Case 2-2: The Levi's Personal Pair Proposal*

"I'll have my recommendation to you by the end of the week." Heidi Green hung up the phone and surveyed her calendar for appointments that could be pushed into the next week. It was a rainy afternoon in December of 1994 and she had yet to recover from the pre-holiday rush to get product out to retailers.

She had three days to prepare a presentation for the Executive Committee on a new concept called Personal Pair. Custom Clothing Technology Corporation (CCTC) had approached Levi Strauss with the joint venture proposal that would marry Levi's core products with the emerging technologies of mass customization. Jeans could be customized in style and fit to meet each customer's unique needs and taste. If CCTC was correct, this would reach the higher end of the jeans market, yielding stronger profit margins due to both the price premium and the streamlined production process involved.

On the other hand, the technology was new to Levi Strauss and the idea could turn out to be an expensive and time-consuming proposal that would come back later to haunt her, since she would have to manage the venture. The initial market studies seemed supportive, but there was no way to know how customers would respond to the program since there was nothing quite like it out there. She also was unsure whether the program would work as smoothly in practice as the plan suggested.

Company Background and History

Levi Strauss and Co. is a privately held company owned by the family of its founder, Levi Strauss. The Bavarian immigrant was the creator of durable work pants from cloth used for ships' sails, which were reinforced with his patented rivets. The now-famous "waist-overalls" were originally created over 130 years ago for use by California gold rush workers. These were later seen as utilitarian farm- or factory-wear. By the 1950s, Levi's jeans had acquired a Hollywood cachet, as the likes of Marilyn Monroe, James Dean, Marlon Brando, Elvis, and Bob Dylan proudly wore them, giving off an air of rebellious hipness. The jeans would become a political statement and an American icon, as all jeans soon became known generically as "Levi's." The baby boomer generation next adopted the jeans as a fashion statement, and from 1964 to 1975, the company's annual sales grew tenfold, from $100 million to $1 billion.³¹⁷ By the late 1970s, Levi's had become synonymous with the terms, "authentic," "genuine," "original," and "real," and wearing them allowed the wearer to make a statement. According to some who recognize the brand's recognition even over that of Coke, Marlboro, Nike, or Microsoft, "Levi Strauss has been, and remains, both the largest brand-apparel company in the world and the number one purveyor of blue jeans in the world."

While blue jeans remain the company's mainstay, the San Francisco-based company also sells pants made of corduroy, twill, and various other fabrics, as well as shorts, skirts, jackets, and outerwear. The company, with its highly recognizable brand name, holds a top position in many of its markets, and is sold in more than 80 countries. More than half of the company's revenue was from its U.S. sales; nevertheless, Europe and Asia are highly profitable markets. Latin America and Canada are secondary markets, with smaller contributions to overall profits. As the following graphic shows, apparel imports were increasing faster than exports during this period.

Import and Exports of Apparel (in billions of dollars)

PC 2-44 Business-Level Strategies Wholesale Original Levi's Personal Channel Store Channel Patr? Notes Operations, per pair Gross Revenue $35 $50 retail price with a 30% channel margin. Less markdowns (3) Avg. channel markdowns of $5; 60% bom by mig- Net Revenue Costs Cotton Mfg. conversion High labor content since all jeans hand-sewn. Wholly owned distribution network for OLS Distribution channel. Add $2 for warehouse to store. Total COGS Gross Margin SG&A Profit Before lax Investment, per pair Inventory 77 days for Levi's wholesale channel & 240 days for OLS stores to include retail inventory. Less A/P be Reflects 27 days of Accounts Payable. Accounts 51-day collection period for wholesale. Retail customers pay immediately Receivable Net working capital Factory PP&E NO= Reflects a sales to fixed asset turnover of 5.33. Distribution PP&E Doubled for OLS channel due to additional retail distribution investment (estimate). Retail Store 20 $2.4M/OLS store for 120,000 pairs sold/yr (est.). Total Investment $13 $38 Pre-tax return on 15% 8% invested capital 1 At $9, a little higher than Levi's overall 25% SC&A due to supply chain problems with women's jeans. The additional $10 reflects an average 22% store expense for retail clothiers (compact Disclosure database). Source: Adapted from Carr, 1998.\f1.4 1.2 1.0 0.8 0.6 0.4 1950 54 58 62 64 66 70 74 78 82 86 90 94 98Demand Forecasting Market Research Design Research Macro Demand Uncertainty INVENTORY FIX ED ASS EI'S Production Planning Raw Shipping by Distribution Ship to Material Production Factory Truck. Fleet Warehouse Stores Retail . . Warehousing E: Common Hub 8: Truck Outlets Logistics . Carrier Spoke Fleet Lead time Cycle time Demand Schedule Demand Schedule Micro demand uncertainty uncertainty uncertainty uncertainty uncertainty variation uncertainty and variation and variation and variation and variation RM. WiP E0. E6. E6. Inventory inventory Inventory lnvennory Inventory ~15 days -1 5 days ~50 days -100 days ~60 days 20.000 SKUs 20.000 SKUs 20.000 SKUs 20.000 SKUS 1.000 SKUs 4 Average 8-month Lead Time I Heavy Equip. Real estate Vehicles Real estate Vehicles Working Cutting (ED-ply) capital sewing. handling. packing and shipping Sales and Promotions Custom er C usto me r satisfaction? Repeat purchases? 54% of customers generate 901:. of sales ?6% of women not fully satised with the purchase Personal EDI link to Manufacturing Pack pair for Raw FedEx Pair kiosk the one pair of daily pickup material directly to in retail manufacturing logistics jeans* at factory via CCTC customer store by FedEx