Backpack

Boutique
Outsourcing, Offshoring
and Mass Customization

Case Study – Schulich Case

Competition

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Read me - before you
get started…
Provided in the following pages is a short case study describing a problem like the types solved by
consultants in the KPMG Advisory practice during a client engagement.

Using the information and data provided, you are asked to prepare a presentation that will be
interlaced with questions from senior KPMG professionals.

To help you focus on your analysis, we recommend you consider the following in solving the
problem:

• Establish a clear approach to structure your analysis

• Identify key issues and develop an action plan for next steps
• Support that approach with quantitative and qualitative evidence
• Note all operating environment assumptions along with other assumptions that are taken to
solve the case study

It is recognized that candidates from different backgrounds will have different approaches in
structuring and analyzing the case and as such, each candidate is encouraged to focus on their
strengths and unique competencies when working through the case.

Best of luck – Go!

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Company Background
Backpack Boutique, a pioneering fashion accessories company, emerged onto the scene in 1989
with a distinct mission to redefine the backpack industry. Established in Toronto, Canada, the
company swiftly made a mark by producing local, high-quality, and fashionable backpacks that
combined style, functionality, and affordability in a unique blend. The founders of Backpack
Boutique recognized the need for a backpack that seamlessly blended into the urban lifestyle,
providing not just utility but also a fashion statement. From the outset, the company's core values
were deeply rooted in the principles of lean manufacturing and mass customization.

• Lean Manufacturing: Backpack Boutique stands as a trailblazer in implementing lean

manufacturing practices within the fashion accessories sector. Embracing the principles of
lean production, the company has placed a substantial emphasis on eliminating waste and
enhancing product quality. This approach involves adopting smaller batch sizes,
optimizing production flows, and meticulously managing resources to deliver a superior
product to its customers. Backpack Boutique has transformed the traditional backpack
manufacturing process by incorporating lean principles at every stage. By focusing on
efficiency, waste reduction, and continuous improvement, the company has not only
reduced its environmental impact but also improved the overall quality of its products.

• Mass Customization: Backpack Boutique has effectively harnessed the power of mass
customization to cater to the diverse preferences of its customer base. Through this
innovative approach, the company combines the efficiency of large- scale production with
the personalization of bespoke craftsmanship. Customers can choose from a wide range of
design options, materials, and features to create a backpack that resonates with their
individual style and needs.

Over the years, Backpack Boutique has garnered a reputation for delivering backpacks that are not
only functional but also express a sense of fashion and identity. The company's commitment to
providing stylish, locally-made backpacks at affordable prices has resonated with customers,
positioning Backpack Boutique as a leading player in the fashion accessories market. With a
legacy spanning decades, Backpack Boutique continues to evolve, staying true to its roots while
embracing innovation. The company's dedication to lean manufacturing and mass customization
remains unwavering, driving its continued success in delivering exceptional products that combine
fashion, quality, and value for its customers.

Operating Model
The manufacturing plant for Backpack Boutique in Toronto has 40 employees, including 30 that
work in production and 25 sewers that work an 8-hour shift. The employees operate in work cells of
5 employees to manufacture bags from start to finish to fill individual

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customer orders (batch size of 1 bag). Backpack Boutique follows a delayed differentiation
process flow.

Delayed differentiation is the process whereby the assembly line is generic until later in the
production process where the item is differentiated into specific configurations after customer
demands are known. Therefore, Backpack Boutique pre-assembles certain parts of their products
(i.e., popular handles), but most of the assembly occurs after they receive a customer order.

All employees at Backpack Boutique are trained to manufacture bags from start to finish. The
employees follow a ‘bump back process’ to fill each order. Once the last person in the assembly
line is finished a bag, they ‘bump back’ to the next-to-last position and all other employees bump
back a position, so that the first person in the assembly line can start on the next customer order.

Backpack Boutique has a highly customizable production process. Custom orders are identified
in the production process with a printed label on the bag. The company’s ‘Build your own bag’
feature on the website allows customers to configure and order individual bags, including
different colours, panel designs and various other options. Backpack Boutique offers three
different colours at no extra cost and charges an $5 for additional non-standard colours.

Backpack Boutique operates five retail channels, including domestic, international, ecommerce,
corporate and other. Table 1 displays the demand and revenue information for Backpack
Boutique’s retail channels. The channels differ in pricing and waiting time to the customer.
Delivery time for e-commerce is 2-3 days, 2-3 weeks for traditional domestic and international and
4-6 weeks for corporate. All bags are produced on the same assembly line, with e-commerce orders
being given priority, followed by traditional domestic and international, then corporate. The
assembly line operates at 100% utilization; however, Backpack Boutique estimates that labour
would be 10% lower if the line was optimally configured for the traditional channel, and 15%
higher if it were configured for e- commerce. The company’s financial statements can be found in
Table 2 and Table 3.

Challenges
Backpack Boutique is experiencing increasing pressure on their margins, as many of their
competitors have offshored their production process in recent years to realize cost savings. The
company wonders if they must consider offshoring the manufacturing process to stay competitive
in the market.

Offshoring operations would require Backpack Boutique to visit suppliers frequently; this would
require monthly and costly visits to maintain an effective relationship and ensure it is meeting the
company’s standards of quality.

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If the company were to offshore its operations, a finished bag would have to be shipped from the
offshore site to the plant in Toronto. A shipping container would cost $1 per bag by ocean with a
4–6-week lead time, and $15 per bag by air freight with a 2-3-day lead time. For Backpack
Boutique to ship from Toronto to the customers, it would cost an additional $3. Furthermore, it was
possible that the offshored site would only accept monthly orders, with a 2-3-month lead time.
Table 4 demonstrates a cost comparison between the current manufacturing plant in Toronto and
the offshore site.

Moving Forward
Backpack Boutique, a Canadian-based company, is confronted with a range of complex challenges
as it considers potential shifts in its manufacturing and outsourcing strategies. These challenges
have significant implications for the company's operations, cost structure, and customer
satisfaction:

o Should Backpack Boutique outsource some, or all of its production? If the company
decides to outsource, what will they do with the current manufacturing plant in Toronto?

o What are the potential benefits and drawbacks of outsourcing production for Backpack
Boutique? How might the need for regular visits to maintain quality affect the company's
overall operational costs?

o How might Backpack Boutique ensure that its decision-making process aligns with its core
values, while also addressing the challenges posed by global manufacturing trends?

o What strategies could Backpack Boutique employ to mitigate the challenges of longer lead
times, potential inventory overages, and the risk of unsold inventory?

Exhibits

Backpack Boutique -
Exhibits .xlsx