University of New South Wales – Sydney, Australia
Nelson Boyd, Jared Goh, Paulette Lo, Matthew Zaidan Mentor: Brian Burfitt
CeeCee Business Challenges and Strategic Solutions 15 May 2010
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APPENDIX D: JEWELLERY RANGE EXPANSION defined.TABLE OF CONTENTS INTRODUCTION DISTRIBUTION STRIKE CHALLENGE RECOMMENDATIONS IT FAILURE CHALLENGE RECOMMENDATIONS CELEBRITY MARKETING EXPANSION INTO JEWELLERY RANGE CHILD LABOUR ACCUSATION CHALLENGE RECOMMENDATIONS CONCLUSION APPENDICES APPENDIX A-1: DISTRIBUTOR STRIKE APPENDIX A-2: DISTRIBUTOR STRIKE APPENDIX A-3: DISTRIBUTOR STRIKE APPENDIX A-4: DISTRIBUTOR STRIKE APPENDIX B: IT SYSTEM FAILURE APPENDIX C: CELEBRITY MARKETING 3 5 5 6 7 7 8 9 9 10 10 11 11 Error! Bookmark not defined. Error! Bookmark not defined.
close contact with manufacturers.INTRODUCTION CeeCee is a retail fashion company that was established in 1989. The following SWOT analysis highlights key attributes and opportunities CeeCee should leverage. CeeCee offers a unique value proposition that differentiates it and positions it competitively in the market (see Appendix E). children’s wear and home furnishings. Distribution strikes. and the swift sale of new inventory items. capturing significant market share in their target market of young professional women looking for fashionable but affordable clothing. CeeCee has recently encountered significant business challenges. threats to be mitigated and weaknesses to overcome. IT failure. operating 630 shops across 18 European countries. Despite intense rivalry between numerous competitors such as Zara and H&M. fast creation and supply to shops. CeeCee has employed this business model to great effect. child labor accusation threaten to disrupt the
. SWOT Analysis Leverage Internal Strengths • Fast creation and supply to shops • Integrated inventory and logistics system • Competitive prices • Excellent customer care • Global manufacturing sources Opportunities • Expansion of jewellery range • Celebrity endorsement • Trend towards ethical products Mitigate Weaknesses • Very reliant on one distributor (EIT) • IT system failure
Threats • Distribution strike • Child labor accusations • Seasonal nature of clothing industry • Economic recession • Intense competition
However. It has since expanded into menswear. This business model relies on sophisticated IT systems. The success of the company is grounded upon employing the ‘fast fashion’ business model that utilizes the manufacturing ‘Just In Time (JIT)’ principle combined with efficient design and delivery systems.
there are opportunities to select payment methods for a new celebrity marketing campaign and expand by offering a jewellery range. Finally the child labour accusations are crucial to CeeCee’s long term image and reputation. EVA Consulting will analyze the challenges and opportunities faced by CeeCee. particularly repeat customers The most critical challenge is the distribution strike which strikes at the heart of the company as it disrupts the delivery of the product sold and damages relationships with repeat customers expecting on-trend items. in comparison to the distribution strike and IT failure it is unlikely to have a large immediate impact on revenues. and provide strategic recommendations to ensure sustainable and profitable growth as a leader in the fashion industry. Celebrity marketing payment options should be decided to ensure the most efficient methods are agreed upon. however. In addition.
. which is the second most critical challenge as managing receivables is crucial for cash flow. but not as pressing as the previous challenges. Timely expansion into the jewelry range is important. It has more severe financial consequences than the IT failure. EVA Consulting has prioritized the above challenges based on a criterion that includes: − Direct effect on immediate business operations − Indirect effect on the long-term growth of the company and brand image − Impact on long-term customer relationships. They pose significant long term ramifications to CeeCee’s image and in the short term affect financials. In this report.successful functioning of the business.
gets runway looks on its shelves within 15 days.314 in revenues (See Appendix A-1).669
The delivery crisis will have long term consequences. Late fashions
. CeeCee’s ‘runway to rack’ approach. Operating profit margin is projected to decline from a prediction of 23% to 14% (See Appendix A-3).669m. Clothing which arrives 6 weeks late could result in a spring item arriving during autumn. The disruption will cost each of CeeCee’s stores approximately €493. Based on the average number of stores in 2010. The success of CeeCee’s fast fashion model.985m to €2.985 Delivery crisis revenue prediction
2. this disruption will cost CeeCee €316m in revenues. Revenues will decline 11% and profit for the period will fall 48% (See Appendix A-2). The graph below illustrates that the disruption will cause predicted revenue to fall from €2. €221m in profits and 100% of sales in week 10 compared with initial projections (See Appendix A-2). negatively impacting CeeCee’s reputation and image. depends on fast creation and supply to shops. See Appendix A-4 for a year to year comparison. 640. that delivers clothes which are on trend.
