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CASE STUDY: ECOSNEAK - Sustainable sneakers for all

Ecosneak is a sneaker merchandising company that prides itself on its environmental credentials; it considers sustainability (alongside high quality) to be central to its business model. The company started operating three years ago in the Edinburgh market; from the start its strategy was to target the higher end of the market the quality and customer intimacy segments - in both the mens and womens markets. Ecosneak was set up two sisters Jenny and Jess Wilson; Jenny is responsible for purchasing and inventory management, while Jess looks after marketing; a year ago they recruited a former university friend of theirs, John Moto, to focus on financial matters and he is now a key part of the business, particularly as Stride has been facing more intense competition over the last year or so. John has consequently been asked to review the companys financial position in 2021 and 2022 (presented in Tables 1, 2 & 3) prior to analysing the impact of a range of possible decisions on revenues and profits.

Table 1: Sales, Revenue and Cost Data for Ecosneak (2021 and 2022)

Table 2: Selling Prices and Variable Costs

Table 3: Ecosneaks Share of Total Market (Quality + Customer Intimacy)

Q3: Constrained Optimisation and Scenario Analysis

Constrained Optimisation: John Moto believes that Ecosneaks decision making might benefit from more rigorous analysis. One potential technique that he recalls from his Business Management studies at university is Linear Programming. He thinks that the technique could be used in the analysis of the companys promotional campaign, but he has only a hazy recollection of what Linear Programming involves and how it could help Ecosneak.

Until now, Ecosneaks promotional campaign has been based largely on TV advertising, targeting both mens and womens markets, but this has not proved particularly effective. Jess, as marketing manager, has suggested that a combination of Billboards and Magazine advertising (in the World of Sports) may be a better approach in 2023.

Scenario Analysis: The management team of Ecosneak would like to separately model the first-year (2024) profit from entering the kids market segment (Option 2, above), using scenario analysis. Assume a notional fixed cost for the first year of 20,000 (120,000/6) and a selling price of 60 per pair. Assume the variable costs for the bicycle (Purchase and Distribution) can vary between 20 and 40, with a most likely value of 32 per pair. First- year demand for the bicycle is expected to range from 8,000 to 18,000 pairs, with 13,000 units the most likely level of demand for the sneakers.

Q3. Constrained Optimisation and Scenario Analysis 3.1 Explain to John what linear programming involves and the types of problems it can help solve. 3.2 You are given the following data by Ecosneak:

• Their annual promotional budget (of 300,000);

• The cost of each Billboard advert (2,000) and the cost of each Magazine advert (5,000);

• The estimated reach of each Billboard advert (20% of the mens and womens total market in 2022) and each Magazine advert (45% of the mens and womens market in 2022);

• There is a signed contract with World of Sports that Ecosneak will place at least 30 adverts per year in the Magazine

• There is a limit of 100 on the number of dedicated Billboard spaces available in Edinburgh for Ecosneak to use. Use this information to formulate Ecosneaks promotional campaign as a linear programming problem, but do not solve.

• 3.3 Use the information given in the case study to undertake a scenario analysis of first-year profits in the kids market. Set up the profit model and use this to calculate base-case, worst-case and best-case scenarios for first year profit.

• 3.4 Explain to Ecosneak management the value and limitations of using scenario analysis as a decision-making technique.

2021 Years Sales volume 29,832 Men* Women* 29,000 Total revenues (Men) 2,684,880 Total revenues (Women) 2,320,000 Total revenues 5,004,880 Cost of sales (Men) 1,193,280 Cost of Sales (Women) 1,102,000 Distribution Cost 294,160 Total Cost of sales 2,589,440 Gross margin 2,415,440 Marketing and Sales 400,000 General administration cost 1,400,000 Net profit 615,440 *Total Sales Quality and Customer Intimacy Segments 2022 25,500 30,000 2,550,000 2,100,000 4,650,000 1,020,000 1,140,000 277,500 2,437,500 2,212,500 400,000 1,500,000 312,500 Price per pair Purchase Cost Distribution Cost 2021 Men's Sneakers 90 40 5 2022 Women's Men's Sneakers Sneakers 80 100 38 40 5 5 Women's Sneakers 70 38 5 Men's Women's 2021 23% 20% 2022 18% 19% 2021 Years Sales volume 29,832 Men* Women* 29,000 Total revenues (Men) 2,684,880 Total revenues (Women) 2,320,000 Total revenues 5,004,880 Cost of sales (Men) 1,193,280 Cost of Sales (Women) 1,102,000 Distribution Cost 294,160 Total Cost of sales 2,589,440 Gross margin 2,415,440 Marketing and Sales 400,000 General administration cost 1,400,000 Net profit 615,440 *Total Sales Quality and Customer Intimacy Segments 2022 25,500 30,000 2,550,000 2,100,000 4,650,000 1,020,000 1,140,000 277,500 2,437,500 2,212,500 400,000 1,500,000 312,500 Price per pair Purchase Cost Distribution Cost 2021 Men's Sneakers 90 40 5 2022 Women's Men's Sneakers Sneakers 80 100 38 40 5 5 Women's Sneakers 70 38 5 Men's Women's 2021 23% 20% 2022 18% 19%