In 1995, women's jeans was a $2 billion fashion category in the US and growing fast. Levi-Strauss

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Question:

In 1995, women's jeans was a $2 billion fashion category in the US and growing fast. Levi-Strauss was the market leader, but its traditional dominant position was under heavy attack. Standard Levi's women's jeans, sold in 51 size combinations (waist and inseam), had been the industry leading product for decades, but “fashion” was now taking over the category. Market research showed that only 24 percent of women were “fully satisfied with their purchase of standard jeans at about $50 per pair.

"Fashion” in jeans meant more styles, more colors, and better fit. All of these combined to create a level of product line complexity that was a nightmare for manufacturing-oriented, “push-based” companies like Strauss. By 1995, Strauss operated 19 Original Levi's retail stores across the country (2,000 to 3,000 square foot mall stores) to put them in closer touch with the ultimate customers. But this channel was a very small part of their overall $6 Billion sales which were still primarily to distributors and/or independent retailers. Exhibit 1 shows Levi's financial footprint.

Strauss was as aggressive as most apparel manufacturers and retailers in investing in process improvements and information technology to improve manufacturing and delivery cycle times and “pull-based” responsiveness to actual buying patterns. But the overall supply chain from product design to retail sales was still complex, expensive and slow. In spite of substantial improvements in recent years (including extensive use of “EDI”), there was still an eight-month lag, on average, between ordering cotton fabric and selling the final pair of jeans. The industry average lag was still well over twelve months in 1995.

The financial footprint for one pair of women's jeans sold through the normal wholesale channel compared to one pair sold through an Original Levi's Store is summarized in Exhibit 2. Although the retail channel was less profitable for Strauss, it was seen as an “investment" in understanding end-user customers better.

As an experiment in an alternative value chain concept, Strauss introduced "Personal Pair” TM kiosks in 4 of its Original Levi's Stores in the Fall of 1994. The experiment was made
possible by a partnership with Custom Clothing Technology Corp. (CCTC), a small Newton, MA-based software firm specializing in client-server applications linking point of sale custom fitting programs directly with single-ply cutting programs in apparel factories. The new process operated as follows:

1. The "Personal Pair"TM kiosk was a separate booth in the retail store, staffed by specially-trained sales clerks and equipped with touch screen PCs.

2. A sales clerk used a tape to take three measurements from the customer (waist, hips and rise) and recorded them on the touch screen. There were 4224 possible combinations of these three measurements.

3. The computer flashed a code corresponding to one of the 400 prototype pairs stocked at the kiosk. The sales clerk retrieved the prototype pair for the customer to try on.

4. Within one or two tries, the customer was wearing the best available prototype. Then the sales clerk used the tape again to determine the exact measurements for the customer (4224 possible combinations) and to note the length required (inseam).

5. The sales clerk entered the 4 final measurements on the touch screen and recorded the order. Initially, the system was available only for Levi's 512 styles, but 5 colour choices were offered in both tapered and boot cut legs.

6. The customer paid for the jeans and chose either Fed Ex delivery (a $5 extra charge, per pair) or store pick up. Delivery was promised in “not more than three weeks."

7. There was a money-back guarantee of full satisfaction on every order.

Each Personal PairTM customer order was transmitted by modem from the kiosk to CCTC where it was logged and immediately retransmitted directly to a Levi's factory in Mountain City, TN where each pair of jeans was individually cut. In the regular supply chain, patterns were cut from rolls of denim in stacks 60 layers thick.

After cutting, each pair was hand-sewn, inspected and individually packed for shipment. Jeans were normally sewn one pair at a time, but there was high WIP at each process stage and several pairs were made in sequence to minimize change-over time.

Each Personal Pair garment included a sewn-in bar code unique to the customer for easy re-ordering at the store where the bar code was on file in the kiosk.

Exhibit 3 is a summary of the normal supply chain for jeans sold through the Original Levi's Store distribution channel. The exhibit includes some additional information about inventories, property and equipment investment, and uncertainties across the chain.

Exhibit 2 Profitability Analysis of Womens Jeans Wholesale Channel Estimate OLS Channel Estimate Operations, per pair Gross

Levis Personal Pair Jeans (B). BAB021 Exhibit 3 LEVI STRAUSS TRADITIONAL ORIGINAL LEVIS STORE 512 SUPPLY CHAIN Demand Forec

Question:

1- Profitability, for any business can be thought of in terms of the basic Return on Invested Capital (ROIC) equation;

Profitability Revenue - Cost Working Capital + Property & Equip. Profit Investment

Calculate the pretax ROIC for Levi Strauss for both channels shown in the Exhibit. So What?

What impact will 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 it all.