Consolidated Western Wear Retailers: Regression Analysis to Understand Cost Drivers in a Purchasing Department Anne M. A Sergeant, PhD, CMA School of Accounting - Seidman College of Business Grand Valley State University INTRODUCTION Dan's Western Wear began its humble roots on Main Street in Sheridan, Wyoming, where Thomas George, a Greek immigrant, settled his family in 1919 and began a cobbler business that served ranchers, cowboys, and coal miners. Dan George, Thomas' son, was nine years old when they arrived in the United States and was soon active in his father's cobbler business. Ultimately, he took over the business and began to increase the store's inventory, creating the business that is known today as Dan's Western Wear, which sells quality boots, work clothes, western apparel, and jewelry to just about anybody. Dan believes that if clothes can hold up to a dusty hard day's work, and look great at the same time, all the better. The company prides itself on quality clothes with good old-fashioned service. Customers are greeted at the door and helped throughout their experience. A visit to Dan's Western Wear is like a visit to an old friend. Dan's Western Wear is typical of western wear retail outlets. The industry is characterized by many independent regional shops. Frequently, these retail shops have been in operation for many years and have a multigenerational, loyal customer base. Recently, the online western wear business has shown some growth, but customers are primarily interested in face-to-face shopping where they can feel the products, try them on, and visit with locals who share their interests. Because these specialty retail outlets have relatively little competition from online and discount retailers, western wear stores have enjoyed relatively high profit margins for retail businesses. If managed well, these can be profitable stores. Joe West, a young entrepreneur who had worked at Dan's Western Wear prior to going to graduate school for a master's in business administration, saw an opportunity to consolidate western wear retail outlets to gain efficiencies. Thus, he founded Consolidated Western Wear Retailers (CWWR) and began purchasing profitable western wear stores, starting with Dan's Western Wear. He also assembled a management team to help him grow his business. As a new store is purchased, Joe and the management team study the store to learn how it is successful. Initially, they do not make major changes, keeping the same store name and encouraging the store to operate as before. Over time, Joe and the management team implement changes to improve profitability. Currently, CWWR owns 21 retail stores, and Joe believes this is large enough to aggressively pursue efficiencies from consolidation THE PROBLEM Each year Joe reviews the financial information for all the CWWR stores. This past year was a relatively good year; company profits were up despite the huge July Fourth fire in Las Vegas, Nevada, that shut down the store for four months and required replacement of all the inventory. Joe did notice, however, that purchasing department costs varied considerably between stores. The minimum was $575,000 and the maximum was $2.2 million. This was perplexing, and he thought this might be an area where efficiencies could be achieved. Currently, each store has its own purchasing department with full autonomy. In the western wear industry, regional customers have regional tastes and desires. Local purchasing agents are thought to be best able to understand the desires of local customers and to meet those needs. On his management team, Joe has a managerial cost specialist with skills in data analytics. Together they discussed the purchase department cost problem and identified three potential cost drivers: merchandise purchased, number of purchase orders, and number of suppliers. To verify these ideas, Joe contacted purchasing managers from three different stores who agreed that these were potentially good cost drivers and that no others were readily apparent. The managerial cost specialist gathered data for the four variables from last year's financial information and reported it in Table 1. The data was also entered into an Excel spreadsheet (see Appendix) by the team's administrative assistant. #of Suppliers 61 95 139 91 155 75 # of Purchase Orders 1708 2519 206 1719 2883 647 2978 3761 2584 5497 4347 2878 819 103 Store Locaton Sheridan, WY Denver Salt Lake City Kansas City Omaha Milwaukee Minneapolis Phoenix Las Vegas Albuquerque Tucson Houston Oklahoma City Tulsa Dallas San Antonio Austin El Paso Nashville Memphis Indianapolis 117 73 Purchasing Merchandise Dept. Cost ($) Purchased (S) 575,000 47,239,000 1,226,000 102,364,000 1,710,000 100,162,000 881,000 95,760,000 1,544,000 51,466,000 794,000 50,631,000 1,341,000 84,753,000 794,000 103,464,000 2,216,000 96,162,000 2,030,000 62,364,000 1,338,000 65,635,000 856,000 88,524,000 1,122,000 72,645,000 863,000 61,638,000 1,085,000 105,666,000 952,000 59,437,000 1,134,000 38,542,000 1,042,000 33,020,000 1,634,000 36,322,000 699,000 34,121,000 875,000 31,920,000 176 130 62 129 145 1247 2162 2822 5115 382 5293 967 141 105 51 131 172 34 2425 48 REQUIREMENTS 1. Why would CWWR want to conduct regression analysis? How can the results be of value to the company? 2. 3. 4. 5. State the cost model and identify the components of the cost model (dependent, independent, slope, and intercept). The company has identified three potential cost drivers. Identify them and discuss whether you think the independent variables you identified are economically plausible. Plot the models and examine the data integrity of each model. Do you need to make any adjustments to the model before running regression analysis? If so, explain the adjustments. Run simple regression for each model. State the cost equation and comment on the goodness of fit and hypothesis test of parameters for each model. Which is the best model? Comment on its predictive ability. Explain what the model means from an economic perspective. Would a multivariate model improve the predictive ability? If so, state the cost equation for the best model. Examine your results and make two recommendations for improving the efficiency of the purchasing operations. Be specific. Estimate the potential cost savings for your recommendations. Can you think of other considerations that should be included in the analysis and recommendations? 6. 7. 