5wings 2011 report cima
DESCRIPTION
5Wings 2011 Report CIMATRANSCRIPT
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CIMA Global Business Challenge 2010-2011
CIMA 2010-2011
THE CASE CONCERNING CERTAIN ISSUES
FACING CEECEE
REPORT
This report is prepared by Team: 5Wings
From: Huazhong University of Science &Technology, School of Management
Team member
Team leader:
Team member 1:
Team member 2:
Team member 3:
Substitute member (if applicable):
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
CONTENTS
1. Introduction ............................................................................................................... 3
2. Terms of reference .................................................................................................... 3
3. Prioritization of the key issues ................................................................................... 4
4. Analyses ................................................................................................................... 5
5. Recommendations .................................................................................................. 11
6. Conclusion .............................................................................................................. 16
APPENDIX
. SWOT Analysis........................................................................................................ 17
. PEST Analysis ......................................................................................................... 18
. Michael Porter's 5 Forces Model ............................................................................. 19
. Lost Profit of the Distributors Strike ......................................................................... 20
. NPV for Expansion of Jewellery Range ................................................................... 21
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
1. INTRODUCTION
CeeCee is a listed high street retailer of fashion clothing. It has been operating for more
than 20 years. It applies the "fast fashion" business model which means exclusivity and
fast turnaround, and its logistics runs well by taking advantage of its advanced and
improved IT systems. In addition, the financial results of CeeCee are quite satisfactory.
In the current market which has grown rapidly, the competition is becoming increasingly
fierce and the retailers are facing great challenges. Currently, CeeCee is facing some
urgent issues from different aspects that will affect the whole operation of the company.
Thus, the board would like to conduct detailed analyses about these issues and make
appropriate decisions.
2. TERMS OF REFERENCE
As independent consultants and qualified members of CIMA, we have first made
scenario analysis in both financial and non-financial aspects regarding the five issues of
CeeCee and then given our recommendations on the strategic future direction for
CeeCee.
To get a better understanding of CeeCees internal and external constraints, we have
used the SWOT analysis (Appendix ), PEST analysis (Appendix ) and Michael
Porter's 5 Forces Model (Appendix ).
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
3. PRIORITIZATION OF THE KEY ISSUES
Considering the influences of all the issues, the decision about the distribution strike is
the most urgent and important one since distribution plays a key role in "fast fashion"
business model and the strike will disrupt the normal operation of CeeCee.
In addition, it is very important to solve the IT failure because the IT system is heavily
relied on and this failure has affected on-line sales and indicated flaws in the internal
control system.
Furthermore, it contributes much to the success of the expansion strategy to obtain
certain market share and to broaden CeeCee's income sources.
CeeCee also has to deal with the way CeeCee is marketed, which is an essential part to
gain brand awareness.
Lastly, the CSR is crucial for CeeCee to obtain social cognition and operate better.
According to the discussion above, we identify and prioritize the issues facing CeeCee
as follows:
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
4. ANALYSES
1) DISTRIBUTORS STRIKE
CeeCee has been caught in a serious logistics crisis as a result of its sole distributors
strike. The strike is caused by the terrible labor-capital relationship of its distributor. And
it brings serious problems to CeeCee.
First and foremost, the strike will significantly affect the normal profit of CeeCee. Under
the strike, products cannot be delivered to the shops, which will decrease the sales,
including the on-line sales. According to our calculation, CeeCee will suffer a lost sales
up to 314,856,163.The amount is approximately 10% of CeeCees 2010 sales forecast
and it results in a lost profit of 189,228,554. (Appendix .)
Besides, the supply shortage will hurt CeeCees customer loyalty. As we all know, in the
fast fashion industry, the products can be easily substituted. If CeeCee cannot provide
its products in time, the customers will turn to its competitors and this will inevitably
decrease its market share.
Therefore, the most urgent thing is to get enough distribution capacity in the following
ten weeks. CeeCee can try to negotiate with the current distributor to get as much
support as possible and at the same time contract with other distributors for short term
outsourcing. In the long run, CeeCee should broaden its distribution channels and
increase the number of its distributors in case that similar logistics crisis happens again.
