08
MAR
2018

In the Headlines – March 9th, 2018

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Levi Strauss Re-Invents the Way Blue Jeans are Made

On a quiet street at the edge of San Francisco’s Telegraph Hill neighborhood is an 88-year-old red-brick building housing the Eureka Innovation Lab for Levi Strauss & Co., the 165-year-old inventor of the blue jean. Inside, there is denim everywhere. Jeans hang from hooks on the wall and lie in tidy grids on the concrete floor. They are draped over metal railings and across wooden tables. It is difficult to walk more than 10 feet without stepping over at least one pair of the iconic American creation, responsible for a global market that researcher Euromonitor predicts will be worth nearly $143 billion next year.

Levi’s Eureka Lab is, as its name suggests, committed to research and development for the privately held company, which counted $4.9 billion in revenue in 2017 and leads the world in jean sales. Indeed, much of the denim on display in the lab is in the form of prototypes for styles not yet on the market. But the latest innovation to emerge from this facility is not a clever take on cut or color. It is an entirely new operating model that further automates the jean-making process by eliminating many manual techniques and dramatically reducing the number of chemicals necessary to create the faded and worn finishes that many denim-wearers love. The key tools to this process are software and lasers. The result: A complete overhaul in the way Levi designs, makes, and sells its signature stuff. “It’s a total transformation of our operating model,” says Liz O’Neill, Levi’s chief supply chain officer. “An end-to-end digital environment that has huge implications for manufacturing, inventory management, sustainability, and ultimately how we sell.”

Levi calls it Project FLX, for “future-led execution.” There are three components. The first is a fully digital design process that allows Levi designers to sketch new finishing styles using high resolution tablet computers and software developed by the company in house. Previously available software was too clumsy to create the finely tuned designs needed for denim, making physical prototypes necessary. Levi’s new software is sophisticated enough to allow that prototyping to happen digitally and accurate enough to allow the digital file to be sent to a vendor for mass manufacturing. The company says this cuts design and development time in half, from months to weeks or days, for the finishing portion of jeans making. “The designers can use the tablet to create their design and see a photo-real image of a product that doesn’t exist yet,” O’Neill says. “They can play as much as they want. They can move holes around, make it dirtier or cleaner looking, move the whiskers”—the term for the light crease lines across the front pocket area—“up or down a half an inch.”

The second component is the laser. It may come as a surprise that the worn and artfully ripped jeans you bought at the store likely achieved that look through the manual labor of overseas workers. Yes, you read that right: In the 21st century, there are factories where muscled men and women brush and scrape at freshly dyed denim to give it a weathered patina. A chemical cocktail, one of thousands customized to the specific finish, further achieves the effect. “It’s recipe-based,” says Bart Sights, vice president of technical innovation at Levi and leader of the Eureka Lab, of the finishing process. “It’s a lot like production cooking, actually. You have experienced people who can look at a jean that’s 50 years old and draft a recipe that chains together manual and machine applications, 15 to 20 steps, that replicates that vintage look.”

Levi’s new process uses lasers made by a Spanish company called Jeanologia to finish the jeans in as little as three steps. Though the technology has long been used by the garment industry to burn visual effects into clothing, its use has been limited in scope and consistently augmented by manual processes. Levi uses it so comprehensively that finishing time for a pair of jeans drops from between 20 and 30 minutes to 90 seconds—a massive improvement. “That was the giant leap for denimkind,” Sights says. “To believe that you could do all of those different effects with a laser. Nobody ever believed that you could.” A demonstration of the technology at the San Francisco lab underscores the benefit as well as the spectacle. A Levi technician hangs a light pair of jeans, one of four “base” colors used, in the laser marking machine. He initiates the laser, which wipes across the garment several times, giving it a camouflage design, whiskers, and—with a flare for each instance—several holes. A wisp of smoke drifts upward as the laser finishes its run across the denim surface.

The final component of Levi’s new model is enabled by the first two: faster time to market. Though the blue jean originated as workwear, it is a trendy fashion item today. The staggering reduction in times to design and manufacture the product allows Levi to delay final style decisions and reduce inventory build-up. “It allows us to shift to a make-what-you-sell model,” Sights says. “Instead of making a bunch of stuff months and years in advance and trying to sell it, we’re able to see what’s selling and make accordingly.” In other words, if the company notices a shift in local consumer tastes, it can fire off a batch of new garb from a nearby factory and get product on shelves many months faster than the old way—a supply chain triumph given that Levi works two years in advance and uses more than 1,000 different finishes in a season, which lasts six months.

“One of the biggest challenges in the industry as a whole is to get closer to market,” says O’Neill. “Denim is one of the hardest products to shorten the lead time and still do it so it looks real.” Levi has begun piloting its new process with select vendors and expects to fully deploy it around the globe by 2020. For the 30 or so lab workers at Eureka, it is another successful idea generated in the idea factory. For Levi executives, it is the first real change to the way jeans have been made in more than a century. “It took huge change management in our company to go all in,” Sights says, rubbing his indigo-stained hands together, “Bravery and leadership.”