8. Consolidated Western Wear Retailers: Regression Analysis to Understand Cost Drivers in a Purchasing Department Anne M. A Sergeant, PhD, CMA School of Accounting - Seidman College of Business Grand Valley State University INTRODUCTION Dan's Western Wear began its humble roots on Main Street in Sheridan, Wyoming, where Thomas George, a Greek immigrant, settled his family in 1919 and began a cobbler business that served ranchers, cowboys, and coal miners. Dan George, Thomas' son, was nine years old when they arrived in the United States and was soon active in his father's cobbler business. Ultimately, he took over the business and began to increase the store's inventory, creating the business that is known today as Dan's Western Wear, which sells quality boots, work clothes, western apparel, and jewelry to just about anybody. Dan believes that if clothes can hold up to a dusty hard day's work, and look great at the same time, all the better. The company prides itself on quality clothes with good old-fashioned service. Customers are greeted at the door and helped throughout their experience. A visit to Dan's Western Wear is like a visit to an old friend. Dan's Western Wear is typical of western wear retail outlets. The industry is characterized by many independent regional shops. Frequently, these retail shops have been in operation for many years and have a multigenerational, loyal customer base. Recently, the online western wear business has shown some growth, but customers are primarily interested in face-to-face shopping where they can feel the products, try them on, and visit with locals who share their interests. Because these specialty retail outlets have relatively little competition from online and discount retailers, western wear stores have enjoyed relatively high profit margins for retail businesses. If managed well, these can be profitable stores. Joe West, a young entrepreneur who had worked at Dan's Western Wear prior to going to graduate school for a master's in business administration, saw an opportunity to consolidate western wear retail outlets to gain efficiencies. Thus, he founded Consolidated Western Wear Retailers (CWWR) and began purchasing profitable western wear stores, starting with Dan's Western Wear. He also assembled a management team to help him grow his business. As a new store is purchased, Joe and the management team study the store to learn how it is successful. Initially, they do not make major changes, keeping the same store name and encouraging the store to operate as before. Over time, Joe and the management team implement changes to improve profitability. Currently, CWWR owns 21 retail stores, and Joe believes this is large enough to aggressively pursue efficiencies from consolidation THE PROBLEM Each year Joe reviews the financial information for all the CWWR stores. This past year was a relatively good year; company profits were up despite the huge July Fourth fire in Las Vegas, Nevada, that shut down the store for four months and required replacement of all the inventory. Joe did notice, however, that purchasing department costs varied considerably between stores. The minimum was $575,000 and the maximum was $2.2 million. This was perplexing, and he thought this might be an area where efficiencies could be achieved. Currently, each store has its own purchasing department with full autonomy. In the western wear industry, regional customers have regional tastes and desires. Local purchasing agents are thought to be best able to understand the desires of local customers and to meet those needs. On his management team, Joe has a managerial cost specialist with skills in data analytics. Together they discussed the purchase department cost problem and identified three potential cost drivers: merchandise purchased, number of purchase orders, and number of suppliers. To verify these ideas, Joe contacted purchasing managers from three different stores who agreed that these were potentially good cost drivers and that no others were readily apparent. The managerial cost specialist gathered data for the four variables from last year's financial information and reported it in Table 1. The data was also entered into an Excel spreadsheet (see Appendix) by the team's administrative assistant. #of Suppliers 61 95 139 91 155 75 # of Purchase Orders 1708 2519 206 1719 2883 647 2978 3761 2584 5497 4347 2878 819 103 Store Locaton Sheridan, WY Denver Salt Lake City Kansas City Omaha Milwaukee Minneapolis Phoenix Las Vegas Albuquerque Tucson Houston Oklahoma City Tulsa Dallas San Antonio Austin El Paso Nashville Memphis Indianapolis 117 73 Purchasing Merchandise Dept. Cost ($) Purchased (S) 575,000 47,239,000 1,226,000 102,364,000 1,710,000 100,162,000 881,000 95,760,000 1,544,000 51,466,000 794,000 50,631,000 1,341,000 84,753,000 794,000 103,464,000 2,216,000 96,162,000 2,030,000 62,364,000 1,338,000 65,635,000 856,000 88,524,000 1,122,000 72,645,000 863,000 61,638,000 1,085,000 105,666,000 952,000 59,437,000 1,134,000 38,542,000 1,042,000 33,020,000 1,634,000 36,322,000 699,000 34,121,000 875,000 31,920,000 176 130 62 129 145 1247 2162 2822 5115 382 5293 967 141 105 51 131 172 34 2425 48 REQUIREMENTS 1. Why would CWWR want to conduct regression analysis? How can the results be of value to the company? 2. 3. 4. 5. State the cost model and identify the components of the cost model (dependent, independent, slope, and intercept). The company has identified three potential cost drivers. Identify them and discuss whether you think the independent variables you identified are economically plausible. Plot the models and examine the data integrity of each model. Do you need to make any adjustments to the model before running regression analysis? If so, explain the adjustments. Run simple regression for each model. State the cost equation and comment on the goodness of fit and hypothesis test of parameters for each model. Which is the best model? Comment on its predictive ability. Explain what the model means from an economic perspective. Would a multivariate model improve the predictive ability? If so, state the cost equation for the best model. Examine your results and make two recommendations for improving the efficiency of the purchasing operations. Be specific. Estimate the potential cost savings for your recommendations. Can you think of other considerations that should be included in the analysis and recommendations? 6. 7. 8