Levis Case Study

Levi’s Strauss Case (Group 5)

Q 1. Calculate the pre-tax ROIC for Levi Strauss for both channels shown in Exhibit 2. So what?

Answer:

*Factory PP&E+Distribution PP&E+Retail strores

Profitability for Wholesale channel is approximately 30% and that for OLS channel is 15%. (Refer excel for calculations)

Even though ROIC for wholesale channel is better for future prospects, customer satisfaction and profit of OLS channel are better for Levi Strauss.

Working capital requirement has increased but most of it can be financed by advance payment from the customers. Moreover, order based delivery will help in reducing inventory. OLS channel will help in gauging changing trends and customer demands ahead of time and thus, help in maintaining updated stock. Also, OLS channel is an excellent way of improving customer satisfaction percentage form 24%. This customization will make customers loyal, help in charging higher premium on jeans and increase profits.

Q 2. What will be the Personal Pair system have on the value chain shown in Exhibit 3. Be careful to consider how each element of the chain will be affected, if at all.

Answer: Levi’s cautiously accepted the CCTC proposal with a test phase to gauze the success of full scale project. With this new system, the value chain can get shrunk with elimination of factory warehouses, Distribution warehouses and stocking at retail outlets. The distribution costs and distribution investment were literally eliminated. There was a lag of almost 8 months between the ordering of cotton and selling of finished jeans which required a lot of work in progress inventory and finished goods inventory. Since the new system was customer demand driven and was specific to the exact needs of the customers, asset investment can be reduced remarkably bringing down the inventory cost of final goods.

1. Raw material inventory stocking becomes complex which requires more stocking of raw materials in advance in order to meet the customer invoice orders
2. The Work in progress inventory will be simplified and the costs become negligible as the orders are custom made and not produced in bulk quantities
3. The finished goods inventory can almost be eliminated as the production of a jean is started and delivered as per customer request only after the payment is made
4. Also the eight month lag between manufacturing and selling was eliminated and continuous flow was achieved

The above gains can be attributed to this new approach which has customer satisfaction as its fundamental ideal.

Q 3. How would you price the Personal Pair jeans (vs $50 for standard, off-the-shelf jeans)? Would you lower the price, since the customer must wait up to three weeks for delivery? Would you raise the price, since the fit will be much better?

Answer: Since the company is providing a customized service & that too a first of its kind initiative in the industry, if it were to be priced below the existing product line, it would be akin to devaluing the brand of the new-service ab-initio. Further the level of service provided to the customer is much higher in terms of better fit, thereby creating a strong ‘differentiation’ and value for the customer. Thus an adequate premium should be charged for it.