Business Policy

Case Study: Styles and Trends

EMBA
Section A



Submitted by
Naveed Akbar Shamim
M. Qasim Nasir Butt
M. Ammar Saeed



Submitted to
Prof. F.A Fareedy






Lahore School of Economics

INTRODUCTION
Shahzad Elahi, Nadira Sabahuddin and Mohammad Ali Tariq implemented their original idea
calling for an integrated knitwear from producing high quality garments for the export market.
However, shortage of finances involved led them to start a small stitching unit with the idea of
learning the vagaries of the markets and eventually using institutional debt to work towards an
integrated unit. As they had operated as a small stitching unit serving very limited markets over
the last four years, sanctioning of their loan from a financial institution would be a green signal
for expanding into a fully integrated unit capable of manufacturing high quality knitwear for
major foreign buyers. Tariq recognized that choosing attractive markets in the beginning would
be the key to success as the knitwear field was becoming increasingly competitive.
The product line had been mostly determined by ease of manufacture and Styles and Trends had
refused some larger orders because they felt uneasy about meeting quality and delivery
requirements. Apart from simple mens T-shirts they offered ladies blouses, baby garments and
jump suits. They had depended heavily upon personal and family contacts to seek customers.
Promotion was mainly through direct mail to prospective clients and through trade fairs and
agents in Europe, mainly Britain. On the other hand production and basic control appeared to be
working well with minimal problems. Shahzad spent considerable time developing basic systems
that would give him quick information for fixing problems before they assumed large
proportions, but knew well that a large integrated unit would be another animal altogether.

STRATEGIC ISSUES AND PROBLEMS
The quality of the garments had to exactly match the buyers specifications in attributes like
garment weight, shrinkage, color fastness and measurement. Therefore, the manufacturing
process was highly dependent of the quality of the raw material and attention to quality was
required at every step of the manufacturing process as one error anywhere could lead ruin or
lower the quality of the finished product. This could deteriorate the credibility of the firm with
the buyers as it was largely based on excellent manufacturing practices that would ensure
consistency in the product quality and on-time delivery. However, Pakistani raw cotton had
traditionally been considered poor by international standards, as it was characterized by a high
level of impurities. In order to transform this cotton to better quality, a labor intensive process of
physically removing the impurities must be undertaken. Some firms treated their cotton in this
manner, but others did not and this had been one of the impediments to developing a more value
added industry.
The bargaining power of the suppliers was high in the textile industry because the availability
and prices of the most basic material for knitwear manufacturers, cotton yarn, was subjects to a
variety of market forces like size of the cotton crop, which could vary up to 50% depending on
the nature, rise in price of other inputs like fertilizer and proliferation of the spinning units in the
country. Then there was lack of vertical integration whereby upstream sectors like spinning acted
as suppliers to downstream sectors like weaving and knitwear to produce higher value added
products. This forced spinning units to export their low value yarn and get better prices than
what the weaving units would pay. The yarn being supplied to the knitwear unit was fairly
difficult to judge when it arrived since many defects were only were only visible after it was
knitted into fabric or the fabric was dyed. Expensive equipment was required to detect the
defects before the knitting stage. Then the rapid development of the knitwear industry over the
past decade had not been matched by a similar development in the ancillary industries like
buttons, labels and zippers etc. sometimes a buying house specified the accessory dealer from
whom these were to be bought but this obviously did not provide much incentive for the
accessory dealers to improve quality, lower prices or improve delivery, the last becoming
increasing important as lead times were shortened. Moreover, all tags attached to the finished
products were imported because the requisite quality of printing was unavailable in Pakistan.
Labels fell in this category could take up to four weeks lead time.
The bargaining power of the buyers was also high because the buyers in the textile market had
the ability to force down prices and bargain for higher quality as buyer purchased larger
proportion of the textile products. In this case the US knit wear market was the single largest
market in the world after E.E.C. Almost 80% of the total apparel purchases for the US were
made by few large buyers which generated large orders. The US market for Pakistani knitwear
was dominated by several large brands for example Chaps Ralph Lauren, Christian Dior,
Hathaway etc. Brand name buyers had fairly stringent quality standards as they could not afford
to damage their hard established brand names with loyal customers. It could be quite difficult for
Pakistani producers to meet these standards. Quality or delivery problems at a supplier would
usually be transmitted rapidly to other buyers and buying houses. New entrants had to be
particularly wary of these situations and the trail order marked the acid test for a new supplier to
be chosen as a regular source of knitwear.
The degree of rivalry among the competitors was quite high because there were many players in
the knitwear section of the textile industry making an effort towards exporting their products and
getting in long term relationship with the buyers. There were four major players Ammar Textiles,
Angora Textiles, Leisure Garments and Omega Knitwear. These companies had developed long
term relationship with the buyers and were working closely with various vendors ranging from
yarn to thread and button suppliers to build long term relationship with them that supported the
growth of these firms.
Apart from these issues there was a problem with the financial performance of the company
itself. Although the company was experiencing an increase in the profit margins and returns on
asset and equity also increased considerably, the quick ratio of the company declined while
current ratio has increased almost 40 times compared to 1989-90, signaling towards the problem
of inventory accumulation in the company. The problem of inventory accumulation could result
in increase in cost of production and also could result in inventory losses if inventory gets
obsolete. Accumulation of inventory coupled with increase in days in receivable and a decrease
in days payable is reflecting deteriorating liquidity position of the company. As a result of this
sanctioning of the loan could be restricted because to a financial institution which is extending
the debt to the company a declining liquidity position would weak cash flows of the firms
reflecting its inability to pay back on its obligations.

