Sloan Styles, Inc. Gary Stoan was spending the summer between the two years of his MBA program at a well- known Eastern business school working at Sloan Styles, Inc. (SS), his father’s private label apparel company. Gary planned to join the company after graduation. He knew relatively litle about the business that his father had started in 1975 and run successfully ever since Before Gary would be abe to make decisions affecting the company's futur, he had a lot tolearn. The business in 1999 faced serious problems regarding future viability. ‘THE COMPANY Sioan styles ($8) is a New England-based, family-owned and operated supplier of private label ‘women’s fashion wear for better department stores such as Nordstrom and Dillard's, specialty retail stores such as Talbots, and high-end eatalogues such as Lands’ End and L.L.Bean. The company that Chester (Chet) Sloan founded 25 years ago gradually grew into a successful business, highly regarded by its customers for dedication to quality manufacturing and quick reliable service. Chet, President and CEO, attributes his company’s success to its ability to provide customers with very short order lead times for styles that pay close attention to both detail and current fashion trends in better women's apparel. SS also began selling its own label in 1997 to further leverage its strong, reputation for quality manufacturing of reasonably-priced tailored fashion clothing. By 1998, SS had grown to about $50 million in revenues with 140 employees, headquartered in Danbury, CT. The main design and product development office was located in the “garment district” of New York City, but one account executive, one account assistant and one designer also worked from Danbury. All sales are handled by account executives paid a salary without volume incentives. SS is reluctant to introduce an incentive system that rewards sales people for the volume of sales because the company strongly believes that the sales person is only one part of the team which rust work together to create sales, One account executive who worked at a competitor before joining SS, said “Twas surprised by how strongly Chet Sloan is committed to making sure that everyone works together to ensure that customers’ needs are satisfied at almost any cost. Our reputation fer fest turn around time, high quality, and high customer responsiveness brings usa fot of referral business. We ae just about the only company in New England who will accept almost any size order. Virtually all our competitors have introduced minimums of 600 units oF more per style.” ‘This case was written by Professor John Shank and Alexandra Latypova with the cooperation of a privately-held fim called here, Sloan Styles. All proprietary information has been disguised, Copyright © 2000.216 The company doesn’t own any bulk sewing facilities, It outsources all garment manufacturing to 25 contract sewing factories located across New England with whom SS has had very stable long-term relationships. SS shipped more than 1.2 million garments in 1998 in 5 product categories - pants, skits, tops, jackets, and dresses, It sells its products to 182 customers, of whom the top seven account for 90% of unit volume. The company is headquartered in 250,000 square feet of beautifully restored textile mill space in downtown Danbury, owned in trust for members of the family who are not active in the business. Fifteen years ago, this long-abandoned mill space was home primarily to pigeons and rats. Chet Sloan’s strong ties to this old mill town that had supported SS over a years led him to fully restore the space, len: onsiderable inspiration othe ivrontReighborhood. Local school groups and community service ‘organizations regularly toured the renovated mil SLOAN "YLES (SS) HISTORY Chet Sloan set up the company in 1975 as a wholesaler distributor of branded women’s apparel. He moved soon into private label apparel manufacturing and distribution. ‘The business grew steadily and successfully through the early 1990s as SS developed its reputation with a number of large and profitable accounts. Revenues and profits reached record levels ‘of $46 million and $2.6 million, respectively, in 1993, ‘Then, in 1994, one of the major accounts decided to exit women’s apparel to concentrate exclusively on men’s apparel. As a result, S$ lost $7 million in sales over night. New accounts were added such that total sales for the year dropped only $2 million. The efforts to build back revenues involved expanding the sales force, increasing trade advertising, and hiring additional designers. The added fixed costs, Selected Historical 1976 1983, Net Sales $257 $4919 Cost of Sales 197 4,043 Gross Margin 60 876 Other Expenses Selling General 37 374 Interest 58 Profit before tax S23 S$ 24s took a heavy toll on profits that also fell by $2 million versus 1993, Selected historical financial information Is shown below (000 omited. By 1997, revenues reached an all ime high of almost $52 million, but profit was stil well below the peak-level in 1993, Management knew there was a need to change the company's strategy to improve overall profitability. The summary financial statements for 1997 and 1998 are shown in Exhibit | ‘The decision in 1997 to introduce a line of branded apparel was largely based on Chet Sloan's belief that $S's strong quality reputation would enable it to capture the higher