CIMA Global Business Challenge 2010-2011

CIMA 2010-2011

THE CASE CONCERNING CERTAIN ISSUES

FACING CEECEE

REPORT

This report is prepared by Team:

From:

5Wings

Huazhong University of Science &Technology,

Team member
Team leader:
Team member 1:
Team member 2:
Team member 3:
Substitute member (if applicable):

School of Management

CONTENTS
1. Introduction ............................................................................................................... 3
2. Terms of reference.................................................................................................... 3
3. Prioritization of the key issues................................................................................... 4
4. Analyses ................................................................................................................... 5
5. Recommendations .................................................................................................. 11
6. Conclusion .............................................................................................................. 16
APPENDIX
. SWOT Analysis........................................................................................................ 17
. PEST Analysis ......................................................................................................... 18
. Michael Porter's 5 Forces Model ............................................................................. 19
. Lost Profit of the Distributors Strike......................................................................... 20
. NPV for Expansion of Jewellery Range ................................................................... 21

CIMA
T. 400 820 4080

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

Web. http://gbc.cncima.com

1. INTRODUCTION
CeeCee is a listed high street retailer of fashion clothing. It has been operating for more
than 20 years. It applies the "fast fashion" business model which means exclusivity and
fast turnaround, and its logistics runs well by taking advantage of its advanced and
improved IT systems. In addition, the financial results of CeeCee are quite satisfactory.
In the current market which has grown rapidly, the competition is becoming increasingly
fierce and the retailers are facing great challenges. Currently, CeeCee is facing some
urgent issues from different aspects that will affect the whole operation of the company.
Thus, the board would like to conduct detailed analyses about these issues and make
appropriate decisions.

2. TERMS OF REFERENCE
As independent consultants and qualified members of CIMA, we have first made
scenario analysis in both financial and non-financial aspects regarding the five issues of
CeeCee and then given our recommendations on the strategic future direction for
CeeCee.
To get a better understanding of CeeCees internal and external constraints, we have
used the SWOT analysis (Appendix ), PEST analysis (Appendix ) and Michael
Porter's 5 Forces Model (Appendix

CIMA
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).

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3. PRIORITIZATION OF THE KEY ISSUES

Considering the influences of all the issues, the decision about the distribution strike is
the most urgent and important one since distribution plays a key role in "fast fashion"
business model and the strike will disrupt the normal operation of CeeCee.
In addition, it is very important to solve the IT failure because the IT system is heavily
relied on and this failure has affected on-line sales and indicated flaws in the internal
control system.
Furthermore, it contributes much to the success of the expansion strategy to obtain
certain market share and to broaden CeeCee's income sources.
CeeCee also has to deal with the way CeeCee is marketed, which is an essential part to
gain brand awareness.
Lastly, the CSR is crucial for CeeCee to obtain social cognition and operate better.
According to the discussion above, we identify and prioritize the issues facing CeeCee
as follows:

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4. ANALYSES
1) DISTRIBUTORS STRIKE
CeeCee has been caught in a serious logistics crisis as a result of its sole distributors
strike. The strike is caused by the terrible labor-capital relationship of its distributor. And
it brings serious problems to CeeCee.
First and foremost, the strike will significantly affect the normal profit of CeeCee. Under
the strike, products cannot be delivered to the shops, which will decrease the sales,
including the on-line sales. According to our calculation, CeeCee will suffer a lost sales
up to 314,856,163.The amount is approximately 10% of CeeCees 2010 sales forecast
and it results in a lost profit of 189,228,554. (Appendix

.)

Besides, the supply shortage will hurt CeeCees customer loyalty. As we all know, in the
fast fashion industry, the products can be easily substituted. If CeeCee cannot provide
its products in time, the customers will turn to its competitors and this will inevitably
decrease its market share.
Therefore, the most urgent thing is to get enough distribution capacity in the following
ten weeks. CeeCee can try to negotiate with the current distributor to get as much
support as possible and at the same time contract with other distributors for short term
outsourcing. In the long run, CeeCee should broaden its distribution channels and
increase the number of its distributors in case that similar logistics crisis happens again.