Citations

  1. http://for.tn/2F53lHl – Fortune
  2. http://bit.ly/2ovkKmf – Fast Company

Harvard Learns an Expensive Lesson about Investment Risk

Six years ago, Jane Mendillo, then head of Harvard’s endowment, spent a week in Brazil, flying in a turboprop plane to survey some of the university’s growing holdings of forest and farmland. That year, Harvard began one of its most daring foreign adventures: an investment in a sprawling agricultural development in Brazil’s remote and impoverished northeast. There, workers would produce tomato paste, sugar, and ethanol, as well as energy after processing crops. The profits, in theory, could outstrip those of conventional stocks and bonds and keep the world’s richest university a step ahead of its peers.

Harvard bet big in Brazil and lost. The university, which invested at least $150 million in the development, is now exiting. The venture contributed to the decision by its current endowment chief, N.P. Narvekar, to write down the value of its globe-spanning natural resources portfolio last year by $1.1 billion, to $2.9 billion. Harvard, which manages $37.1 billion, has said those investments produced strong returns but now face “significant challenges.”

Harvard made many mistakes over the last decade, according to Thomas Gilbert, a finance professor at the University of Washington, but almost all of them boiled down to a single miscalculation: the belief that its top money managers—who were paid $242 million from 2010 through 2014—were smarter than everyone else and could handle the risks almost all other endowments avoided. “They became loose cannons,” Gilbert says. “When you’re managing donor money, it’s appalling.” Harvard over the past decade ended June 30 posted a 4.4 percent average annual return, among the worst of its peers. It even lagged the simplest approach: Investing in a market-tracking index fund holding 60% stocks and 40% bonds, which earned an annual return of 6.4%. Some of Harvard’s blunders have been well-chronicled. Facing heavy losses after the financial crisis in 2008, Mendillo sold private equity stakes at deep discounts before they could recover. Her successor, Stephen Blyth, experimented with expanding the endowment’s in-house team of stock traders before retreating in the face of tens of millions of dollars of portfolio losses. Blyth stepped down in 2016.

But perhaps no bet damaged Harvard more than its foray into natural resources. The university invested in central California vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania. Harvard has been reevaluating and selling some of those investments, such as part of the Uruguayan plantation it sold to insurer Liberty Mutual last year. “The natural resources portfolio was supposed to be the crown jewel,” says Joshua Humphreys, president of the Croatan Institute, a nonprofit that focuses on sustainable capitalism. “But they were known for taking outsize risks, and those can cut both ways.”

Such investments have not always lost. Mendillo took the lead flipping U.S. timberland in the 1990s, delivering substantial profits when she worked for then-endowment chief Jack Meyer. Harvard similarly scored big gains when it bought and sold timberland in New Zealand in 2003. When Mendillo returned to Harvard after managing Wellesley College’s endowment, she tried for a reprise. This time she thought U.S. timber was expensive. Instead, Harvard could tap forestry Ph.D.s and other sharp minds to find opportunities in emerging markets, taking advantage of growing demand for scarce resources around the globe.

Mendillo saw these investments as decades-long wagers, which her board embraced. “Natural resources is our favorite area,” she told a July 2012 investor conference. At the time, Brazil’s economy was booming, and the government was pouring development money into the impoverished, rugged, semi-arid northeast. The university, working with Brazilian private equity firm Gordian BioEnergy, established a company called Terracal Alimentos e Bioenergia, according to tax filings and people familiar with the matter. Terracal planned to spend more than 5 billion Brazilian reals ($1.5 billion) on the agricultural complexes. The first development would transform thousands of acres around the remote town of Guadalupe on the Parnaiba River using modern irrigation technologies. By the time Mendillo stepped down as endowment chief executive officer in 2014, the economy in Brazil was slowing, and a government corruption scandal was deepening, spooking Harvard and other foreign investors.

The strategy paid off for one constituency: Harvard’s money managers. Alvaro Aguirre, who oversaw natural resources investments, made $25 million over four years, tax records show. His boss, Andrew Wiltshire, was paid $38 million over five years. Both have since left Harvard. Mendillo earned as much as $13.8 million in a single year. Narvekar, who took over in 2016, has decided to shift most of Harvard’s investments to outside managers. While considering further write-downs of natural resources investments, he has indicated that he may continue to hold some if they are a good value now. A group of alumni from the class of 1969 recently had a suggestion for Narvekar: Invest in index funds.

Citations

  1. https://bloom.bg/2CQgbrj – BusinessWeek
  2. http://bit.ly/2FQ4NyN – The Harvard Crimson

The Good News Is . . .