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
2) IT FAILURE
CeeCee has been involved in an IT failure (programming error) which causes a loss of
6,000,000 in CeeCee's online sales since it sent lots of goods to its customers without
receiving payments. Thus, CeeCee must try to collect those unpaid cash from its
customers immediately as much as possible. There are two methods to do this:
(1) By an outside agency: 14 per customer and a success fee of 5% of the amounts
recovered would be charged; 60% of these customers would be collected.
NPV1 = 6,000,000*60 %*( 1-5%) - 14*50,000 = 2,720,000
(2) By CeeCee finance department: only 45% of the money would be recovered by its
already overstretched staff.
NPV2= 6,000,000*45% = 2,700,000
From the calculation results we can see that CeeCee can collect 20,000 more by
employing an outside agency. What's more, the ordinary operations of CeeCee will be
affected if the overstretched staffs are designated to collect the money. Therefore, we
suggest that CeeCee should employ an outside agency to collect the money.
Another problem is that both CeeCee and the outsourced IT supplier persist that it is not
their fault. Thus CeeCee should identify who is responsible for it and ask for
compensation if possible.
After making up the loss, it is necessary to look into this IT failure to prevent similar
problems happening again. Since CeeCee's "fast fashion" business model relies heavily
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
on its sophisticated IT systems, the regular operation of the IT system is critical to
CeeCee's success.
At present, CeeCee employs its own IT staff but it also outsourced some specialized
design and update work to ProvelT, a leading global IT solutions specialist company.
This enables CeeCee to take advantage of continuing enhancements in retail and
inventory management systems. However, this also creates risks since it is difficult to
discover the errors in outsourced programming work. Therefore, CeeCee should
reconsider its outsourcing policy.
What's more, this IT failure has indicted that there are some inefficiencies in CeeCee's
internal control system. In this way, errors cannot be discovered and corrected in time
and CeeCee has to devote much more money and time to solving these problems. Thus,
CeeCee should pay more attention to its internal control system.
3) EXPANSION OF JEWELLERY RANGE
CeeCee has expanded from only women's clothing into menswear, children's clothing,
home furnishings and clothing accessories. And now its CEO plans to launch a new
range of jewellery. She believes that the plan will have a positive effect on CeeCees
profit.
Using the data given in the scenario, we calculate the net present value of the
expansion project and get the results below: (Appendix .)
NPV= 239,266.24
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
From the numbers above, we can see that although the NPV is positive, it is quite a
small amount compared to CeeCees current total profit.
After the calculation, we take detailed analyses and summarize them in the below chart:
It is known that the expansion requires large amount of present space and in this way it
will influence the existing operation greatly. The main focus of the brand CeeCee is for
clothing, and this ideology cannot be violated, otherwise the company will get into big
trouble. The company should consider the expansion on the premise of not hurting the
existing business.
Therefore, even though the new jewellery range may bring CeeCee some profits and
benefits, we recommend that the project should be abandoned in the current trend.
4) CELEBRITY MARKETING
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
Juliette Lespere, as CeeCee's director of sales and marketing, has been trying to
introduce a number of changes to the way in which CeeCee markets itself. Currently,
she has proposed that CeeCee contract with Kool, a well-known and popular European
singer of rock music. Kools agent has proposed a choice of payment method:
(1) A fixed payment of 50,000 with a bonus of 150,000 if incremental sales reach 2
million
(2) A royalty of 5% of all incremental sales revenue
The payments based on incremental sales between 1,200,000 and 2,000,000 under
the two methods are presented as below: ( 000)
0
50
100
150
200
250
1200 1400 1600 1800 2000
50 50 50 50
200
60 7080 90
100
incremental sales
payment
Method 1Method 2
The payment pattern based on the level of incremental sales under the two methods are
presented as below: ( 000)
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
0
50
100
150
200
250
500
1000
1500
2000
2500
3000
3500
4000
4500
incremental sales
payments
Method 1
Method 1Method 2
From the graph we can see that there are two break-even sale values: 1million and
4million.
