Harrington Collection Assignment #2 Alan Wei Kang Liu - 100196797 2/12/2012 Instructor: Daniel Fawcett MRKT 3240 S10
Table of Contents Projected Impact of New Product Line Launch Active-wear... 3 Potential Market Size for Better Active-wear... 3 Breakeven Units & Profit Margin, Wholesale... 4 Category & Line Forecast... 5 Market Growth of 2009... 5 Category Forecast... 5 Vigor Active Wear Product Line Forecast... 6 Manufacturing Plant Alternatives & Decision... 6 Advantages of Locating Manufacturing Plant in Mexico... 6 Disadvantages of Locating Manufacturing Plant in Mexico... 7 Target Consumer Profile... 10
Projected Impact of New Product Line Launch Active-wear Regardless of the potential market size that active-wear offers, the reaction of customers is crucial that determines the likelihood of launching a new product line. Previously, Harrington estimated that over 7.5 million active wear units had been sold in 2007, and this estimated number is expecting to double by 2009. Clearly, the size of the market is expecting to grow tremendously during the upcoming two years. Despite the fact that most of the active wear apparels being sold in the market today are made poorly in terms of product quality, etc., 95% of purchasers were satisfied with the products quality and durability. In other words, quality is not a concern for these customers who value price as one of their main purchasing criteria. Moreover, Harrington s survey had indicated 10% of the customers that purchase items from the price point ranging from $100 - $200 are very likely to purchase better quality and style active wears. On the other hand, a company s competitiveness is also determined by its ability to adapt to market and demand changes as the business grows. The results from interviewing focus group had also proved that a subset of loyal Harrington customers is no long interested in what the company used to offer. Instead, they are leaning toward a more casual wear trend at a more affordable price. Clearly, these are all facts that signal the company to adjust its current offerings. Base on these statistical facts, we can conclude that the market for active wear is favorable in terms of its size and consumer behavior towards a newly launch product category. According to the statistical facts, estimated sales units for active wear in 2009 doubles the sales volume (units) sold in 2007. (7.5 million * 2 = 15 million units). 40% of the estimated sales volume of 15 million units in 2009 is consisted with active wear products classified in the better quality category. Assuming Harrington is targeting consumers who favor these better quality active wear, the estimated market size (units) in this specific category is 6 million (15 million * 40% = 6 million units). In short, 6 million units out of 15 million units (estimated market size in units sold) are considered better quality active wears. Potential Market Size for Better Active-wear According to statistical research result, 10% of the customers from price point category range from $100 - $200 would buy a better quality active wear. Therefore, the estimated market size for better quality active wear is estimated at 22.22 million units (222.2 million units, year 2007 * 10% = 22.22 million units). Assumption: The calculation above is based on the assumption that sales from consumers who would consider buying a better quality active wear would not affect the sales of other product offerings in other categories. Due to the incomplete data given in relation to number of customers who purchased an item within the price point of $100 - $200, the previous calculation is calculated base on the assumption that every unit sold within this specific price point was bought by one customer. [See Figure 1 for details]
Figure 1 - U.S Women's Apparel Market Units Sold U.S Women's Apparel Market Units Sold Price Point 2005 % of Total 2006 % of Total 2007 % of Total % change 2005-2007 $200+ 138.3 10.76% 139.2 10.30% 143.2 9.80% 3.54% $100 - $200 219.0 17.04% 218.9 16.20% 222.2 15.20% 1.46% $50 - $100 438.0 34.08% 468.9 34.70% 511.5 35.00% 16.78% Under $50 489.9 38.12% 524.3 38.80% 584.6 40.00% 19.33% Total 1285.3 100.00% 1351.2 100.00% 1461.5 100.00% 13.71% Assumption: With the assumption that this new product line will be merged into the Vigor division, the current market share of 7% within this division can now be used as a forecasting tool to measure the profitability of this new product line (to existing customers). Assuming Harrington s Vigor division is able to maintain a market share of 7% within the better product classification (price point $150 - $500), 7% market share of the estimated total market size (units) for