margins of a branded label. SS hired a dedicated sales executive to promote the “Sloan Specialties” line of products to buyers from department stores and specialty retailers. This experiment was not as successful, initially, as Chet had hoped. By the Fall of 1998 SS. was lef with significant overstock which was liquidated at a loss to discount chains. ‘The experience so far made clear that branded merchandising requires far greater investment in marketing and promotion then had originally been anticipated... Whether to stay with the “house brand” beyond 1998 was a big choice facing the company. Without the “house brand” losses, profit in 1998 could have been well over $2 rilion. But, two years was a very short period from ‘hich t0 conclude that S$ should stick solely to the private label segment The company is partially integrated as shown below in the schematic of the value delivery system. ‘The company designs each style in cooperation with customers, sources fabries and trim (lining, buttons, etc), manufactures the production samples, and packages the finished garments for shipment direct to ‘customers’ sales outlets. More information on the value delivery process is presented in the Appendix at the end ofthe case. ‘nancial Results 1991, 1993 A994 S 28653 $ 45,905 $43,727 23.20 __36.595 __35,062 5,433 9,310 8,665 1,213 3,135 2,897 2,686 4,107 9 a_i S128 $ 2655 S$ 690‘Sloan Styles 217 ‘The SS Value Delivery System Product —_ Production Packaging, Development rm aa }—>| Scheduling Loading & & Sales Manufacturing & Purchasing Shipping : Contract Suppliers ae Factory ANALYZING THE PROBLEM only down 2% on overall contribution margin (28 Jn thinking about the profit “squeeze,” Gary was particularly concerned about the increase in the number of styles with fewer than 500 units. Willingness to accept small orders was part of $S's competitive strategy, but the extra strain on the value delivery system was not insignificant. Gary wondered about the profit impact of the smail orders that seemed to cut across all products and customers. Gary met with the Chief Accountant to discuss the dectining profitability. She was a long-time employee ‘who had experienced both the high profit years around 1990 and the recent lean years. She saw the primary issue ‘as dectining margins. “Sales people have to understand that 28% contribution margin doesn’t leave any profit at the end for us anymore. They have to work harder to get adequate pricing.” Gary felt she was naive about price ‘exibility in today’s competitive environment Gary felt that the implicit “target cost” framework his father had used quite successfully for ‘many years needed to be reasserted again as a formal management framework in order for the company to retum to reasonable profitability. Previously, Chet estimated his wholesale prices as about 50 % of the expected retail price for a garment, because his customers wanted to get about 50% gross margins, He then worked hhis costs backwards fo get about 30% contribution margin (20% gross margin). The result, in 1993 for example, was an excellent level of profitability for the firm. In today’s very volatile and highly competitive marketplace, SS was ‘versus 30%), but the fixed overhead now ate up virtually all the contribution margin. Fixed overhead wasn’t fixed at alll And, overhead seemed to Gary to be out of control, He felt sure that SS had to accept the current ‘market prices, subtract desired profit and learn to operate at the resulting target cost. Gary compiled the sales and contribution margin breakdowns by customer, by product group and by order size shown in Exhibits 2,3, and 4. ABC PROFITABILITY To understand profitability by product, by customer, and by order size Gary needed a finer breakdown of unit volumes than is shown in Exhibits 2, 3, and 4. Exhibits 5 and 6 here show additional detail for products, customers and order size. Gary knew that SS invested a lot of time and effort in creating new styles for its customers. The same amount of work went into a style selling thousands of units as into one selling only 100 units. In order to understand the effect of order size on profitability, Gary wanted to do ABC profitability by order size for two product groups (jackets and tops) and for two specific customers (Nordstrom and Dillard’). Exhibit 7 shows the detail for company overhead for 1998, broken down by major line items as shown in ‘the monthly financial reports. The breakdown for 1997 ‘was not materially different. Gary found this breakdown of overhead spending useless in thinking about the business problems he faced.218 Exhibit 8 is a first cut “ABC” analysis of the overhead that Gary prepared, broken down by major value delivery stages. In interpreting Exhibit 8, three major caveats must be kept in mind: L. Fixed versus variable costs. It is. important to understand how cost per driver unit will change with changes in volume, either up or down. Very little cost is purely variable in the short-run, but virtually all cost is variable over a three to five year time frame. Excess capacity is also a critical issue for understanding fixed costs per unit. The change in fixed cost per driver unit as volume changes is heavily influenced by the level of capacity utilization in each activity, “Bottleneck” analysis is a key issue here, 3. Finally, process efficiency can also be @ major issue. Management must understand that if certain areas of the supply chain are not efficiently designed or ‘managed, the current cost per driver unit is not useful for planning purposes. Such areas can reach a “bottleneck” condition prematurely, or can appear much more expensive than they need to be. ‘The analysis presented in Exhibit 8 is static, in the sense that none of these thre issues has been fully explored. ASSIGNMENT. 