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George Soros

10/7/2011
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DEPARTMENT OF ACCOUNTANCY
UNIVERSITY OF ILLINOIS
MEMORANDUM
TO: George Soros, Fund Manager, Quantum Endowment Fund
FROM: Kevin Campbell, Steven Hollon, Zach Studnicka, Joon Hyeok Choi; Ashima Jain:
Section 116
DATE: 10/6/2011
SUBJECT: A critical risk factor at Gap, Inc.

INTRODUCTION
In order to analyze one of a risk factor that Gap, Inc possesses, we must look at its
financial status and how this particular risk factor, which is to be analyzed below, affects Gap,
Inc. From all of the risk factors, Gap, Inc.s critical risk to be taken seriously and analyzed is that
its products are subject to risks associated with global sourcing and manufacturing, including
increased product costs. This risk factor tends to occur due to independent third parties who are
responsible for manufacturing nearly all of Gap, Incs products and their leverage upon the
industry of which Gap, Inc is a part. The increase in price of the raw materials or any other items
that are used as the bases in making the final products affects Gap, Inc company significantly.

SOURCES OF UNCERTAINTY
Gap, Inc. relies on many third-party sources to manufacture their products, and this risk
factor is therefore caused by external forces. When these companies suffer increasing supply
costs, Gap suffers them as well. In their annual report, Gap, Inc. acknowledges that the costs for
their products have already risen, and they expect them to continue to rise. Due to higher costs,
manufacturing companies may suffer shortages in products, which may severely affect Gaps
outbound logistics processes. In the case of shortages due to an increase in demand, a new
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supplier may be needed. The report explains that if a new manufacturer is needed, it may require
time for training in quality checks and other standards that Gap holds its products to, or that there
may not be another supplier at all. Another uncertainty dealing with third-party sources is the
possibility of delays in shipment, manufacturing, or work strikes. If the third-party sources
cannot deliver Gaps products on time, it will directly affect their financial performance because
Gap may have to use faster and more expensive ways to transport the products on time.

POTENTIAL CONSEQUENCES
There are some serious potential risks to the Gaps supplies, costs, and prices. If they are
forced to stay with the same manufacturers and pay higher prices, that means higher prices for
their customers. Higher prices refer to not only cash itself but also the delayed delivery of the
items. These delays occurs due to the independent third parties who are responsible for
manufacturing Gap, Incs significant amount of products; they are responsible for transporting its
finalized products over large geographic distances. The availability of transportation means,
infrastructure congestion or other cost-related factors that rise whenever the independent parties
cannot resolve the issue, affect Gap, Incs financial performance negatively. In a declining
economy, even minor price changes could make the difference in losing customers who are
suffering financially. Additionally, higher costs for Gap Inc. means less profit for the company.
Not only would this harm employees and executives alike, but it is also a key interest for
stockholders.

CONCLUSION
After analyzing the risk factors of Gap Inc. and finding potential negative consequences,
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we strongly recommend that you should start thinking about searching for other new suppliers in
advance to compensate for the inevitable financial loss that occurs due to heavy amount of work
exerted on the independent third parties. With more than one independent third party working
with Gap Inc., if one party raises its prices or has delays in shipments, Gap Inc. will be able to
negotiate with the other independent third party to manufacture and ship its products without
having financial losses. A variety of manufacturers will eventually decrease the costs put into
transportation mediums. Another way to monitor this risk is to control the demand by limiting
the number of new stores opened. Prior to opening a store, deliberate planning should be done so
that stores are able to keep up with demand. If these precautions are taken in future planning,
Gap, Inc. will be better prepared to handle these risks to protect itself, its stockholders, and
customers.













George Soros
10/7/2011
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