better quality active wear is calculated to be 1,555,400 units. (22.22 million units * 7% = 1,555,400 units) [See Figure 2 for details] Figure 2 Harrington Manufacturing Divisions Market Shares Harrington Manufacturing Divisions Division Product Classification Retail Price Range Market Share Harrrington Limited Designer $500 - $1,000+ 20% Sopra Bridge $400 - $800 5% Christina Cole Bridge $300 - $700 8% Vigor Better $150 - $500 7% Breakeven Units & Profit Margin, Wholesale Assuming Harrington Collection s Vigor division is able to maintain its 7% market share within its category, the potential sales in unit was estimated at 1,555,400 units without affecting its current sales within the Vigor division. Under this assumption, Harrington s Vigor division is able to generate revenue of $147.763 million. Profit before tax is calculated at $61.303 million. Profit margin before tax is calculated at 41.49%. In short, the overall product development strategy along with its estimated market share is sufficient and profitable for the Vigor active-wear product line to be launched. [See Figure 3 for details]
Figure 3 Breakeven Units & Profit Margin Direct VC Translated into "Unit" Cost Hoodie Tee-Shirt Pants $ 20.55 $ 7.50 $ 16.40 x.5 x1.5 x1 $ 10.28 $ 11.25 $ 16.40 Suggested Retail Price for Vigor products $ 100.00 $ 40.00 $ 80.00 Suggested Whole sale Price for Vigor products $ 50.00 $ 20.00 $ 40.00 Whole sale "unit" price of Vigor Active Wear $ 25.00 $ 30.00 $ 40.00 Indirect VC: Wholesale "unit" price $ 95.00 Total Variable Costs as % of whole sale price 9.09% Indirect variable costs per "unit" $ 8.64 Direct VC per "unit" $ 37.93 Indirect VC per "unit" $ 8.64 Total VC per "unit" $ 46.56 Contribution: Wholesale price per "unit" $ 95.00 Less total variable costs per "unit" $ 46.56 Contribution per "unit" $ 48.44 Breakeven: Fixed annual costs (operating & depreciated start up) $ 14,040,000.00 Contribution per unit $ 48.44 Breakeven units 289,846.1 Profit Margin: Year 2007 1,555,400 Units with 7% market share Revenue $ 49,875,000.00 $ 147,763,000.00 Less fixed annual costs $ 14,040,000.00 $ 14,040,000.00 less total VC $ 24,444,262.50 $ 72,420,201.70 Profit before tax $ 11,390,737.50 $ 61,302,798.30 Profit margin before tax (%) 22.84% 41.49% Category & Line Forecast Market Growth of 2009 Previously, Harrington estimated that over 7.5 million active wear units had been sold in 2007, and this estimated number is expecting to double by 2009. Under this assumption, the 2009 forecasted market size is calculated at 15 million sales units. Category Forecast Assumption: Assuming the estimated sales units for 2009 is for 2012, the projected sales forecast for 2012, 2013, and 2014 are as follows:
Compound annual growth rate = [(15,000,000/7,500,000)^(1/3)]-1 = 0.2599 The expected compound annual growth rate is 25.99%. Forecast of 2012 = 15,000,000 units Forecast of 2013 = 15,000,000 + 25.99%*15,000,000 = 18,898,500 units Forecast of 2014 = 18,898,500 + 25.99%*18,898,500 = 23,810,220.15 units Vigor Active Wear Product Line Forecast According to statistics given in the case, 7.5 million units were sold in year 2007. Sales unit for better quality classification in 2007 = 7.5 million * 20% * 7% = 105,000 units Market proportion for better quality active wear = 100% - 80% (moderate & budget classification) = 20% Market share = 7% Assumption: By year 2012, the sales volume for active-wear is expecting to double; estimating at 15 million units. In addition, 40% of the estimated sales volume will be captured by better quality active wear classification. To be consistent, assuming Vigor continue to capture 7% of market share within this specific targeted group. The expected sales volume for Vigor active-wear line as a percentage of the total market size for better quality classification is estimated at 420,000 units (15,000,000 * 40% * 7% = 420,000 units). Compound Annual Growth Rate = [(420,000/105,000)^(1/5)]-1 = 0.3195 The expected compound annual growth rate is = 31.95% Forecast of 2012 = 420,000 units Forecast of 2013 = 420,000 + 31.95%*420,000 = 554,190 units Forecast of 2014 = 554,190 + 31.95%*554,190 = 731,253 units Manufacturing Plant Alternatives & Decision Advantages of Locating Manufacturing Plant in Mexico 1. Having the company s own manufacturing facility in Mexico would offer the company with a lower cost of production which gives the company advantages such as the ability to offer a lower price and/or a larger contribution margin. These significant cost savings from labor costs, manufacturing costs, etc., together help the company to remain competitive in terms of price due to the fact that industry leaders are also moving toward this end.
