The Current Facing Issue Levi’s Is the Investment Decision

Case Name:               Levi’s Personal PairTM Jeans

Student Name:                Ying Chen

Student Number:            100316853

Short Cycle Process:        

• Who are you: Financial analyst
• When does the case occur: 1995
• Where does the case take place: in the US

ISSUE 1: The current facing issue Levi’s is the investment decision

Return on invested capital (ROIC) is a profitability ratio which shows how good the company turning capital into profit. Levi’s cannot only consider the ROIC of the retail and wholesaler channel because that would not help Levi’s to make the investment decision.

ANALYSIS:

The pre-tax ROIC for Strauss in both channels is calculated as profit before tax divided total investment. As the result, the ROIC of the wholesaler channel is 31%, which is much higher than Levi’s store channel of 16% (Exhibit 1). Also, invested retail channels means almost three times as much as the investment of the wholesaler channel; however, the profit before tax of original Levi’s store channel is only 1.5 times of the wholesale channels. That means the retail channel has lower profitability compare to the wholesale channel. ROIC is an indicator which let company to analyze the company’s past return on investment. Levi’s can not use ROIC as the sole criterion for making investment decisions. Current social trend indicating that the customers pay more attention on more style, more colours and better fit. The position of Levi’s- market leader was under attack. Levi’s invested in retail channel to better communicate with customers and understand the needs of customers.

RECOMMENDATION:

Even though both channels provided higher ROIC, Levi’s cannot make investment decision only based on high ROIC. Instead of only care about profit, Levi’s need to consider its long-term development. Therefore, Levi’s should focus on customers need customers satisfaction and profit to develop its competitive advantage, which is good for its future prospects.    

ISSUE 2: Ineffective and inefficient value chain for Jeans sold through original Levi’s store.

Levi’s try to improve its value chain implement EDI. Even though EDI can reduce its lag time, it is still complex and slow. The inefficient and ineffective supply chain will eliminate the competitive advantage and negatively impact the long-term development of Levi’s.  

ANALYSIS:

Based on the case exhibit 3, after Levi’s implement EDI, the lag time can be reduced to 8 months for the normal supply chain for jeans sold through original Levi’s retail store. However, eight months are still slow for Levi’s. The long lag times will cause the jeans occupy the capital, take up the shelves which will increase investment on inventor and the selling, general and administrative expense (S, G&A); therefore, the profit of Levi’s will decrease. Moreover, customers now pay more attention to fashion so the jeans go out of style easily, which will cause a large amount of loss. Levi’s need to mark down its products to attract customers, which will decrease its profit. Since Levi’s partnership with CCTC and apply the new system, the value chain will become more effective and efficient. The raw material inventory should become complex and diverse in order to satisfy different customers’ needs. The finish good inventory will decrease because the company will produce the jeans after customers pay. As the result, the new system will improve the value chain of Levi’s, by reduce its S, G&A and lag time.