Good News

  • A measure of U.S. manufacturing activity increased faster in February, extending a growth streak that stretched into 18 months. The Institute of Supply Management’s manufacturing index jumped to 60.8 in February, up from the 59.1 reading recorded the month before. Economists from Reuters expected manufacturing growth to slip to 58.7 in February. A reading above 50 for the index indicates expansion in the manufacturing sector, and a reading below 50 signals contraction.
  • Analog Devices Inc., the leading global supplier of high-performance analog technology, reported earnings of $1.42 per share, an increase of 10.1% over year-earlier earnings of $1.29 per share. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $1.5 billion, an increase of 54.3%. Management attributed the results to strength in its business-to-business segments and expanding market share.
  • Amazon said it had acquired Ring, a maker of internet-connected doorbells and cameras, pushing more deeply into the home security market. The deal is worth around $1.1 billion. Ring is best known for a doorbell with a security camera inside. The device allows homeowners to monitor visitors at their front door through an app on their phone, even if they are not at home. Amazon has made home automation a major focus because of the success of its Echo family of products, which allow users to control thermostats, surveillance cameras and other connected devices using voice commands. Amazon’s Echo Spot device already works with Ring doorbells, allowing people to look at footage from the cameras on the Echo Spot’s screen. Buying Ring suggests that Amazon has more ambitious plans for the product than it could achieve through a technology partnership.

Citations

    1. https://bloom.bg/2eVhfSb – Bloomberg
    2. http://cnb.cx/2lwnm3s – CNBC
    3. http://bit.ly/2oL9VvT – Analog Devices Inc.
    4. http://nyti.ms/2FhovVZ – NY Times Dealbook

Planning Tips

Guide to Diversifying Your Fixed Income Portfolio

A 529 college savings plan allows you to save for your child’s or grandchild’s education with a savings plan or prepaid tuition plan and withdraw the funds tax-free when needed. There is no limit to the number of plans you can contribute to or the number of accounts you can be open for any child. Each state’s rules are different so you will need to do your homework. If you are already contributing to a 529 plan, with the reduced deductions in the new 2018 tax law, you may want to increase your contributions—or even create a second 529 account—to offset higher state taxes. If you have not yet opened a 529 account, this year’s important changes in tax and 529 regulations have made them an even more valuable option for parents (or grandparents) of school-aged or college-aged children. Below are some of the benefits of a 529 plan. Be sure to consult with your financial advisor to determine if a 529 plan is appropriate for your situation.

K-12 Tuition Can Now Be Funded With a 529 Plan – All 529 plans were originally created to let you to save and invest for your child’s college education while paying no federal tax on qualified withdrawals. The good news is this benefit has now been expanded: you will be able to withdraw up to $10,000 per year per student for elementary, middle and high school education expenses if your child attends a private or religious school. And, if you have already been saving for K-12 with a Coverdell Education Savings Account (ESA), you can roll over that account to a 529 plan without tax consequences.

Saving by Off-Setting State Taxes – The new 2018 tax law limits deductions for your state income and property taxes to $10,000, so you might find yourself paying more state tax this year. But if you live in one of the 34 states that offers a state tax deduction for contributions to a 529 plan, you can lower your state taxes by contributing more to your 529. In most states, you have to be enrolled in that state’s own plans to take the deduction, but several states, such as Utah, Vermont and Indiana, allow you to deduct contributions from any state plan. If you live in one of the several states whose 529 plans include state tax credits, you could also find yourself paying considerably less.

Enhancing the Benefits for Younger Children – A 529 plan allows “front-loading,” a term for making up to five years of contributions at once. This not only allows you to catch up for a child already in elementary or secondary school, it also allows you to maximize state tax deductions or credits. And anyone can make contributions to your child’s 529 plan. Friends and relatives can each contribute up to $15,000 per recipient. They can also front-load up to five years of contributions while maximizing their own tax savings. Additionally, if they make direct payments to services provided for beneficiaries’ tuition or medical expenses, these expenses would be tax-free, even though the costs surpass the annual gift tax exclusion.

New Benefits for Special Needs Students – The new tax law allows assets in 529 accounts to be transferred to ABLE accounts without any penalties as long as they are transferred by 2025. ABLE plans, named for the Achieving a Better Life Experience Act, are designed to provide tax-favored savings for people with disabilities without limiting their access to benefits such as Medicaid, Social Security disability insurance (SSDI) and Supplemental Security Income (SSI). The annual contribution cap for ABLE plans is $15,000, and an ABLE account can reach $100,000 without affecting SSI benefits. You can also make tax-free withdrawals from ABLE accounts when paying for expenses such as housing, legal fees and employment trainings.

Transferring Unneeded Funds – Given all the benefits brought by 529 plans, you might already have substantially contributed to an account. What if your child decides not to receive the planned education or is able to pay for it through scholarship? If you no longer need the account for the child it was created for, you can change the plan’s beneficiary to another family member, saving you the income tax on 529 earnings and the 10% federal penalty you pay if you withdraw money for non-educational purposes.

Citations

    1. http://bit.ly/2FjeswZ – US News & World Report
    2. http://cnb.cx/2DPAb2j – CNBC
    3. http://bit.ly/2oCIFAk – Investopedia
    4. http://bit.ly/2FizM8M – SavingForCollege.com
    5. http://bit.ly/2F53GtB – Forbes
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