Operations_Research

Introduction Gina Fox has entered the apparel industry, an industry that continuously evolves as fashion and trends emerge.Starting a clothing business is just like any other business: you need to have the resources to jumpstart your vision, skills and know-how in managing the business, and marketing savvy to promote the business. You must also have a business plan that will serve as your detailed guide that will walk you through your first couple of years in business. Having gone through the process of thinking through a plan for your business will enable you to always know what steps to take next. However, there are a number of unique factors that a would-be apparel manufacturer needs to know about the clothing business. Small businesses face an increasing competition from big firms given their marketing muscles and economies of scale. In South Africa we have recently seen a decline in this industry, as a result of a flood of imported Chinese clothing, stringent labour practices and high labour costs. At the Outset Before going into business Foxy shirts would need to determine the type of clothing it would like to manufacture and establish if a market exists for the sale of this product. In this instance Foxy Shirts has already established that it would manufacture imprinted shirts for special occasions. Foxy Shirts can segment its market based on age and gender demographics, or depending on opportunities diversify to where potential exists to maximize profit. The type of distribution depends on the identified target market. This has a direct impact on pricing, promotion and production. If this garment is available at exclusive stores, there is opportunity to price this higher as it would be deemed to be a unique product with lower production volumes and possibly higher production costs. However if this product is targeted at the masses, then it would be mass production at a lower cost. At this point the financial impact of production capacity and supplier relationships should be factored in. Be Acquainted with your Market Foxy Shirts should have some idea or indication of the potential customer that it is going to target as when as how it would reach them. To establish this Foxy Shirts can engage with the intended target market directly or it can liaise with the retail stores, or exclusive agents who would be the buyers and the distributors. In is important for Foxy Shirts to know who its competitors are and what they are doing and to be cognisant of what is happening in the industry. This information can be obtained from various sources including trade associations, retailers, suppliers and buyers. Entering the market Once this has been established the critical element of the appropriate distribution channel needs to be decided upon. The distribution channel impacts on the cost structure, the quantity and the quality of the manufactured clothing. Foxy Shirts is currently manufacturing shirts when necessary, depending on their medium and long term strategy, target market, production and distribution could change which affects capital outlay and returns thereof. Foxy Shirt’s is entering the industry as a Small Medium Enterprise and needs to be mindful of the possible challenges and opportunities that it may endure. SWOT Analysis on the Apparel Industry in South Africa |Strengths |Weakness | |Established Industry with pre determined regulation |High Wages rates pre set in the industry | |Good and consistent pre determined quality measures and standards|Highly regulated labour practices | |Raw material available locally |Retailers importing from international manufacturers | |Labour available |Poor collaboration amongst manufacturers | |Access to Ports |Rand/Dollar exchange rate | |Established infrastructure –rail/road |Insufficient government support for larger clothing and textiles | |Stable Macro -environment |firms | | |No strategic public/private sector partnerships driving the | | |industry | |Opportunity |Threats | |Potential to create a niche market |Cost of capital remains to high to justify investments | |Emerge from SME to large scale manufacturer |Rand strength and/or Rand volatility continues | |Female Entrepreneur |SA customs is unable to keep out illegal/under invoiced imports | |Clustering between firms to reduce factor costs and improve |China and other competing economies target SA with continued | |efficiencies |cheap imports | |Forge better relations and partnerships with governments, |Clothing firms import made-up garments | |textiles, clothing and retailers | | Whilst there are factors that would restrict limit and could eliminate Foxy Shirts from the industry, there are contributing factors that create opportunities for Foxy Shirts. Foxy Shirts should leverage these factors to create a sustainable business. In order to create sustainability Foxy shirts can either increase production or capitalize on the niche market. Before Foxy Shirts chooses its strategy it would need to consider the impact of the competition in the industry. With the aid of Michael Porters Five Forces model this will be discussed further. Porters Five forces[pic] The clothing manufacturing industry in South Africa faces market pressures from domestic and the international arena. These include advanced technology, material input, labour and garment costs. Legal and illegal entrants to the market as well the increased quantity of imported goods are placing severe pressure on this industry. Further impacting the industry is government rules and regulations as well socio –economic factors and the environmental impact. Barriers to Entry and the threat of new entrants The clothing industry has the propensity to attract new entrants because of the low capital investment and the fact that a small operation can be run from residential premises. Markets that offer high returns will attract new entrants, however