5wings 2011 report cima

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CIMA Global Business Challenge 2010-2011 CIMA 2010-2011 ଚϮ㊒㣅䰙ᣥ䌯 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: ᴢ༩䳪 Team member 1: 㹕᭛ Team member 2: ᕤ呺⧾ Team member 3: 䩳䲙။ Substitute member (if applicable): ԩᅝ⧺

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5Wings 2011 Report CIMA

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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):

  • 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

  • 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 ).

  • 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:

  • 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.

  • 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

  • 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

  • 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

  • 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)

  • 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

  • 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.

  • 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

  • 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.

  • 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

  • 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.

  • 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

  • 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

  • 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

  • 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

  • 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

  • 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