CIMA
T. 400 820 4080

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2) IT FAILURE
CeeCee has been involved in an IT failure (programming error) which causes a loss of
6,000,000 in CeeCee's online sales since it sent lots of goods to its customers without
receiving payments. Thus, CeeCee must try to collect those unpaid cash from its
customers immediately as much as possible. There are two methods to do this:
(1) By an outside agency: 14 per customer and a success fee of 5% of the amounts
recovered would be charged; 60% of these customers would be collected.
NPV1 = 6,000,000*60 %*( 1-5%) - 14*50,000 = 2,720,000
(2) By CeeCee finance department: only 45% of the money would be recovered by its
already overstretched staff.
NPV2= 6,000,000*45% = 2,700,000
From the calculation results we can see that CeeCee can collect 20,000 more by
employing an outside agency. What's more, the ordinary operations of CeeCee will be
affected if the overstretched staffs are designated to collect the money. Therefore, we
suggest that CeeCee should employ an outside agency to collect the money.
Another problem is that both CeeCee and the outsourced IT supplier persist that it is not
their fault. Thus CeeCee should identify who is responsible for it and ask for
compensation if possible.
After making up the loss, it is necessary to look into this IT failure to prevent similar
problems happening again. Since CeeCee's "fast fashion" business model relies heavily
CIMA
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on its sophisticated IT systems, the regular operation of the IT system is critical to

CeeCee's success.
At present, CeeCee employs its own IT staff but it also outsourced some specialized
design and update work to ProvelT, a leading global IT solutions specialist company.
This enables CeeCee to take advantage of continuing enhancements in retail and
inventory management systems. However, this also creates risks since it is difficult to
discover the errors in outsourced programming work. Therefore, CeeCee should
reconsider its outsourcing policy.
What's more, this IT failure has indicted that there are some inefficiencies in CeeCee's
internal control system. In this way, errors cannot be discovered and corrected in time
and CeeCee has to devote much more money and time to solving these problems. Thus,
CeeCee should pay more attention to its internal control system.

3) EXPANSION OF JEW ELLERY RANGE

CeeCee has expanded from only women's clothing into menswear, children's clothing,
home furnishings and clothing accessories. And now its CEO plans to launch a new
range of jewellery. She believes that the plan will have a positive effect on CeeCees
profit.
Using the data given in the scenario, we calculate the net present value of the
expansion project and get the results below: (Appendix .)
NPV= 239,266.24

CIMA
T. 400 820 4080

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E. gbc.china@cimaglobal.com

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From the numbers above, we can see that although the NPV is positive, it is quite a
small amount compared to CeeCees current total profit.
After the calculation, we take detailed analyses and summarize them in the below chart:

It is known that the expansion requires large amount of present space and in this way it
will influence the existing operation greatly. The main focus of the brand CeeCee is for
clothing, and this ideology cannot be violated, otherwise the company will get into big
trouble. The company should consider the expansion on the premise of not hurting the
existing business.
Therefore, even though the new jewellery range may bring CeeCee some profits and
benefits, we recommend that the project should be abandoned in the current trend.

4) CELEBRITY MARKETING

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Juliette Lespere, as CeeCee's director of sales and marketing, has been trying to
introduce a number of changes to the way in which CeeCee markets itself. Currently,
she has proposed that CeeCee contract with Kool, a well-known and popular European
singer of rock music. Kools agent has proposed a choice of payment method:
(1) A fixed payment of 50,000 with a bonus of 150,000 if incremental sales reach 2
million
(2) A royalty of 5% of all incremental sales revenue
The payments based on incremental sales between 1,200,000 and 2,000,000 under
the two methods are presented as below: ( 000)

250
200

payment

200
150
100
50

70

90

80

50 60

50

1200

1400
1600
1800
incremental sales

50

100

Method 1
Method 2

50

0
2000

The payment pattern based on the level of incremental sales under the two methods are
presented as below: ( 000)

CIMA
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250

payments

200
Method 1
Method 1
Method 2

150
100
50
4500

4000

3500

3000

2500

2000

1500

1000

500

0
incremental sales

From the graph we can see that there are two break-even sale values: 1million and
4million.

