CASE: PEPE JEANS

Financial analysis for different alternatives aimed at improving current ordering system is
displayed below.

  CURRENT ALTERNATIVE 1* ALTERNATIVE 2**

Sales Revenue £200,000,000 £220,000,000 £220,000,000
(Cost of Goods Sold) (£80,000,000) (£104,000,000) (£72,000,000)
 
Gross Profit £120,000,000 £116,000,000 £148,000,000
 
(Operating Expenses) (£56,000,000) (£56,000,000) (£56,000,000)
(Additional Operating Expenses) - - (£2,992,308)
Inventory holding cost*** £2,492,308
Facility operating cost £500,000
 
Profit Before Taxes £64,000,000 £60,000,000 £89,007,692

Change in Profit Before Taxes (compared to

- -£4,000,000 £25,007,692
current operation)

* Working with a sourcing agent to shorten order lead time

** Building a finishing operation in the United Kingdom
*** Inventory holding cost = [COGS*(6/52)]*0.3
(Six weeks of supply carried at %30 inventory carrying cost)

Additional investment is not needed for alternative 1. Therefore payback period analysis cannot
be carried out.

Alternative 2 has an investment cost of £1,300,000 (£1,000,000 worth of equipment and

renovations with a cost of £300,000). On the other hand, there will be a £25 million increase in
the profit before taxes in case this alternative is implemented.

Payback period for the investment = (£1.3 mil. / £25 mil.)*52 weeks = 2.7 weeks

As seen from the financial analysis, Pepe Jeans should choose to build a finishing operation in
the United Kingdom, since change in profit before taxes is greater compared to alternative 1 and
the payback period for the investment is very small.

On the other hand, the company can consider working with a sourcing agent (use alternative 1)
temporarily for a short period of time in order to minimize complaints from independent retailers
and avoid losing their advantage against their competitors.

In the long term, the company should consider establishing its own manufacturing company.
This way they will have full control of their supply chain, which will ensure quality and
sustainability. Even though this alternative would require a substantial amount of investment, the
company is financially capable of an investment at this scale.