Question

Case Study 2-3

Case Source: https://www.homeworkmarket.com/sites/default/files/q3/05/11/levis.pdf

Question:

What were the anticipated costs and benefits for each participant in the proposed joint venture? Fill in the following table.

Firm	Financial Costs	Proposed Financial Benefits	Proposed Strategic Business Benefits
Levis
CCTC

Answer 1

Firm	Financial Costs	Proposed Financial Benefits	Proposed Strategic Benefits
Levis	1. Cost of setting up Personal Pair kiosks in Original Levi's Stores (OLS) - $7/pair 2. Investment in IT to integrate Levi's and CCTC's existing systems - $3 mn 3. Training Costs - Mainly for OLS Sales Clerks who will guide the customer on the kiosks on how to place an order, and, at the manufacturing plant where groups of 8 workers will work as a team to process an order (they need to be trained to handle issues which may crop up during production)	1. Levi’s can definitely charge a premium for the Personal Pair product range. A premium of $15/pair is anticipated, subject to market response. However, there are suggestions to lower the premium to 5$ - 10$ range as well to counter competition from volume players. 2. Lower distribution costs – Products will be Made-to-Order which eliminates the need of a distribution layer. Orders will be directly placed by customer and will be shipped from the manufacturing directly to customer. 3. Prepayment by Customer – positive impact on cashflow and Account Receivables ($2/pair). There is a 51 day collection period for wholesale channel (Exhibit 2), this will also be eliminated resulting in higher margins. 4. Reduction in inventory carrying costs – only raw material inventory ($1/pair) needs to be maintained as the sales is 100% forecasted (No impact of seasonality as manufacturing is triggered by the order). Levi’s conventional business maintains around 8 months of inventory (Finished Goods and raw materials). Inventory Turnover Ratio is 7.76 (Exhibit 1) which means Inventory worth $0.78 mn on Sales and $0.47 mn on COGS is maintained by Levi’s – a huge drain on working capital 5. Lower SG&A costs at the stores (OLS) as 50% sales is projected through reorders (savings of $5/pair) 6. Eliminates need of discounting for Stock Clearance – as mentioned in point 4 above Levi’s carries inventory in the conventional business to almost 8 months which leads to heavy discounting (nearly 30%) to clear the stock. 7. Optional Delivery is available to customer (charged at $5/pair from the customer during ordering), this contributes to cost reduction across the supply chain as this will be managed by Fed-Ex (eliminates cost of setting up infrastructure and manpower).	1. First Mover Advantage in addressing a business problem related to a large customer segment (poor customer satisfaction among women buyers, 25%) 2. Customization as per size, fit, color etc is projected to increase the satisfaction levels. This will lead to Customer Loyalty and recurring business (reorders). Loyalty in this segment will be a huge Entry Barrier for competitors. 3. Levi’s is facing stiff competition at both ends of the market. Volume players who source the finished good from low cost countries are selling at lower prices and Premium Players who target only the affluent buyers and charge a premium. Levi’s can use the Personal Pair program build a stronger presence in both segments. Due to the efficient process and customization, they can differentiate from volume players (zero customization). More importantly, Levi’s will be able to tap into the affluent segment as these buyers are willing to pay a premium for customization and access to full range of products and designs (4224 combinations will be available vis-à-vis the 40 combinations in the conventional business)
CCTC	IT investment of $10/pair to maintain the system and upgrade it as business scales up. SG&A costs of $3/pair, to manage the IT backend of the ordering process on kiosk	This Joint Venture will help CCTC to monetize its technology and build a steady cashflow	CCTC will establish itself as strong player in the IT enabled Mass Customization services. Working with the Market Leader (Levi’s) will give them great visibility and help them to expand into other markets / work with other partners CCTC will be able to work on the standardizations in the technology / processes and this learning will help them to make the system scalable. Modules will be developed to manage the process, which can be replicated into other industries and applications also.