2. Under the industry of U.S. apparel market, new products and product lines are constantly being introduced into the market in order to stimulate sales; as a result, the company s ability to response to demand changes has become extremely crucial for Harrington Collection. In regards to the need for a faster response time, it is more favorable for Harrington to locate its manufacturing plant that is closer to the U.S., Mexico in this case. 3. The rising shipping costs along with the labor costs that contribute to the overall costs of manufacturing these apparels have gone up over the years. This rise in costs has minimized the cost savings from moving manufacturing plants to China. Instead, the overall shipping cost may offset the higher labor cost in Mexico compare to China. As a result, Mexico may be a more favorable facility location alternative. Disadvantages of Locating Manufacturing Plant in Mexico 1. With this lower price product line, product life cycle is not as crucial as other premium brands that Harrington produces. Therefore, the cost of locating a manufacturing facility in Mexico may not be a relevant and favorable choice compare to other alternatives such as China. On the other hand, the significant amount of initial investment required for setting up Harrington s own production facility will eventually increase the financial risk of this investment. 2. Although Harrington would prefer not to outsource, the situation with a lower price product line that is targeted to price sensitive consumers may not be applicable with the strategies for other premium brands. The situation with this low price active wear apparel does not apply with the overall strategy that Harrington values with its other premium brands. From a marketing standpoint, benchmarking plays a key role in determining what types of features or quality standards those are suitable for customers. Currently, price sensitive consumers are satisfied with the quality and durability of the products that exist in the current market. Therefore, quality control shouldn t be one of the priorities for Harrington in considering the alternatives for facility location. Instead, the company should focus on the location s cost incentives. 3. Generally, Mexico has a larger pool of skill labors that are suitable for this type of production. However, the cost of hiring labors with greater skill sets tend to be higher. As a matter of fact, the skill set level require for this type of product facility is not as high as other more products such as the production for electronics. Therefore, the need for higher skill set labor is not mandatory. It is more reasonable for Harrington to consider hiring Chinese labors for their production facility. Assuming labor cost is a major determinant of profit margin for this project, the idea to locate the production facility to China may seem more relevant under this circumstance.
Figure 4 Projected Revenue & Profit for 2012, 2013, 2014 Direct VC Translated into "Unit" Cost Hoodie Tee-Shirt Pants $ 20.55 $ 7.50 $ 16.40 x.5 x1.5 x1 $ 10.28 $ 11.25 $ 16.40 Suggested Retail Price for Vigor products $ 100.00 $ 40.00 $ 80.00 Suggested Whole sale Price for Vigor products $ 50.00 $ 20.00 $ 40.00 Whole sale "unit" price of Vigor Active Wear $ 25.00 $ 30.00 $ 40.00 Indirect VC: Wholesale "unit" price $ 95.00 Total Variable Costs as % of whole sale price 9.09% Indirect variable costs per "unit" $ 8.64 Direct VC per "unit" $ 37.93 Indirect VC per "unit" $ 8.64 Total VC per "unit" $ 46.56 Contribution: Wholesale price per "unit" $ 95.00 Less total variable costs per "unit" $ 46.56 Contribution per "unit" $ 48.44 Breakeven: Fixed annual costs (operating & depreciated start up) $ 14,040,000.00 Contribution per unit $ 48.44 Breakeven units 289,846.1 Profit Margin: Year 2012 2013 2014 Revenue $ 39,900,000.00 $ 52,648,050.00 $ 69,469,035.00 Less fixed annual costs $ 14,040,000.00 $ 14,040,000.00 $ 14,040,000.00 less total VC $ 19,555,410.00 $ 25,803,363.50 $ 34,047,505.31 Profit before tax $ 6,304,590.00 $ 12,804,686.51 $ 21,381,529.69 Profit margin before tax (%) 15.80% 24.32% 30.78% Profit Margin for Manufacturing in Mexico Year 2012 = 15.80% Year 2013 = 24.32% Year 2014 = 30.78% EBT 2012 = $6,304,590 EBT 2013 = $12,804,686.51 EBT 2014 = $21,381,529.69
Profit Margin for Outsourcing to China Mexico 2012 2013 2014 Selling Price $ 95.00 $ 95.00 $ 95.00 VC Per Unit $ 46.56 $ 46.56 $ 46.56 Contribution Margin $ 48.44 $ 48.44 $ 48.44 Fixed Cost Per Unit $ 33.43 $ 25.33 $ 19.20 Profit Margin Per Unit $ 15.01 $ 23.11 $ 29.24 China 2012 2013 2014 Selling Price $ 95.00 $ 95.00 $ 95.00 VC Per Unit $ 23.28 $ 23.28 $ 23.28 Contribution Margin $ 71.72 $ 71.72 $ 71.72 Fixed Cost Per Unit $ - $ - $ - Profit Margin Per Unit $ 71.72 $ 71.72 $ 71.72 Assumption: Cost of shipping and handling is not included in the calculation as these data are not given. Furthermore, the whole sale price of $95 for outsourcing is also an estimate base on the whole sale price of Harrington if it was producing the product internally. These assumptions eventually limit the accuracy of the forecast. Conclusion Based on the calculation above, contribution per unit tends to increase over time as the company produces more units of goods in which it will eventually achieve economies of scale in the case of Mexico plant. With each additional unit being produced, the fixed cost per unit will decrease overtime which makes the profit margin per unit to increase on the other hand. In the case of outsourcing to China, the need for initial investment as well as the overhead costs associated with running the facility has eliminated. Profit margin per unit tends to be consistent at $71.72 at the whole sale price of $95 per unit. Additionally, the cost saving of up to 50% (assuming 50% for calculation) on variable cost per unit has also contributed to the significant amount of profit margin per unit. As a result, it would be more profitable for Harrington to outsource assuming the company desires an earlier return on investment. Also, the profit tends to be more consistent with a consistent amount of profit margin per unit, holding all else constant. However, it would make more sense for Harrington to continue locating manufacturing plants in Mexico if the market for better quality active wear continues to grow in the medium or long run. The reason for that is because it takes a longer time for Harrington to generate the same amount of profit from locating facility in Mexico than outsourcing production to China. However, the concerns for delivery time and quality control have been the critical for Harrington. With an well establish brand such as Harrington, it would be more beneficial for the company in terms of the