Impact of delivery crisis on revenue (€m)
Initial sales revenue prediction 2. This severe delivery disruption has significant financial consequences in the short term and in the long term damage of CeeCee’s reputation.CHALLENGE EIT. is unable to deliver goods for five weeks and in the following five weeks is able to distribute half the deliveries due to servicing and repair work. which is the only distribution company utilised by CeeCee.
The success of legal action depends on the length of the contract. A combined effort would also increase leverage when bargaining with delivery companies. 2. with the company’s reputation and sales at stake. 3. a 10 week failure to deliver may be determined as an insignificant time frame. CeeCee could sue EIT for damages for breach of contract. Alternatively. It may enter a short term delivery contract with an alternative distributor for the 10 week period. To minimise the immediate loss in sales revenue. Failed legal action would be costly. CeeCee could absorb the sales lost and continue its relationship with EIT as occurred before the union crisis. Future deliveries may be late as maintenance is now a priority for EIT.
. Thus. A failure to deliver 10 weeks of a six month contract may constitute a substantial failure to deliver the service promised. A short term contract with little notice may attract a premium. Thus. RECOMMENDATIONS As EIT expects vehicles to be fully operational after ten weeks. relying solely on EIT’s distribution services is highly risky. With a 5 year contract. another clothing company with established distribution networks in similar areas could be approached with a fee to utilise their networks for the 10 week period. EIT’s reliable and on-time delivery was provided at the expense of maintenance of its vehicles. cause negative media attention. However. going forward management should to develop a course of action to ensure the reliability and effectiveness of its delivery systems. a premium is a worthwhile investment.combined with stock-outs as inventory is not replenished could damage CeeCee’s reputation with customers who return frequently expecting a fresh supply of fashionable designs. CeeCee has three options: 1. and severely damage CeeCee’s future relationship with EIT.
reducing the fees required for outsourcing and ensure control over delivery reliability. which will leverage CeeCee’s strong ability to raise finances. Cee has three options: 1. which has led to a discrepancy between website sales figures and cash received. This will require extensive capital investment. and costs may increase as CeeCee loses leverage in negotiations. the company can transform its weakness of reliance on one distributor and significantly reduce the risk of a similar crisis in the future. Multiple distributors may reduce costs and improve delivery reliabilities as delivery companies compete to retain CeeCee’s business. Acquiring an existing delivery company is less time consuming and complex compared with starting a delivery business. 2.000 orders have been processed without
. There is a risk that smaller companies will be unable to meet deadlines. A second option is to establish a new delivery business unit. establish its own distribution network or contract more firms to distribute clothing. Switching some orders to EIT’s distribution rivals will make CeeCee less vulnerable to distribution shocks. due diligence of prospective targets. CeeCee could vertically integrate and acquire an existing delivery company. the maintenance of delivery trucks and the expansion of human resources could be a challenge. IT FAILURE CHALLENGE The online sales system delivered by ProveIT accepted sales order without payment. 3. Through increasing the distributors CeeCee utilises. but will require expertise in an area that CeeCee lacks experience. Approximately 50. Whilst new distributors would require updating information systems and adapting communication channels to accommodate different systems. to diversify its distribution options.In the long term. as it becomes a smaller customer to both distributors. Owning a delivery network would result in cost savings. However. the reduction in risk is significant.
000 damaged reputation and potential loss of future business. In addition. damaged reputation and potential loss of future business. as the outsourced IT service provider responsible for the design and development of the online sales system. The fact that CeeCee failed to detect the programming error in the system does not waive ProveIT’s liability. this failure has cast doubt on the reliability of the online sales system delivered by ProveIT.000. An external debt agency should be engaged by the Finance Director to recover the outstanding payments immediately. Sales reconciliation should be done using reports generated from CCF and CCIPL – in particular weekly sales revenue and weekly inventory sold. The expected monetary recovery is also comparatively less than the recovery by an external debt collection agency (see Appendix B). as the finance team is currently overstretched.
. ProveIT. ProveIT is responsible for supervising and managing the quality of the work done by CeeCee’s seconded staff during the development of the system. Both the Finance and IT Directors should be responsible for reviewing the design of the online sales system and identifying the need for additional internal controls to prevent any further errors. This has led to financial loss of approximately €6. has failed to deliver a working product. Due to a lack of legal expertise in CeeCee.payment at an average transaction value of 120 per order. It is recommended that CeeCee undertake a reassessment of the robustness and reliability of the online sales system. the Finance and IT Directors should enlist the assistance of an external legal firm to sue ProveIT for liquidated damages for financial loss. RECOMMENDATIONS Recovery of unpaid goods by the Finance department would impose additional workload leading to staff morale and productivity issues. Hiring an external agency would be more cost effective and maximises recovery (see Appendix B) and does not distract the finance team from carrying out their regular day-to-day work.
This costs result in a projected level of profit as shown in figure 2 and 3 (see Appendix C). This provision of space cannot
be supported by smaller shops.1 for sales to exceed €2 million. that is. where the cost method of payment option 1 and option 2 are both equal and thus the estimated profit level at that incremental revenue level is equal as shown in table 1 (see Appendix C).It is important for CeeCee to consider the two proposed payment methods for the endorsement of CeeCee by Kool (a popular European rock singer) to ensure the most cost efficient method that maximises value for shareholders is selected.