5) CSR
CeeCee has been informed by a local Asian agent that a substantial number of the
Asian suppliers have been using child labor to manufacture garments for CeeCee.
Though the agent didnt think CeeCee could do much of the issue but as it is so
common. But if CeeCee take no measure on it, it will influence CeeCees reputation and
as Asia is a new market for CeeCee, if it failed at the beginning stages, the expansion
plan will also be affected. Even worse, other suppliers might also violate their code of
conduct just as the Asian suppliers do. If this continues, CeeCee will be under lawsuit
and hard to manage its suppliers. It also violates the CSR strategy of CeeCee.
Besides, CeeCee needs to be more responsible for the product quality that its suppliers
offered. In modern society, the possibility of using unhealthy material increases and
CIMA
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people are paying more attention to this problem. Environmental protection can be an
everlasting issue that CeeCee need to consider as it is both social friendly end
corporate friendly. If CeeCee carries its CSR successfully, it will benefit the society and
in turn increase its image as well as cost reduction.
Lastly, CeeCee should be responsible for its employees make sure that it exercises its
corporate social responsibility and its employees will be more devoted to the company.

5. RECOMMENDATIONS
1

DISTRIBUTORS STRIKE

According to our previous analyses, CeeCee has to recover its distribution capacity
timely, effectively and economically and maintain it in the long term.
Helping the distributor recover its capacity is the most economical method as costs of
finding other distributors in such a short time can be avoided. But this may take a longer
period.
It is easier to outsource to other distributors as the third-party logistics is adequate in
Europe. However, the quality of services varies significantly between different
distributors.
Therefore, we recommend that CeeCee help the current distributor serve and repair the
vehicles, rent well-performed vehicles and negotiate with the union to get workers back
to work. At the same time, CeeCee can look for qualified distributors to ensure
temporary capacity in time.
CIMA
T. 400 820 4080

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

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Moreover, in the long run, CeeCee has to prevent the similar crisis happening again. In
this case the crisis is caused by the heavy reliance on the sole distributor. Therefore,
CeeCee can diversify its distribution channels and outsource the work to different
qualified distributors so that unexpected risks can be dispersed. In addition, CeeCee
should build up its own distribution team to ensure normal operation.

IT FAILURE

Considering both financial and non-financial aspects, we recommend that CeeCee

should employ an outside agency to collect those unpaid orders. At the same time,
CeeCee should search relevant terms in its outsourcing contract with ProvelT and even
turn to legal consultant (seek legal advice) to identify the specific responsibility.
As to the outsourcing policy, we conduct a risk-cost analysis as below

Risk

All
outsourced

Partial
outsourced

None
outsourced

Cost

CIMA
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As the graph shows, considering the tradeoff between risk and cost, we recommend
that CeeCee should amend its outsourcing policy to retain its core design work and
outsource some update work to qualified IT companies.
CeeCee should also take measures to improve the efficiency and effectiveness of its
internal control system. On one hand, CeeCee could establish a series of policies to
make sure that every design and update work of the IT system be carefully inspected to
detect errors in time. On the other hand, CeeCee financial department should compare
the figures for sales made and the amount of cash received regularly and frequently to
identify how many orders are unpaid. CeeCee should also set up similar internal control
policies over its every functional region throughout its supply chain to enhance the
efficiency and effectiveness of its regular operations.

EXPANSION OF JEW ELLERY RANGE

After the analyses we come to the conclusion that CeeCee should reject the expansion
project under its current operating condition.
However, other than the jewellery expansion, in the brand stretching campaign, we think
that CeeCee should pay more attention on the diversification of its products which face
a variety of needs. For example, we suggest that it should separate its home furnishing,
accessories, menswear, and children's clothing as independent brands. Statistics show
that the ranges of home furnishing and clothing accessories generate high gross
margins both average more than 70%, therefore, under this diversification CeeCee can
achieve more successful management and development.

