This report concerns the cost structure of Primark and suggests implementation to improve the company’s current cost situation. We will first explore the theoretical costing principles namely target costing, kaizen costing, total life costing, total quality management and benchmarking. Then we will examine Primark’s targeted customer segments and their needs as well as the unique selling points. Then we will apply the mentioned concepts for possible improvement to Primark’s cost structure for Primark’s performance enhancement.
Targeting costing, which starts with the analysis of selling price, is the allowed amount of cost per unit that makes reaching required profit from that product attainable (California State University, Sacramento, n.d.). One advantage is that the company is guaranteed it will not make any loses as its production costs is integrated into the price. Moreover, inspection on the costs will be carefully considered by the target costing team to recognize any inefficiencies in the processes and provide recommendations on how to improve efficiency and reduce costs. Finally, staffs from different departments can better enrich their knowledge as they cooperate to finding ways to minimize the production costs (Bizfluent, 2017).
However, one disadvantage is that product quality, design and usability can be neglected since keeping target costs as low as possible is constantly at the priority, hurting the business in the long run. Moreover, because the target costing team is made up of representatives from different departments, it could be hard for them to find a unanimous voice on the product design. Last but not least, not having an assigned team leader can lead to insufficient performance from the whole team. (Accounting Learning, n.d.)
Kaizen costing is management oriented and revolves around setting up standards and continuously heightening those standards to achieve the business’s long-term goals, just as the name derives from a Japanese term for ‘continual improvement’ (Latest Quality, 2017). It helps businesses identify problems in the costing calculation process, minimize the need for inspection, utilize available human resource and their productivity to the maximum capacity, understand the specific needs of their targeted customers, and realize their short term and long term goals. This forces the business to constantly look for further improvements and build cross-functional teams as well as more sustainable relationship with its customers. (Hakma, n.d.) However, a couple of disadvantages include problems with adopting open style of communication and keeping the excitement in the work of the staff can arise (Kaplan Financial Knowledge Bank, n.d.).
Total Life Cycle Costing
Life-cycle cost is a tool to determine the most cost-effective option and says that costs do not happen only during the production phase of a product. This approach considers all cost that occur through all the production phases of a product which include pre-production, production and post-production. It believes that most of the costs to produce a product are incurred during its pre-production phase. Additionally, production set-up is during this phase, which includes purchase of equipment and materials, and could be expensive. Though LCC seems great some might argue otherwise because “(1) the operational life and operational profile of a system decades into the future is wildly unpredictable; (2) 20 or 30 years of theoretical sustainment cost overshadows current, real procurement cost; (3) life-cycle cost, by definition, will occur well beyond the life of an individual contract” (Glibreth, 2017).
Total Quality Management
Total quality management describes a management approach to long-term success through customer satisfaction. In a TQM effort, all members of an organization participate in improving processes, products, services, and the culture in which they work. (Learn About Quality, 2018). TQM is developed into four costs or stages: Prevention cost in which, investment in new equipment is handled, providing knowledge to the staff/employees so that there won’t be any quality issues, finally, Pre-production stage to avoid potential quality problems. Appraisal costs would include the procedures to check quality and Monitoring all phases from which the product goes through to be developed. Internal failure cost is procedures to deal with quality problems before the product passes to the customer, rectifying substandard products and cost of scrap arising. Lastly, external failure cost includes procedures that deal with quality problems after a product passes to the customer, rectifying quality problems and customer service.
Benchmarking is a tool in which managers can apply in their business strategy to achieve continuous improvement and competitive advantage against competitors. The main essence behind this strategy is the procedure of identifying the highest possible standards for procedures, services or products, and then making the necessary improvements to achieve that level of standards and quality, these are usually referred to as “best practices” (Elmuti & Kathawala, 1997, pp.229).
Benchmarking are divided into four types namely internal benchmarking, competitive benchmarking, functional or industry benchmarking and lastly process benchmarking (Elmuti & Kathawala, 1997, pp.231-2). Benchmarking allows companies to constantly measure themselves to the best in their industry and try to imitate its processes and styles, thus helping companies in determining what they can improve.
However, Benchmarking does have its limitations. Companies could potentially lose focus on customers and its employees, leading to the company’s overall deterioration in the long run by trying to achieve short run number goals.
Business Overview on Primark
Primark Limited, also known as Penneys in Ireland, is a global fast fashion retailer and is currently a subsidiary of Associated British Foods founded by Arthur Ryan. Primark currently operates more than 360 discount department stores and is fast becoming a top player in the retail market. Their three strongest current markets are the United Kingdom, Spain and Ireland. They also have a presence in Germany, Netherlands, France, Portugal, Belgium, Austria, Italy and the United States. The brands main selling scope focuses on the sale of clothing, footwear, accessories and household textiles. In the UK market Primark accounts for 7% of the clothing market by value, and its current biggest competitors in the UK markets are Next and Marks ; Spencer (Butler, 2018). Other than these two competitors, Primark also competes with other fast fashion brands such as Zara, H;M, Uniqlo and Gap.
