which include the provision of personal
information (name, mobile number, address and etc.), any
government ID number, if payment through bank (bank account
number), if through credit card (credit card number) before
forwarding the orders to the production department. The Company
has to protect the confidentiality of these information to build a
strong foundation of trust and competence to its customers.
Finance
No In case of insufficiency of funds, the Company has the readily
emergency/liquidity available resources to finance any necessary expenditures in the
fund future and also avoid getting a loan with high interest from lending
companies and the like.
Poor Overall In order to avoid delayed remittances by the courier, it is better for
Collection the Company to have other payment options aside from COD to
Performance cater wider reach to customers. The Company may have
prepayments through bank deposit or credit cards.
Manufacturing
No proper In order for the Company to closely manage the different
accounting records operations of the business, there has to be proper system for the
accounting records to have a reasonable basis for future economic
decisions for the Company and at the same time improve the
quality of operations the Company has been practicing.