CIMA
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In addition to the brand diversification, CeeCee should at the same time expand its shop
ranges. CeeCee is always increasing its shop ranges and at the end of 2008 it has
already had 610 shops across European countries. However, this is quite a small
number compared to its competitors. It will limit the market share and CeeCee cannot
authentically succeed. Therefore, also considering the weak economy in Europe, we
recommend further expansion to other regions such as Asia and North America.

CELEBRITY MARKETING

We do not recommend the celebrity marketing strategy, since the probability of sales
exceeding 2million resulting from this strategy is only about 0.1, which is extremely low
compared with CeeCees total sales revenue of 2,700million in 2009.
However, since the fast fashion industry is facing a current phase of homogenous
competition, in which the industry is nearly saturated, it is essential to focus more on the
brand/image investment in order to differentiate CeeCee from its competitors. We think
the branding benefit outweighs the cost of a more variant advertising and marketing
strategy. Thus, CeeCee should properly increase its marketing budget. And the specific
advertising campaign recommendations are as follows.
To start with, CeeCee should have more traditional advertisements on TV, magazines
and billboards which are the main access to fashion for CeeCees core customers. In
addition, since design quality is a crucial factor in the fashion industry, CeeCee can
contract with noted fashion designers/celebrities to create exclusive designer clothing.
These contracted designers/celebrities can also take part in marketing campaigns such

CIMA
T. 400 820 4080

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

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as CeeCee fashion week, new store opening ceremony and photo shots advertising.
Last but not least, CeeCee should also concentrate more on online advertising, due to
an obvious trend of online shopping. Cooperation with major online shops can help a lot
in promotion.
To conclude, CeeCee should make more effort in launching a variety of marketing and
advertising campaign based on the cost-benefit principle.

CSR

The crisis is mostly due to the lack of attention from CeeCee, unethical behavior of
suppliers and the lack of self-protecting awareness of the employees.
CeeCee can be more cautious when prequalify and audit the suppliers as it has already
been informed by the Asian agent of the problem. It can increase its frequency of
auditing the suppliers to two or three times a year, especially in the Asian Market. And
CeeCee can form a special team for it. Then CeeCee can promote legal education
among the employees as well as cooperate with the local labor union.
Then in order to make sure that every garment is under the quality restriction, CeeCee
can use chemical and laundry test to inspect on the final product.
As with the environmental protection area, CeeCee has already done a great job in
most areas like emission reduction in waste recycling, transportation and etc. Further
improvement can be used in R&D for new environmental friendly material like organic
cotton.

CIMA
T. 400 820 4080

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CeeCee also need to keep improving employees skills by delivering training for them
including safety problem so as to guarantee employees working environment.

6. CONCLUSION
According to our analyses and recommendations, we suggest that CeeCee should
tackle its current problems and seek for future development in different aspects.
Short-term
Distributors strike

IT failure

Expansion of jewellery
range
Celebrity marketing

CSR

CIMA
T. 400 820 4080

Help the distributor recover

its capacity
Look
for
qualified
distributors

Employ an outside agency to

collect money
Identify
the
specific
responsibility and ask for
compensation
Reject
the
jewellery
expansion project
Reject
the
celebrity
marketing proposal

Long-term
Diversify
distribution
channels
Outsource the work to
different
qualified
distributors
Build
up
the
own
distribution team
Amend its outsourcing
policy
Improve the efficiency and
effectiveness of its internal
control system
Diversify its product range
Expand its shop ranges
Expand to other regions
Increase the marketing
budget
Diversify its advertising and
marketing strategy
and enhance the suppliers

Prequalify the suppliers

management
Provide trainings for its own employees
Cooperate with local labor unions
Use chemical and laundry test
Use environmental-friendly materials

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

Web. http://gbc.cncima.com

APPENDIX
S

. SWOT
ANALYSIS

Well performed fast

fashion business
model
Experienced
professionals in design,
finance, and logistic
areas
Diversified products
Effective direct shop
management
Good visibility
marketing strategy
prime location and
exclusive store layout
Excellent customer
care

Expand into the

oversea market.
Further develop
online sales.