CORE PROBLEM
The core problem faced by the company was that given the high bargaining power of the
suppliers and buyers and the extent of competition in the industry the company did not has a
strong supply chain department. Therefore, pursuing any of the three strategic alternatives would
not be possible without having a supply chain department in the firm. To maintain credibility
with the buyers whom the company would be supplying there is a need to ensure the company
provides high quality product and the delivery should be on time. To accomplish this, the
procurement of the right inputs to production must be made available at the right place and at the
right time in an industry where suppliers of inputs are dominant and can exercise high bargaining
power so a strong supply chain department was required which the company did not have.
Alternate Solutions

In order to address the problem of producing high quality garments the company could introduce
total quality management (TQM). It is a management approach to long-term success through
customer satisfaction. In a TQM effort, all members of an organization participate in improving
processes, products, services and the culture in which they work. By implementing his system
the company could insure that the quality of their garments could stay intact and the customers
would remain satisfied. In order to succeed in the long term the company would have to give
greater importance to quality in order to gain customer loyalty and gain consistent orders from
the clients. Another reason why quality was very important was due to the increasing
competition from garment manufacturers around the world.
The high bargaining power of suppliers needed to be reduced as this allowed the suppliers to
exploit the manufacturers at times. The company could reduce this by indulging into backward
integration as this would allow it to have control over its supplies. The company could also make
certain inputs like buttons and zips on their own as the manufacturing process of these products
could be carried out simultaneously with the manufacture of garments. The only thing that
needed to be insured was that the quality of these inputs matches the international standards as it
would reduce the rejection rate. The printing of tags could be carried out in Pakistan as well by
importing machines that would allow the manufacturers to make tags of international standards.
This would allow the manufacturer to control the price of these inputs and thus reduce the
bargaining power of suppliers. Having control over these smaller inputs would also allow he
manufacturers to reduce lead times which was imperative for on time delivery. The company
could not control the price and availability of cotton yarn as it depended on many factors which
were mostly uncontrollable. The only thing that the company could do in this regard was to have
their own agricultural land where cotton yarn could be grown but this option was not very
feasible at the moment as their company was very small in size and had very limited financial
resources available. Thus in this regard they had to rely on suppliers and pa them the price that
was quoted.
As there few large buyers in the market it was important that the manufacturing firm was run
efficiently and professionally as these large buyers had very strict standards especially with
regards to quality. While catering to the U.S market the company should regularly be looking at
other avenues. Other market could be the European or the Middle East markets. Thus in this way
the bargaining power of the buyers could be reduced in the long term. But initially the company
would have to depend on these few large U.S companies. The solution to meeting to high quality
standards would be TQM as mentioned earlier.
The degree of rivalry among competitors could be avoided by the company by finding a
propitious niche for their garments. This could be done on the basis of finding a market where
the garments of the company are high in demand and exporting the garments to such a market
suits the core competency of the firm. Initially the company can export the garments to the
Middle Eastern market as most of its competitors mentioned are catering to the U.S market. It
would also suit the company to go into such a market as the quality standards would not be as
stringent. Other than that the cost of exporting the garments would be lower than that of
exporting to the U.S market initially.
The company was facing liquidity problems mainly due to the stacking up of inventory. In order
to improve the liquidity position the company needed to get rid of the inventory and get some
cash into the company. This was important for the loan that the company wanted. The inventory
could have been reduced by selling the garments in the domestic market if there were no orders
from abroad. Although this would mean lower sales margins but it was a better option than just
stacking up the inventory. Garments can go out of fashion very quickly thus it was important to
sell them off quickly for cash as it would improve the overall liquidity position of the company.