Logistics Case Assignment: Vertigo
Vertigo is a menswear chain specializing in formal wear and suits, shirts, leisurewear and footwear targeted at the 35-55 years age group. Since its launch in 1962 the chain had been performing well with rising sales, profits and share price until 2004. Since then sales have stagnated, profit margins dropped by 40% and its share price has decreased by 25%. Vertigo’s market share has declined from around 13% to 8% mainly as a result of two of its major competitors, Bond and DJ, who have embarked on major expansion programs. Bond and DJ have gained competitive advantage over Vertigo in four ways:
1. Investment in a new generation of larger, ‘off-center’ stores. With around 250 square meters of sales area, they are roughly twice as large as Vertigo shops, almost all of which are in town centers.
2. Global sourcing. Bond and DJ now source respectively, 55% and 44% of their clothing from low labor cost countries. Imports from these countries represent only a quarter of Vertigo’s sales, though this proportion has been growing.
3. Extending the product range. Both of Vertigo’s main competitors have diversified their product ranges into leisure-wear and footwear and broadened their appeal to younger men, i.e. less than 35 years old. This has expanded their customer base, increased average expenditure per visit and made their offering more fashion- sensitive.
4. Overhauling their supply chain. Bond has enlarged its original distribution center (DC) from 8000 square metres (sq. m) to 12000 sq. m, while DJ has built a new 10000 sq. m. distribution centre. This has enabled the companies to increase the proportion of sales channelled through their DCs to 92% and 84%, respectively.
In mid-2010 Vertigo appointed a new Chief Executive Officer (CEO) to ‘stop the slide’ and ‘turn the business around within a five year period’. His initial strategic review identified logistics as a problem area and indicated that the company’s competitiveness could be significantly improved by restructuring the current distribution operation. At present Vertigo channels around 48% of its supplies through three warehouses, all of which are relatively small and built in the 1970s: London (2200 sq. m), Leeds (1400 sq. m) and Glasgow (1200 sq. m). All imported products have traditionally been stored at the London DC, though with the recent increase in sourcing from India and the Far East, this warehouse is working at full capacity and has struggled to cope with peak sales before Christmas.
In his summary report to the Board, Vertigo’s new CEO stated: “Our logistical system has simply not moved with the times. It may have been state-of-the-art back in the 1960s, but today it is a major liability. For decades we have been pre-occupied with the front-end of our retail operation, keeping our sales volumes up, and largely ignored the quality and efficiency of store replenishment. This will not simply involve improving the logistical support for our existing retail activities. These activities will also have to undergo radical change if we are to regain our competitiveness. It is now imperative that we re-engineer our supply chain. We will have to follow our competitors’ example in concentrating retail sales
in bigger outlets, buying as cheaply as we can in global markets and extending our product range. The intention is to source approximately a third of each range from within Europe and the remainder from the Indian sub-continent and South East Asia. This will pose a huge logistical challenge for the business.”
The CEO commissioned a survey to benchmark Vertigo’s retail and logistics operations against those of Bond and DJ. The seven tables on the next page summarize the main data to emerge from this survey.
You have been asked to prepare a report and analysis for a presentation to Vertigo and the CEO:
Your report should be no more than 5,000 words and make reference to the data below and appropriate literature and theory on logistics to critically discuss these issues. From a presentational perspective your report should:
1. Outlines the deficiencies in the company’s present logistics operation;
2. Proposes a new logistical system for the company which takes account of the wider changes that the chief executive outlines in his statement; and
3. Indicates what additional information would be required to formulate a detailed logistics strategy for the business.
From a presentational perspective your report should:
a) Be based on established theoretical principles of logistics and supply chain management;
b) Indicate any assumptions made in the course of your analysis and argument;
c) Explain what additional information you would require to be able to make firm recommendations on the redesign of Vertigo’s logistical system; and
d) Contain any appropriate tables or diagrams and a proper reference list. An executive summary and table of contents are not required.
BENCHMARKING DATA TABLES
Table 1: Sales data
annual sales (£ million) / % own label sales / net profit margin(% of sales) / annual rate of stock rotation
Vertigo / 71.4 / 20 / 2.8 / 7.0
BOND / 113.4 / 45 / 4.6 / 9.2
DJ / 105.0 / 52 / 4.1 / 8.4
Table 2: Percentage distribution of sales between product groups
Formal suits / Lounge suits / Formal shirts / Other shirts / Leisure-wear / FootwearVertigo / 52 / 30 / 12 / 4 / 0 / 2
BOND / 32 / 24 / 8 / 15 / 11 / 10
DJ / 28 / 26 / 5 / 15 / 18 / 8
Table 3: Numbers of shops and floor space
no. of shops / total shop floor space (‘000 square metres) / Conversion ratio1Vertigo / 126 / 15.4 / 72
BOND / 72 / 18.5 / 86
DJ / 66 / 17.9 / 84
1 sales area as % of total shop floor space.
Table 4: Number of shops in different locations
City centre / Out-of-centreVertigo / 95 / 31
BOND / 15 / 57
DJ / 26 / 40
Table 5: Distribution centre (DC) data
no. of distribution centres / in-house (I) orthird party (T) / total warehouse floor space (square metres) / % of supplies through DCs
Vertigo / 3 / I / 4800 / 48
BOND / 1 / T / 12000 / 92
DJ / 1 / T / 10000 / 84
Table 6: Average daily delivery frequency to shops
from company DCs / from suppliersVertigo / 0.4 / 22.5
BOND / 0.9 / 3.2
DJ / 1.0 / 4.3
Table 7: Product and supplier data
no. of SKUs stocked / product availability in shops / no. of suppliersVertigo / 1320 / 89.7 / 55
BOND / 1667 / 96.4 / 82
DJ / 1780 / 94.6 / 96