5) CSR
CeeCee has been informed by a local Asian agent that a substantial number of the
Asian suppliers have been using child labor to manufacture garments for CeeCee.
Though the agent didnt think CeeCee could do much of the issue but as it is so
common. But if CeeCee take no measure on it, it will influence CeeCees reputation and
as Asia is a new market for CeeCee, if it failed at the beginning stages, the expansion
plan will also be affected. Even worse, other suppliers might also violate their code of
conduct just as the Asian suppliers do. If this continues, CeeCee will be under lawsuit
and hard to manage its suppliers. It also violates the CSR strategy of CeeCee.
Besides, CeeCee needs to be more responsible for the product quality that its suppliers
offered. In modern society, the possibility of using unhealthy material increases and
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
people are paying more attention to this problem. Environmental protection can be an
everlasting issue that CeeCee need to consider as it is both social friendly end
corporate friendly. If CeeCee carries its CSR successfully, it will benefit the society and
in turn increase its image as well as cost reduction.
Lastly, CeeCee should be responsible for its employees make sure that it exercises its
corporate social responsibility and its employees will be more devoted to the company.
5. RECOMMENDATIONS
1 DISTRIBUTORS STRIKE
According to our previous analyses, CeeCee has to recover its distribution capacity
timely, effectively and economically and maintain it in the long term.
Helping the distributor recover its capacity is the most economical method as costs of
finding other distributors in such a short time can be avoided. But this may take a longer
period.
It is easier to outsource to other distributors as the third-party logistics is adequate in
Europe. However, the quality of services varies significantly between different
distributors.
Therefore, we recommend that CeeCee help the current distributor serve and repair the
vehicles, rent well-performed vehicles and negotiate with the union to get workers back
to work. At the same time, CeeCee can look for qualified distributors to ensure
temporary capacity in time.
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
Moreover, in the long run, CeeCee has to prevent the similar crisis happening again. In
this case the crisis is caused by the heavy reliance on the sole distributor. Therefore,
CeeCee can diversify its distribution channels and outsource the work to different
qualified distributors so that unexpected risks can be dispersed. In addition, CeeCee
should build up its own distribution team to ensure normal operation.
2 IT FAILURE
Considering both financial and non-financial aspects, we recommend that CeeCee
should employ an outside agency to collect those unpaid orders. At the same time,
CeeCee should search relevant terms in its outsourcing contract with ProvelT and even
turn to legal consultant (seek legal advice) to identify the specific responsibility.
As to the outsourcing policy, we conduct a risk-cost analysis as below
Risk
Cost
All outsourced Partial
outsourced None
outsourced
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
As the graph shows, considering the tradeoff between risk and cost, we recommend
that CeeCee should amend its outsourcing policy to retain its core design work and
outsource some update work to qualified IT companies.
CeeCee should also take measures to improve the efficiency and effectiveness of its
internal control system. On one hand, CeeCee could establish a series of policies to
make sure that every design and update work of the IT system be carefully inspected to
detect errors in time. On the other hand, CeeCee financial department should compare
the figures for sales made and the amount of cash received regularly and frequently to
identify how many orders are unpaid. CeeCee should also set up similar internal control
policies over its every functional region throughout its supply chain to enhance the
efficiency and effectiveness of its regular operations.
3 EXPANSION OF JEWELLERY RANGE
After the analyses we come to the conclusion that CeeCee should reject the expansion
project under its current operating condition.
However, other than the jewellery expansion, in the brand stretching campaign, we think
that CeeCee should pay more attention on the diversification of its products which face
a variety of needs. For example, we suggest that it should separate its home furnishing,
accessories, menswear, and children's clothing as independent brands. Statistics show
that the ranges of home furnishing and clothing accessories generate high gross
margins both average more than 70%, therefore, under this diversification CeeCee can
achieve more successful management and development.
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
In addition to the brand diversification, CeeCee should at the same time expand its shop
ranges. CeeCee is always increasing its shop ranges and at the end of 2008 it has
already had 610 shops across European countries. However, this is quite a small
number compared to its competitors. It will limit the market share and CeeCee cannot
authentically succeed. Therefore, also considering the weak economy in Europe, we
recommend further expansion to other regions such as Asia and North America.