WO

Increase distributor
number and set up
its own logistics team
Diversify its
marketing strategy

ST

Weak economic
climate
Suppliers violation of
code of conduct
Homogeneous
products
Fierce competition
from value retailer

T. 400 820 4080

Sole-dependence on
one distributor
Low market share
Simple marketing
strategy

SO

Online shopping trends

Potential market
outside Europe
Increasing demand for
affordable clothing in
M-structure society

CIMA

Broaden its product

range
Strengthen
management over its
suppliers

WT

Enhance
image/brand
marketing
Accelerate the shop
expansion

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

Web. http://gbc.cncima.com

. PEST ANALYSIS
POLITICAL
Policies issued by key European

ECONOMIC
Wider adoption of fast fashion

countries to help the textile industry

business model

survive and develop

Weak economic climate

Increasing strict environment

Depressed consumer purchasing

protection standards

desire

Acts for design piracy prohibition

Huge market in East Asia

under discussion.

Highly competitive European

distribution market.

SOCIAL
Transformation to M-structure

TECHNOLOGICAL
Huge cost to develop and maintain

society(larger portion of low income

the IT system

households)

Rapid development of IT system

Different customer demand between

Asia and Europe
Increasing popularity of on-line
shopping
Negative CSR news in fast fashion
industry

CIMA
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. MICHAEL PORTER'S 5 FORCES MODEL

COMPETITORS

HIGH

Wider adoption of fast fashion business model

Smaller market under the weak economy.
Large market shares possessed by the leading companies in the industry
Growing number of value retailers at the inexpensive end of the market

ENTRANTS

MEDIUM

Low initial investment requirements

Easily piracy of the products
Highly competitive market

SUPPLIERS

LOW

Fierce competition among a large number of suppliers

Limited number of suppliers meeting the CSR standard in Asia

BUYERS

HIGH

Limited consumer purchasing power under the weak economy.

Numerous choices for consumers in the clothing market

SUBSTITUTES

MEDIUM

Homogeneous product in this market

Low conversion cost among various products

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. LOST PROFIT OF THE DISTRIBUTORS STRIKE

We used the forecast for 2010 sales revenue of 2,985million to calculate the lost sales
and profits as follows:
Lost sales

2,985,000,000*7/365*(10%+20%+30%+40%+50%+60%+70%+80%+90%+100%)
= 314,856,162.5
Since gross margin will be the same as 2008 level of 60.1% and most other costs are
fixed in the short term, therefore:
Lost profit

= 60.1%*314,856,162.5
= 189, 228, 553. 7

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. NPV FOR EXPANSION OF JEWELLERY RANGE

Year

Glass display
Opportunity cost
Changes in NWC
ICF

NPV(per)
NPV(total)

CIMA
T. 400 820 4080

-15,000.00

0.00
-901.50 -3,906.50 -3,906.50 -3,906.50 -3,906.50
0.00 ########
0.00
0.00
-6,000.00 #######
-21,000.00 ####### -3,906.50 -3,906.50 -3,906.50 6,093.50

Sales
Gross margin(95%)
Operating costs
Depreciation
EBT
Tax(30%)
Net income
OCF
Total cash flow
DCF(12%)

6,000
5,700
-2,500
-3,000
200
60
140
3,140

26,000
24,700
-1,000
-3,000
20,700
6,210
14,490
17,490

26,000
24,700
-1,000
-3,000
20,700
6,210
14,490
17,490

26,000
24,700
-1,000
-3,000
20,700
6,210
14,490
17,490

26,000
24,700
-1,000
-3,000
20,700
6,210
14,490
17,490

-21,000.00 ####### ######## ######## ######## ########

-21,000.00 ####### ######## 9,668.47 8,632.56 ########
19,938.85
#########

(Chartered Institute of Management Accountants)

E. gbc.china@cimaglobal.com

Web. http://gbc.cncima.com