Primark is one of the largest clothing retailers in Europe. It operates around 325 stores in different countries. The customers are fashion conscious individuals who are between 16 and 30 years old. The brand doesn’t have an online store, which is quite interesting because this means that customers need to buy the products in stores and this is one of Primarks strategies. Customers go to these stores and what they will find is a huge diversity of different very cheap items. This leads to that the customers is going to buy more because he is in the shop and sees all the discounts and cheap offers. This results in that he will buy more than just one item. PRIMARK wants not just to sell one product they are focussing on selling several products and it is just not viable to sell online. As shipping cost would be in excess of the product value. Part of the customer segment are people who are living on a low income but also people who could afford better quality but who just like to buy a lot of goods for just a for a small amount of money.
The needs of Primark’s customers are fashionable clothes for cheap prices and also other devices for a cheap price. The trends which Primark offers are coming directly from the fashion week and are therefore very popular. The product range is very broad, it includes womenswear, lingerie, childrenswear, menswear, footwear, accessories, beauty, hosiery and homeware.
Primark’s unique selling points
One of the unique selling points is that it offers a huge selection and a constantly changing selection with the newest trends, which means that all the trends which get introduced during the fashion week will be available some weeks later in the stores. Furthermore, the clothes and other devices are much cheaper than everywhere else because of their production which is in Asia at economies of scale. The company pays their employees just the minimum wage which leads to a very cheap production and in the end the product can be sold cheap too. In addition, the company doesn’t have any advertisement costs because they rely on the word-of-mouth advertising. This results in a bigger margin and/or lower selling price. Another unique selling point is the accessibility and the presence of the brand. We can find more than 300 stores across Europe. These stores are placed almost everywhere and also on high streets which is actually not common for this kind of price segment.
Suggestions and implementations
Primark does not have online stores yet according to Euromonitor, e-commerce rose 11.5% from 2005 to 2015 (Daneshkhu, S. 2016). So going online is an inevitable strategy from Primark if it does not wish to miss out.
If Primark plans to operates online platform and wants to achieve target costings, we suggest they improve efficiency in their existing cost pools and evaluate costs of additional online functions such as inventories, maintenance of online stores, deliveries service and so on. An effective implementation is to use Activity Based Costings as it provides more accurate total indirect costs of each cost pools. Thus, it allows Primark managers to identify excess costs or productive inefficiency and accordingly fix those so that Primark can spare up capital to invest in the transition.
Primark has been categorised as supplier of disposable fashion, meaning their customers tend to change fashion very quickly thus also buy very frequently (Morgan, L., & Birtwistle, G. 2009). We suggest Primark use Kaizen costing to decrease the number of units of each apparels produced in order to minimise excess units that are not sold out. To implement this, Primark should collect data from each stores to see which apparel incurs the largest excess units. Thus Primark can proceed to cut down that apparel’s units produced as well as other items of similarity.
Total Life Cycle Costing
We suggest Primark using TLCC by investing in advanced manufacturing such as Baxter learning robots or automation. This means Primark can automate their production phase, resulting more accurate inspection and lower defects in their clothes. This should theoretically shred labour costs in Primark’s factories. However, as we know that Primark employs cheap labor in sweatshop conditions, the reduction is likely insignificant.
Total Quality Management
Primark paid £6 million in 2014 to the victims of its factory collapse in Bangladesh, plus other non monetary costs such as bad PR and losing customers who are sensitive to sweatshop working conditions (Butler, S. 2014). It means Primark did not “get it right in the first time”. So we suggest Primark use TQM to improve not just its products, but its production plants and labors.
Primark should introduce regular inspections on the quality of buildings, machinery and environments of their factories. They need to identify inefficient use of energy, the age of the buildings and devise alternative plants should a factory is unsafe to work in.
This use of TQM should save Primark from the costs of rebuilding or relocation of factories, compensations to accident victims and PR costs.
We know that Primark is already leading the market in terms of price and values to customers, with products on average 5 times cheaper than their rivals’ (Hendriksz, V. 2017). So we suggest Primark uses internal benchmarking to identify the best performing stores geography-wise, thus helps senior managers decide better on where to divert investment to, and help identify stores that needs improvement.
To achieve this objective, we need to measure which stores earn the most turnovers.
We then rank the top 3 stores and incentivise other stores to achieve those targets.
However, we have to be cautious as some locations have intrinsically more customer traffic than the others, for instance, London’s Westfields compared to Aberdeen in Scotland. This mean achieving the benchmarking is impossible for some stores. Thus, whilst setting the targets, Primark need to consider customer traffic in terms of locations as well.
Primark is already a leader in cost and productive efficiencies. Many tactics such as material bulk purchases, uses of cheaps hangers or making products shelf-ready to minimise transports are already done. Yet, we believe Primark still can apply the costing principles above to improve their future plans and minimise non monetary costs such as PR and labour welfare.
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