4 CELEBRITY MARKETING
We do not recommend the celebrity marketing strategy, since the probability of sales
exceeding 2million resulting from this strategy is only about 0.1, which is extremely low
compared with CeeCees total sales revenue of 2,700million in 2009.
However, since the fast fashion industry is facing a current phase of homogenous
competition, in which the industry is nearly saturated, it is essential to focus more on the
brand/image investment in order to differentiate CeeCee from its competitors. We think
the branding benefit outweighs the cost of a more variant advertising and marketing
strategy. Thus, CeeCee should properly increase its marketing budget. And the specific
advertising campaign recommendations are as follows.
To start with, CeeCee should have more traditional advertisements on TV, magazines
and billboards which are the main access to fashion for CeeCees core customers. In
addition, since design quality is a crucial factor in the fashion industry, CeeCee can
contract with noted fashion designers/celebrities to create exclusive designer clothing.
These contracted designers/celebrities can also take part in marketing campaigns such
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
as CeeCee fashion week, new store opening ceremony and photo shots advertising.
Last but not least, CeeCee should also concentrate more on online advertising, due to
an obvious trend of online shopping. Cooperation with major online shops can help a lot
in promotion.
To conclude, CeeCee should make more effort in launching a variety of marketing and
advertising campaign based on the cost-benefit principle.
5 CSR
The crisis is mostly due to the lack of attention from CeeCee, unethical behavior of
suppliers and the lack of self-protecting awareness of the employees.
CeeCee can be more cautious when prequalify and audit the suppliers as it has already
been informed by the Asian agent of the problem. It can increase its frequency of
auditing the suppliers to two or three times a year, especially in the Asian Market. And
CeeCee can form a special team for it. Then CeeCee can promote legal education
among the employees as well as cooperate with the local labor union.
Then in order to make sure that every garment is under the quality restriction, CeeCee
can use chemical and laundry test to inspect on the final product.
As with the environmental protection area, CeeCee has already done a great job in
most areas like emission reduction in waste recycling, transportation and etc. Further
improvement can be used in R&D for new environmental friendly material like organic
cotton.
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
CeeCee also need to keep improving employees skills by delivering training for them
including safety problem so as to guarantee employees working environment.
6. CONCLUSION
According to our analyses and recommendations, we suggest that CeeCee should
tackle its current problems and seek for future development in different aspects.
Short-term Long-term
Distributors strike z Help the distributor recover
its capacity z Look for qualified
distributors
z Diversify distribution channels
z Outsource the work to different qualified distributors
z Build up the own distribution team
IT failure z Employ an outside agency to
collect money z Identify the specific
responsibility and ask for compensation
z Amend its outsourcing policy
z Improve the efficiency and effectiveness of its internal control system
Expansion of jewellery range
z Reject the jewellery expansion project
z Diversify its product range z Expand its shop ranges z Expand to other regions
Celebrity marketing z Reject the celebrity
marketing proposal z Increase the marketing
budget z Diversify its advertising and
marketing strategy
CSR z Prequalify the suppliers and enhance the suppliers
management z Provide trainings for its own employees z Cooperate with local labor unions z Use chemical and laundry test z Use environmental-friendly materials
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
APPENDIX
. SWOT
ANALYSIS
S z Well performed fast
fashion business model
z Experienced professionals in design, finance, and logistic areas
z Diversified products z Effective direct shop
management z Good visibility
marketing strategy prime location and exclusive store layout
z Excellent customer care
W z Sole-dependence on
one distributor z Low market share z Simple marketing
strategy
O z Online shopping trends z Potential market
outside Europe z Increasing demand for
affordable clothing in M-structure society
SO z Expand into the
oversea market. z Further develop
online sales.