branding strategy and quality of products that it comes with the premium branding strategy. Therefore, I would suggest Harrington to locate its manufacturing facilities in Mexico as response time, quality control, delivery time, etc. are main competencies for the company. Target Consumer Profile Since Harrington has employed a system that helps to track inventory and sales information about its existing customer, it would be beneficial for Harrington to continue using this type of system for data gathering. The results of this type of system are quicker response to market demands, improve productivity, and shortening manufacturing cycles. Due to the fact that Harrington has nearly no experience in dealing with this type of lower end product and the lack of customer data base, there are certain aspects of customer data that Harrington would need to gather from sales and consumers. The Harrington Collections Group should consider the following aspects of consumer data: - Customers o This helps to measure the company (Vigor Active-wear product line) s ability to attract and retain customers. o The data gathering process should avoid doing double counting in counting customers who bought more than one product. In addition, detailed customer information should also be record. E.g. individual, household, transaction sales amount, etc. o Data should be collected within a time period. E.g. monthly, quarterly, semi-annually, annually. - Recency o It tracks the changes in number of active buyers o Measures the length of time between last purchase and recent purchase o The result of recency or number of active buyers can provide information to Harrington on how much of the sales increase come from active buyers. In fact, the ability to retain active buyers will generate a lot more profits/sales for Harrington compare to other less frequent buyers. - Retention Rate o Measures the company s ability to retain its customers and measure the rate of repeated purchases from same customer o This applies to existing customers o The cost of acquiring new customers is generally higher to the cost of retaining customers; therefore, a high retention rate would suggest that customers are satisfied with the products/services. Harrington should focus on increasing sales by encouraging more repeated sales.
These three metrics together are used to measure the performance result of a company and the activity/consumer purchasing behavior of their customers. Base on these numbers, Harrington will be able to forecast an appropriate production volume for each item and minimize the chances of having overstock or understock. - Customer Profitability o This allows the company to track which group of customers are profitable to the company and which are not o The company is able to allocate/focus its limited resources in retaining these most profitable customers in having repeated businesses o It is the difference between the revenue generated from a specific customer and the cost of maintaining a healthy relationship with such customer. o From calculating the customer profitability of each group, Harrington should prioritize these groups in terms of profitability then allocate resources in serving these customers with the best quality service. E.g. Recency of customers. Active buyers should deserve most of Harrington s attention in retaining sales from these customers. - Customer Life time Value o This is the technique/measurement tool in calculating the life time value of a customer, in which the maximum profitability of a customer that Harrington is able to generate o It represents the upper limit on spending to acquire new customers o Harrington should use its existing data base to calculate the customer life time value of its existing Vigor customers. With the result, Harrington can then focus on promoting the new active wear line to these most valuable/profitable customers with years to come. - Acquisition Vs. Retention Spending o Average Acquisition Cost to track the cost of acquiring new customers and to compare the cost to the value of the new customer o Average Retention Cost used to monitor the average spending on maintaining sales from customers o By comparing the two, Harrington can optimize on its mix of acquisition and retention budget. The result would suggest budgeting advices for Harrington in whether it is cheaper to acquire news customers or to retain them. All of these data can be obtain from point of sales. Harrington should train its employees in asking customers for their information during the checkout process. These gathered data can then be used to build customer data bases. When the data base is established, Harrington can then pull out relevant numbers in calculating all the metric results such as the ones mentioned above. On the other hand, Harrington can also implement incentives to customers who choose to enroll in this type of activities. As a result, relationship between customers and Harrington can be enhanced through these interaction and engagement in mailing out recent promotions, sales deals, etc.