this can be blocked by government policies .Foxy Shirts would need to ensure that it meets the requirements of the Basic Conditions of the Employment Act as well as the Occupation Health as Safety Act should it expand it operation. The other factor that it would need to look at if it too chooses to look at mass production is capital requirements and its associated costs. Whilst Foxy Shirts can venture in this direction, it is equally easy for others to enter this market.This could lead to increased supply, which will reduce market equilibrium and selling price. Threat of Substitutes The existence of substitute products provides customers with alternatives. In the event of a high price good the customer has the option to switch to the alternative. Imported garments are certainly a threat to the domestic market. The imported garments are favoured as they are reasonably priced and readily accepted by the local consumers. In the South African context, the consumers are looking to be trendy and up to date with fashion without having to spend large sum of money to keep up with the trends. The increased volumes of imported goods, in particular the Chinese clothing is a key contributing factor to S.A manufactures experiencing low production volumes. Foxy Shirt would need to factor this into their future planning and sales forecasting. Whilst they maybe making a profit now and there is a demand for their goods, they should guard against the design, style and print being replicated and sold at a lower price than them. In terms of economies of scale Foxy Shirts is far from leveraging of the benefits of this like a larger company would. Foxy Shirts is a very small operation that is hiring equipment to achieve business objectives. This has a direct impact of fixed costs and hence on Break even Analysis. The Bargaining Power of Suppliers Suppliers provide the “input” in the manufacturing process, which are the raw materials. In the apparel industry acquiring the raw materials from reliable, reasonably priced suppliers creates the foundation to a sustainable profitable business. Suppliers also provide valuable insight and best practices in the industry that could enhance the business. Depending on the uniqueness of the raw materials suppliers could embark on forward integration and capture the market independently. Suppliers could choose to work with larger companies who provide regular orders and ignore smaller firms with small ad-hoc requirements. The quantity and quality acquired from a supplier has an impact on pricing as large bulk orders may have a pre negotiated discount. The absence of a collaborative relationship between the suppliers and Foxy Shirts will be detrimental to its existence in the industry. The Bargaining Power of Buyers The supplier’s influence of clothing manufacturers is diminished through the bargaining power and various sources available to the retailer. Retailers select their suppliers based on their customer demands. Customers are well informed and are savvy about their purchases. Retailers therefore base its selection criteria of suppliers on the quality of the product, cost and reliability of service delivery. Christopher (2004) mentions that the SA markets changed considerably and thus increased the purchasing power of customers. Considering the low demand for locally manufactured clothing, retailers will bargain for the best deal and play one against the other. These impacts on the margins and ultimately the revenue. Demand is volatile and is one of the major problems faced by the clothing industry. This threatens the existence of manufacturers (Adewole, 2005). Clothing manufacturers can create a competitive advantage if they differentiate themselves either by cost leadership, improving process or design development. They would also need to have substantial buying power to source raw material at a competitive price that is of high quality, and delivered promptly. Rivalry The apparel industry has been in existence for many years. Foxy Shirts would need to establish the number of competitors in the market as well as the growth rate of the industry. Considering that Foxy Shirts is a newly established business, some of the factors that require consideration would be its ability to compete with established industry players, in terms of advertising spend, production costs, capacity, branding, image etc. Other Factors to Consider Production The scale of production determines the infrastructure, equipment and capital required. The option of out-sourcing may also be considered at this point, depending on what’s the financial impact. The apparel industry has an existing practice of outsourcing called CMT (Cut, Make & Trim).If this alternative is used, Foxy Shirts would avoid outlaying capital to acquire equipment necessary for every step of making the garment. Large scale production promotes economies of scale and generally lower production costs. Cost of labour Wages in the clothing industry is governed by a national collective between employers and employees. In terms of this wages differences exist between metro areas and non metro areas, where non metro areas have a lower wage rate. Foxy shirts would therefore need to consider its location and availability of required labour when strategizing about the future. Once again, this has a direct impact on variable costs in terms of labour and fixed costs in terms of premises and these impacts on Total Revenue, profit margins and Break even quantities. Finance The capital outlay and financing requirements are determined by various factors these include: the size of the operation, whether production is outsourced or not, and whether equipment is rented or owned. The finance requirements are further impacted by the variety of styles and designs manufactured and level of diversification and well as the required staff complement. Depending on how the product will be