WO z Increase distributor
number and set up its own logistics team
z Diversify its marketing strategy T
z Weak economic climate
z Suppliers violation of code of conduct
z Homogeneous products
z Fierce competition from value retailer
ST z Broaden its product
range z Strengthen
management over its suppliers
WT z Enhance
image/brand marketing
z Accelerate the shop expansion
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
. PEST ANALYSIS
POLITICAL z Policies issued by key European
countries to help the textile industry
survive and develop
z Increasing strict environment protection standards
z Acts for design piracy prohibition under discussion.
ECONOMIC z Wider adoption of fast fashion
business model
z Weak economic climate z Depressed consumer purchasing
desire
z Huge market in East Asia z Highly competitive European
distribution market.
SOCIAL z Transformation to M-structure
society(larger portion of low income
households)
z Different customer demand between Asia and Europe
z Increasing popularity of on-line shopping
z Negative CSR news in fast fashion industry
TECHNOLOGICAL z Huge cost to develop and maintain
the IT system
z Rapid development of IT system
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
. MICHAEL PORTER'S 5 FORCES MODEL
COMPETITORS HIGH
z Wider adoption of fast fashion business model z Smaller market under the weak economy. z Large market shares possessed by the leading companies in the industry z Growing number of value retailers at the inexpensive end of the market
ENTRANTS MEDIUM
z Low initial investment requirements z Easily piracy of the products z Highly competitive market
SUPPLIERS LOW
z Fierce competition among a large number of suppliers z Limited number of suppliers meeting the CSR standard in Asia
BUYERS HIGH
z Limited consumer purchasing power under the weak economy. z Numerous choices for consumers in the clothing market
SUBSTITUTES MEDIUM
z Homogeneous product in this market z Low conversion cost among various products
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
. LOST PROFIT OF THE DISTRIBUTORS STRIKE We used the forecast for 2010 sales revenue of 2,985million to calculate the lost sales
and profits as follows:
Lost sales = 2,985,000,000*7/365*(10%+20%+30%+40%+50%+60%+70%+80%+90%+100%)
= 314,856,162.5
Since gross margin will be the same as 2008 level of 60.1% and most other costs are
fixed in the short term, therefore:
Lost profit = 60.1%*314,856,162.5
= 189, 228, 553. 7
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CIMA (Chartered Institute of Management Accountants)
T. 400 820 4080 E. [email protected] Web. http://gbc.cncima.com
. NPV FOR EXPANSION OF JEWELLERY RANGE
0 1 2 3 4 5
Glass display -15,000.00 0.00Opportunity cost -901.50 -3,906.50 -3,906.50 -3,906.50 -3,906.50Changes in NWC -6,000.00 ####### 0.00 0.00 0.00 ########ICF -21,000.00 ####### -3,906.50 -3,906.50 -3,906.50 6,093.50
Sales 6,000 26,000 26,000 26,000 26,000Gross margin(95%) 5,700 24,700 24,700 24,700 24,700Operating costs -2,500 -1,000 -1,000 -1,000 -1,000Depreciation -3,000 -3,000 -3,000 -3,000 -3,000EBT 200 20,700 20,700 20,700 20,700Tax(30%) 60 6,210 6,210 6,210 6,210Net income 140 14,490 14,490 14,490 14,490OCF 3,140 17,490 17,490 17,490 17,490
Total cash flow -21,000.00 ####### ######## ######## ######## ########DCF(12%) -21,000.00 ####### ######## 9,668.47 8,632.56 ########
19,938.85#########
Year
NPV(per)NPV(total)
Contents1. Introduction2. Terms of reference3. Prioritization of the key issues4. Analyses1) Distributors strike2) IT failure3) Expansion of jewellery range4) Celebrity marketing5) CSR
5. Recommendations1 Distributors Strike2 IT failure3 Expansion of jewellery range4 Celebrity marketing5 CSR
6. ConclusionWSWOSOOWTSTT. PEST AnalysisECONOMICPOLITICALTECHNOLOGICALSOCIAL. Michael Porter's 5 Forces ModelCompetitors HighEntrants MediumSuppliers LowBuyers HighSubstitutes Medium
. Lost profit of the Distributors strike. NPV for EXPANSION OF JEWELLERY RANGE