IMA The Association of EDUCATIONAL Case Accountants and Case Journal Study ima Financial Professionals in Business ISSN 1940-204X 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 share their interests. Because these specialty retail outlets have relatively little competition from online and discount Dan's Western Wear began its humble roots on Main Street retailers, western wear stores have enjoyed relatively high in Sheridan, Wyoming, where Thomas George, a Greek profit margins for retail businesses. If managed well, these immigrant, settled his family in 1919 and began a cobbler can be profitable stores. business that served ranchers, cowboys, and coal miners. Dan Joe West, a young entrepreneur who had worked at George, Thomas' son, was nine years old when they arrived Dan's Western Wear prior to going to graduate school for a in the United States and was soon active in his father's master's in business administration, saw an opportunity to cobbler business. Ultimately, he took over the business and consolidate western wear retail outlets to gain efficiencies. began to increase the store's inventory, creating the business Thus, he founded Consolidated Western Wear Retailers that is known today as Dan's Western Wear, which sells [CWWR) and began purchasing profitable western wear quality boots, work clothes, western apparel, and jewelry to stores, starting with Dan's Western Wear. He also assembled just about anybody. Dan believes that if clothes can hold up a management team to help him grow his business. As a to a dusty hard day's work, and look great at the same time, new store is purchased, Joe and the management team studyINTRODUCTION share their interests. Because these specialty retail outlets have relatively little competition from online and discount Dan's Western Wear began its humble roots on Main Street retailers, western wear stores have enjoyed relatively high in Sheridan, Wyoming, where Thomas George, a Greek profit margins for retail businesses. If managed well, these immigrant, settled his family in 1919 and began a cobbler can be profitable stores. business that served ranchers, cowboys, and coal miners. Dan Joe West, a young entrepreneur who had worked at George, Thomas' son, was nine years old when they arrived Dan's Western Wear prior to going to graduate school for a in the United States and was soon active in his father's master's in business administration, saw an opportunity to cobbler business. Ultimately, he took over the business and consolidate western wear retail outlets to gain efficiencies. began to increase the store's inventory, creating the business Thus, he founded Consolidated Western Wear Retailers that is known today as Dan's Western Wear, which sells (CWWR) and began purchasing profitable western wear quality boots, work clothes, western apparel, and jewelry to stores, starting with Dan's Western Wear. He also assembled just about anybody. Dan believes that if clothes can hold up a management team to help him grow his business. As a to a dusty hard day's work, and look great at the same time, new store is purchased, Joe and the management team study all the better. The company prides itself on quality clothes the store to learn how it is successful. Initially, they do not with good old-fashioned service. Customers are greeted at make major changes, keeping the same store name and the door and helped throughout their experience. A visit to encouraging the store to operate as before. Over time, Joe Dan's Western Wear is like a visit to an old friend. and the management team implement changes to improve Dan's Western Wear is typical of western wear retail profitability. Currently, CWWR owns 21 retail stores, and outlets. The industry is characterized by many independent Joe believes this is large enough to aggressively pursue regional shops. Frequently, these retail shops have been efficiencies from consolidation. 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 IMA EDUCATIONAL CASE JOURNAL 1 VOL. 10, NO. 4, ART. 3, DECEMBER 2017 02017 IMATHE PROBLEM d. Identify the best model, and explain why. e. Explain what the model means from an economic Each year Joe reviews the financial information for all the perspective. CWWR stores. This past year was a relatively good year; company profits were up despite the huge July Fourth fire 2. Use the model to make two recommendations to the in Las Vegas, Nevada, that shut down the store for four CWWRmanagementteamforimproving the efficiency of months and required replacement of all the inventory. Joe purchasing operations. did notice, however, that purchasing department costs varied a. Be specific with details of the recommendations. considerably between stores. The minimum was $575,000 b. Estimate the cost savings from the implementation of and the maximum was $2.2 million. This was perplexing, and your recommendations. he thought this might be an area where efficiencies could c. Consider secondary implications, quantitative and/or be achieved. Currently, each store has its own purchasing qualitative. department with full autonomy. In the western wear industry, d. Indicate how these changes (recommendations) should regional customers have regional tastes and desires. Local be implemented. 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 ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) discussed the purchase department cost problem and IMA", the association of accountants and financial professionals identified three potential cost drivers: merchandise in business, is one of the largest and most respected associations purchased, number of purchase orders, and number of focused exclusively on advancing the management accounting suppliers. Toverify these ideas, Joe contacted purchasing profession. Globally, IMA supports the profession through managers from three different stores who agreed that research, the CMA" (Certified Management Accountant) these were potentially good cost drivers and that no others program, continuing education, networking and advocacy of the were readily apparent. The managerial cost specialist highest ethical business practices. IMA has a global network of gathered data for the four variables from last year's financial more than 85,000 membersin 140 countries and 300 professional information and reported it in Table 1. The data was also and student chapters. Headquartered in Montvale, N.J., USA, entered into an Excel spreadsheet (see Appendix) by the IMA provides localized services through its four global regions: team's administrative assistant. The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org. REQUIREMENTSREQUIREMENTS Joe asked you, the managerial cost specialist on his management team, to examine the data and to recommend some courses of action to reduce purchasing department costs. Joe would like you to write a two-page memo (plus attachments) outlining your analytical findings as well as recommendations. This memo will be shared with the team before the meeting to discuss purchasing department costs. Use the following requirements as a guide: 1. Prepare a statistical analysis of the costs provided. a. Plot the purchase department cost vs. each cost driver (include these at the end of the memo as an attachment, one graph per page). b. Analyze the data for potential problems, correct data problems if necessary, and report any changes made. C. Use regression analysis to develop cost models for all potential cost drivers. IMA EDUCATIONAL CASE JOURNAL 2 VOL. 10, NO. 4, ART. 3, DECEMBER 2017Table1: CWWRPurchasing Department Costsand Cost Drivers Purchasing Store Location Dept. Cost (US$) Merchandise Number of Purchased (US$) Number of Purchase Orders Suppliers Sheridan $575,000 $47,239,000 1,708 61 Denver 1,226,000 102 364,000 2,519 95 Salt Lake City 1,710,000 100,162,000 2,506 139 Kansas City 381,000 95,760,000 1,719 91 Omaha 1,544,000 51,466,000 2,883 155 Milwaukee 794,000 50,631,000 647 75 Minneapolis 1,341,000 84,753,000 2,978 10 Phoenix 794,000 103,464,000 3,761 117 Las Vegas 2,216,000 16,162,000 2,584 73 Albuquerq 2,030,000 62 364,000 5,497 176 Tucson 1,338,000 65,635,000 4,347 130 Houston 856,000 88,524,000 2,878 52 ahoma 1,122,000 72,645,000 819 129 Tulsa 863,000 61,638,000 1,247 145 Dallas 1,085,000 105,666,000 2,162 141 San Antonio 952,000 59,437,000 2,822 105 Austin 1,134,000 38,542,000 5,115 51 El Paso 1,042,000 83,020,000 382 131 Nashville 1,634,000 36.322,000 5,293 172 Memphis 699,000 34,121,000 967 34 Indianapolis 875,000 31,920,000 2,425 48