distributed and marketed a sample range may be necessary, this needs to be accounted for in the working capital requirements, as no revenue will be generated at this point. Equipment Currently Foxy Shirts is renting equipment as the need arises. This might not be the most cost efficient way to run a business. Given that this business has started, consideration will have to be given as to whether equipment is leased, bought or rented. There are advantages and disadvantages to the various methods of acquisition, which has a direct bearing on costs either fixed or variable depending on the option chosen. Value Chain Source www.12manage.com [pic] The above discussion has high-lighted and re-enforced the diagrammatic representation below of Michael Porter’s Value Chain Analysis. The Primary activities of the shirt manufacturing made up of Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Service, supported by the firm infrastructure, human resource management, technology development and procurement have a direct impact on margin, and this in turn has a correlating impact on the Break Even Point. An article by Christian M Rogerson about Successful SME’ in South Africa discusses the case of clothing producers in Witwatersrand. A case study on Morar reveals that he started his business as a home run business with 4 employees and grew this to 45 employees. This turn in business is attributable to a 7 year distribution contract. This highlights the importance of logistics and distribution and the potential of a business if they can get this right. Break Even Analysis [pic] The diagram above graphically illustrates the break even point. The preceding discussion showed the impact of decision making and how it would affect material, labour, production and finance costs, which then affects either fixed or variable costs that ultimately impacts on selling price and revenue that determines the break even point. Whilst it is important to undertake a quantitative analysis it is equally important to consider the qualitative factors. The quantitative analysis is impacted by the qualitative factors that alters the decision making process. Recommendation I would recommend that Foxy Shirts differentiates themselves by acquiring a niche market. Stevenson (2006) mentioned that an organisation can compete on three major issues namely: Cost leadership-competing on the basis of price; Differentiation – a unique product that is valued by customers; and Focus – a niche market for its products developed on cost and differentiation strategy. Niche market companies target a specific portion of the market and will not be competing with the industry players targeting the main stream business. This will provide Foxy Shirts with an opportunity to stay focused and address a specific need for a product and gradually progress and expand. Krajewski and Ritzman (1996) discuss “a more detailed list by differentiating four different aspects namely : Cost, Quality, Time and Flexibility.” Other factors that Foxy Shirts can focus on to differentiate themselves and gain credibility and market share, establish a brand identity will be: Packaging Reliability of Delivery After sales Service Product innovation Responsiveness to problems Geographical proximity. Conclusion The apparel industry played a significant role in the economy and made a major contribution to the economy. We have over the recent years seen a steady decline in the industry due to the flood of cheaper imported goods, increased labour costs and as well as the introduction of stringent laws. Despite this, this industry can still make a significant contribution, depending on the space that it chooses to occupy in the market and how it aligns itself to the other players in the market. The Small Medium Enterprise can contribute to job creation, alleviation of poverty and make a contribution towards economic development. Foxy shirts need to choose an appropriate market to focus on and strategically align themselves with the other stakeholders. Foxy Shirts can also look at aspects from a “Lean” perspective, eliminate waste and streamline its operation to be as cost effective as possible. These aspects will include time lost in motion from one work station to the other, the amount of rework, The analysis of the current scenario is as follows: Gina Fox has started her own company, Foxy Shirts, which manufactures imprinted shirts for special occasions. Since she has just begun this operation, she rents the equipment from a local printing shop when necessary. The cost of using the equipment is $350. The materials used in one shirt costs $8, and Gina can sell these for $15 each. a) If Gina sells 20 Shirts, what will her total revenue be' Total revenue may be defined as the amount of money received from the sales of a product. This is determined by the quantity sold and the price that it is sold for. Total Revenue = Price x Quantity sold. TR = $15 x 20 =$ 300 Gina’s total revenue from the sales of 20 shirts is $300.00 What will her total variable cost be' Variable costs may be defined as costs of production that very when the rate of output is changed, these can include the cost of labour or material costs as an example. VC = $8 x 20 = $160 Variable costs of producing 20 shirts is $160.00 b) How many shirts must Gina sell to break even' The Break-even Point allows you determine what you need to sell, monthly or annually, to cover your costs of doing business; at this point you do not make a profit or a loss. This calculation is based on fixed costs, variable costs per unit of sales, and revenue per unit of sales.   Break Even Point = Fixed Costs Selling Price – Variable Costs = 350 15 -8 = 350 7 = 50 This implies that Foxy shirts needs to sell 50 shirts to cover costs of doing business, at this point the profit will be equal to 0. What is the total revenue for this' TR = Q x SP = 50 x $15 =$ 750 . Biblography