1 First, calculate ABC profitability by product, by customer and by order size, So what? For 2 specific products (jackets and tops) and 2 specific customers (Nordstrom and Dillard's) calculate ABC profitability by order size. So what? This considers the 2-way interactions between product or customer and order size. The detailed volume information necessary for these calculations is included in Exhibits 5 and 6. ‘What is your advice for Gary and Chet Sloan? 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Actual unit sales by customer by product group Pants ‘Tops Dresses Skirts 163,906 28,871 3,656 161,777 15,555 10.920 6,901 45,013 15,264 4352 5 28,258 7365 23,153 14,158 14,870 5272 : 4.233 3138s 18,038 2,340 943, 17.954 1,028 62 : 1175 60816 —_30,993 3.146 87.617 287,744 101,301 33,037 394,049 B, Actual unit sales by customer by order size 100 10010500 500 t01000 21000 344 21,145 28.424 485,747 3316 27,428 19,659 107,555 303 4,702 5,435 64,723 334 5010 1875 44,367 90 4356 7,040 44,849 231 4,805 14,332 36,946 186 7431 4.873 9,952 196358171 21,059 _172.098 12,767 130,048 112,697 966,237 CC. Actual unit sales by product group by order size <100 10010509500 to 1000 21000 3494 437,728 36975 327,421 3255 33,309 36303 321,092 3.495 35,039 26266 222,944 2265 13,686 5,901 79,449 258 10.196 | _2252 __18.331. 12,767 130,048, 112,697 966,237 1D. ABC Information for Dillard’s, by Order Size S102 10010500 50040 Lodo 21000 4 12 8 9 4 104 185 7 sil 5188 $201 $2,747 3 60 63 820 E, ABC Information for Nordstrom, by Order Size <100 1000500 $00 t0 1000 21000 SI 118 28 B 361 1,488 916 6,719 $133 $181 $761 soi, 31 348 247 1,327 Jackets 177,850 79,569 27289 L340 1s4as 179039 13567 — Bus 405618 Toual 535,660 157958 75.163, 61,586 56335 56314 22.442 256291 1,221,749 Total 405618 394,049 287,744 101,301 33037 1,221,749 ‘Total 43 1.067 $3,147 946 oval 7240 9544 86,093 1,953 Toul 535,660 157,958 78,163, 61,586 56,335 56314 22,482 256.29) 1,221,749Sloan Styles 223 EXHIBIT 6 Unit Volume Data and ABC Information for Two Products, By Customer and By Order Size Unit sales of jackets by customer by order size nits S100 10040300 300 to 104 > 1000 Talbots 177,450 - 6,462 9,652 161,336 Nordstrom * 791569 1,182 91563 7,087 61777 Dillard's 27289 B 1474 1.447 24,295 Jill 1540 ~ 207 . 1333 Lands' End 1siaas 5 776 123348, Stein Mart 17,039 154 879 071 Onis 13,567 186 3.807 7079 Other 178, B19 1,899 __14°560 51,182 405,618 3,494 37,728 327,421 ABC Information for Jackets, by 100 10010500 $00 to 1000 1000 Total # Styles 101 156 31 90 398, # Shipments 372 2317 2,290 9,122 14,101 Net Sales S188 $2,215 sz i747 822/046 Contribution Margin 37 22 659 4977 6,295 Unit sales of tops by customer by order size Units <100 1000-500 500101000 > 1000 Talbots 28,871 = 281 588 28,002 Nordstrom 10,920 305 2,090 805 7,720 Dillard's 4352 - - - 4352 Jill 23133 166 1,600 3,094 18,295 Lands’ End - : : : - Stein Mart 2,340 - 606 : 1,734 Orvis 672 5 on : : Other 178 30.993 __1.794 __8.437 __1.4l4 __19.348 Total 101,301 2.265 13,686 5901 79,449. ABC Information for Tops, by order size s1MQ 1otios09 Sabin soda — 100 # Styles 10 25 # Shipments, 20 805 89 1,007 Net Sales S76 S413 $173 $2,047 Contribution Margin 16 80 41 568 133 2121 $2709 "705224 EXHIBIT 7 Breakdown of Selling, Production Support and General Expenses-1998, Selling Salaries (Note 4) Travel & Entertain. (sales) ‘Travel & Entertain.(quality contr.) Modeling Rent & phone (Note 1) Office expense Purchased samples Courrier services Advertising (Note 5) Production Support Salaries-Production Support Salaries—Fabric Purchasing Wages-Pattern Making Wages-Mark. & Grading Wages-Warehousing Saiaries-Trim Purchasing Salaties-Drivers. Wages-Shipping Vehicle lease Rent & phone (Note 1) Insurance Supplies Fabric and trim for samples Maintenance (Note 2) Depreciation General Salaries - CEO (Note 3) Salaries - office Rent & phone (Note 1) Legal fees Professional fees Insurance Office expense Telephone Computer Other TOTAL 1998 $1,508 170 100 38 253 30 35 252 246 $589 4.116 403 482 573 108 105 $12,342 (Note [Total space breakdown by function’ Selling 23%| | Production Support 70% ‘Sample Making 1% Purchasing 7% Warehouse (materials handling) 17% Production Support 18% Shipping 21% General 7%) INote 2 ‘Maintenance of space and equipment. {About 35% of equipment isin sample making area, |45% in shipping, and the rest. the warehouse. [Equipment maintenance is about 80% of total Imaintenance expense. Building maintenance is the other 20%. \Note 3 [The CEO spends about 65% of his time on direct customer \Service and about 35% of his time on management issues. INote 4 |Account executives, account assistants and designers ispend about 45% of their time on work related to the Inumber of styles being offered (selling support). The jother 55% is on work related to customer service. Within lany one customer, the customer service work relates best lo units for different products. 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