. it’s important for CeeCee to consider. that although there is a probability of 0. CeeCee’s payment option 1 for Kool is the cheaper option within the sales revenue range of €1. The project involves the allocation of 150 of space for the new jewellery range. This strategy should be supported. EXPANSION INTO JEWELLERY RANGE CeeCee should take advantage of complacent competitors in the Jewellery market that are not upgrading the shopping experience for consumers. earning 5% of incremental sales revenue Both methods of payment have different projected costs for different associated levels of revenue as evident in figure 1 (see Appendix C).000 should incremental sales reach €2 Million (probability of 0.2m to €2m. The Chief Executive Officer recommended the launch of a new jewellery range.1) • Payment Option 2: Royalty basis. so will only be introduced by 320 medium or larger stores. However. The incremental revenue level of $1 Million is the estimated break even sale value.000 with a bonus of €150. The two payment methods include: • Payment Option 1: Kool would accept a fixed payment of €50. outside of this range (above and below). payment option 2 is the cheaper option.
indicating a cost efficient system and a current ratio in 2008 of 3. In terms of financing the jewellery range expansion. this could significantly damage CeeCee image and cause it to lose loyal customers who are affronted by the violations. If reported. a net present value analysis must be conducted. or act ethically – not for their own positive publicity or to avoid
.In order to assess the viability of undergoing such a project. This creates a conflict of interests for management between a cheap labour option which ensures manufacturing cost are low and being ethical. and although the agent believes that the child labour issue is so commonly reported that many newspapers have grown bored of the story. Jewellery expansion can be timed to occur during regular shop refurbishments to minimise sales disruptions.26 indicating the company has the liquidity to meet short term obligations. Management must choose whether to turn a blind eye to the illegal production of their product. CHILD LABOUR ACCUSATION CHALLENGE The management of CeeCee has encountered an ethical dilemma with the knowledge that a substantial number of the Asian suppliers have been using child labour to manufacture garments for CeeCee. by not engaging in contracts with suppliers who do not abide by child labour laws. Although this information is not yet public. With an internal rate of return of 53% being greater than the required discount rate of 12%.77 and Net Present Value of €37.this is still illegal. it was projected that the jewellery expansion project per shop is a viable option. In reference to the Net Present Value of the jewellery range expansion project conducted in table 1 and 2 (see Appendix D). Whilst the CeeCee already allocated significant expense to shop refurbishment and expansion. it is noted that CeeCee should have little difficulty in raising finances as it is a listed company. young educated women.216.09 the project is viable and it is highly recommended that CeeCee pursues it. the company is in a strong financial position with strong sales and profit margins. Child labour is a sensitive issue amongst CeeCee’s target market. the Profit Index of 2.
an image CeeCee can aggressively portray. CeeCee may be able to persuade suppliers from hiring child workers. In addition. CeeCee can identify which suppliers are acting ethically and refused to engage with suppliers who breach these ethical borders. but in acting as a responsible social entity that promotes fairness and honourable operations. RECOMMENDATIONS For these reasons we recommend that CeeCee conduct a review of its suppliers. which strikes at the very heart of the business model employed. CeeCee can capitalise on its ethical choices by publicly declaring its careful selection of suppliers. The company can transform its weakness of reliance on one distributor by diversifying and contracting multiple distribution companies. CONCLUSION The current challenges faced by CeeCee pose a unique opportunity to establish a firm foundation in all areas of performance and establish the company for sustained and profitable growth in the future. It is critical that CeeCee prioritizes a solution to the threat posed by the distribution crisis. By leveraging its position. reviewing working conditions and the age of workers. Customers are increasingly willing to pay a premium for products created ethically. as incremental sales are less likely to exceed €2 million.legal action – but because acting ethically and fairly is a long-term goal of any company. By paying endorser Kool with a fixed
payment method (payment option 1). what is ultimately necessary is that CeeCee reviews the IT system and ascertain its reliability. this could save long term sales losses if the child labour issue were to get into media attention. Whilst CeeCee may suffer slightly higher manufacturing costs as adult workers are paid higher wages. CeeCee should expand its jewellery range to capitalize on competitor
. This is important not just for the company in promoting an ethical image and operating legally. Despite the urgency of recovering lost monies. as companies such as CeeCee have a social responsibility to not promote or encourage child labour. CeeCee maximises return from the marketing strategy. not just in the Asian region but in Europe as well.
complacency and consumer demand. Finally it is recommended that CeeCee reviews suppliers. to ensure they are operating ethically. Whilst manufacturing costs may increase slightly. the firm can ensure that it increases market share and achieve long term sustainable growth in sales. these are eclipsed by potential costs if consumers were to discover the child labour accusations. but through cross selling and attracting customers into the store. regardless of region and importance. to ensure long term cost savings.
. Not only will CeeCee benefit from sale of this range.