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Geans.
Case-Study Overview
• History:
- Key dates
• Solution:
- Financial analysis
1973 Pepe Jeans was established as a road
side stall by three brothers Nitin Shah, Arun
Shah and Milan Shah from Kenya at
Portobello Road Market in West London’s
trendy Notting Hill district.
www.pepejeans.com
Flexible system would lead to an increase in the sales
of about 10%.
Currently the yearly cost of sales is 40% of sales of £ 200 000 000 that is
£ 80 000 000( 40%x £ 200 000 000)
If the cost goes up by 30% it would mean 30% of £ 80 000 000M that is
£ 24 000 000
In return for this increase in cost the company could make an approximate increase
in the PBT of £ 6 400 000 that would still mean (24 000 000 – 6 400 000) = £ 17
600 000 additional burden on the company.
The advantage in this alternative is that the company does not have to make any
initial investment but has to incur this additional burden every year. Since no
investment is made , no payback period is calculated.
Second Alternative
Initial fixed cost for equipment £ 1 000 000
Renovations £ 300 000
Total £ 1 300 000
Operations costs £ 500 000
Lead time 6 weeks
40%x £ 200 000 000= £ 80 000 000 yearly cost of sales at 40%
The other alternative that Pepe could consider could be to continue with the
current arrangement. It is excellent from the financial point of view but it is
vulnerable from the marketing point of view. If Pepe continues to insist on
requirements to place firm orders six months in advance with no possibility
of amendment, cancellation, or repeat ordering, it is a matter of time before
the retailers turned to other manufacturers who allowed more flexibility.
Some other alternatives that Pepe could consider could include sourcing its
jeans in some other country where there were more cost advantages and
greater flexibility. Finally, Pepe could consider the case where the entire
manufacturing was transferred to UK, the financial strength of the company
could finance it and this step would provide it with great flexibility and
responsiveness to independents.
Thank you!
• Questions?
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