Competing in Volatile Markets through Analysis of Agile Supply Chain. Case of H&M.

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1 Online available since March 2015 at (2015) Copyright ORIC Publications Journal of Human and Social Science Research; Vol. 06 (02), 2015, ISSN Competing in Volatile Markets through Analysis of Agile Supply Chain. Case of H&M. Almaz Sandybayev University of Mediterranean Karpasia, Department of Business Administration Nicosia, Northern Cyprus Received January 2015, Accepted February 2015 ABSTRACT Fashion industry is one of the fast developing and extremely popularized segment of economy. Market fashion industry is also called fashion-retail market with a total value in 2012 of more than 50 billion USD. The relevance of the topic of this article is caused by the growing attention to the fashion sector in the last years, especially to famous brands like New Yorker, Zara or H&M. More new fashion houses have set ambitious targets to speedy promotion of their brands to the market. Thus, the key idea of this paper is to estimate and element the different forms of H&M success through description of current gaps and obstacles in its supply chain. The methodology used is based on revision and critical analysis of the existing literature. This paper examines the impact of agile supply chain integration on the following critical parameters: integration, planning, workflow, and new business models. The general outcomes of the research prove that H&M success is based on the previous research studies by adopting integrated business approaches and benefits of supply chain integration, namely reduced costs, increased flexibility, faster response times, efficient and effective coordination methods. The review is a useful tool to consider supply chain from the perspective of agile supply chain and retailers planning to know more on H&M success in supply chain management. Keywords: Supply chain management, agile supply chain, H&M. Contents 1 Introduction Materials and Methods Description of Agile and Lean Systems The Specific Nature of Fashion Markets H & M Company s Case Financial Results Supply Chain Organization and the concept of H&M Strategy All rights reserved. No part of contents of this work may be reproduced or transmitted in any form or by any means without the written permission of ORIC Publications,

2 Journal of Human and Social Science Research / ISSN Results Conclusions INTRODUCTION Supply chain sustainability is dramatically recognized as a main frame of business value and an essential part of a robust corporate responsibility work. The globally changing and unforeseen conditions in the world marketplace appeal to a more genuine feedback from the organizations and participants in the supply chain. To stay competitive, sophisticated organizations endeavored to succeed larger allocation and partnership among supply chain partners in an approach called supply chain integration. Creating a system of effective management of the organization is one of the challenges facing by modern management. There is no universal solution for the creation of such control systems but there is a possibility of developing common principles. Some of the most advanced methods of constructing effective management systems include Supply Chain Management. Supply Chain Management (SCM) is the integration of key business processes, starting from the end user and covering all providers of goods, services and information. At its core, the supply chain is a sequence of suppliers and consumers: each link on its own level is a consumer of commodity and financial products or services to more senior management and a supplier for a lower level. Thus, until the final product is not received by the end user. At each stage of a product is added to a certain value. Currently, the emphasis in the interpretation of the concept of Supply Chain Management is increasingly shifting towards an expanded understanding it as a new business concept. One of the recognized American scientists in the field of Supply Chain Management, Lambert (2008) defines Supply Chain Management as the integration of key business processes, covering end users and screening all providers of goods, services and information that add value for customers and other interested parties. According to Villa (2001), SCM is defined as the management of different types physical, information and financial flows from the stage of raw material through the final product where material suppliers, manufacturers, distributors, and customers are connected. The execution of SCM within organization s' is understood as a firm's internal and external integration of business process with suppliers and customers in order to create a value and to improve the total performance of the chain. (Cooper et al., 1997; Lambert et al., 1998). This execution depends on utilizing the process internally through the organization and externally with suppliers and customers. In order to generate or adopt these processes and consequently undertake SCM, fundamental requirements which are called 'SCM Conditions' must exist within an organization and between participating parties (Mentzer et al., 2001). In the past two decades, supply chain management is a dynamic concept and at the same time one of the most common relationship management in the supply chain. Affecting the practice and theory of business is largely (up to the assumption of a paradigm shift competitive "new competitive paradigm is that compete with each other the supply chain, and the company's success will depend on how well it manages the relationships in the supply chain (Christopher, 1998). The concept of supply chain management itself has evolved dramatically and is now at the next stage of its development (Jüttner, Christopher, Baker, 2007; Mentzer, 2004). Studies over the subject of supply chain generally are focused on solving one of the two questions: "how to make supply chain management more frugal" (Lean) and how to make supply chain management more flexible" (Agile). "Lean" approach to supply chain management involves reducing costs by reducing the amount of inventory, the active use of the practice of supply "Just in time", reduce production and other operating costs through joint planning, redistribution of resources, responsibilities, risks, etc. in the supply chain which is an effective solution, for example, for standardized products. It is appropriate to the now classic example of a lean supply chain or lean management. This is an example of working with suppliers to the automotive manufacturer Toyota, the principle of which is to minimize the cost of storing materials and their delivery. "Flexible" or Agile approach to supply chain management, on

3 Journal of Human and Social Science Research / ISSN the contrary, is effective for fashionable products with high demand fluctuations (Fisher, 1997). "Flexible" supply chain, focused on what to respond quickly to changes in demand, both on quantitative and qualitative options (Christopher, 2004). An example of "agile" supply chain are companies Zara or H&M which work in a segment of "affordable fashion". Zara and H&M companies receive a strong competitive advantage not due to the fact that they can anticipate fashion trends and demand in each local geographic region but due to the fact that these companies are learning very quick to form a range without extra resources. The secret of the companies in a special link of the supply chain in the factory which is set to "rework" semi-finished products: paint, labels, and accessories - all what the fashion is changing very quickly. The rest of the clothes undergo less rapid change. By creating an effective "agile" supply chain and actually creating a segment of fast fashion, the companies have achieved leadership in the clothing market in many countries. Two approaches, the "lean" and "agile" in supply chain management have their priority goal an efficient service demand. However, these approaches are not able to solve the key problem of marketing to identify what is the value of a potential offer for a particular segment (or even for a specific user in the ideal case) and how to implement this proposal the most efficient way (Jüttner, Christopher, Baker, 2007). 2 MATERIALS AND METHODS The research examination employed within this paper is the survey method for the collection key data and observing H&M Company from different positions. 2.1 Description of Agile and Lean Systems Lean: - Forecast at generic level - Economic Batch Quantities - Maximize efficiencies Agile: - Demand driven - Localized Configuration - Maximize effectiveness Fig. 1. Lean and Agile Product Complexity

4 Journal of Human and Social Science Research / ISSN Fig. 2. The Agile Supply Chain It has been discussed (Harrison, Christopher and van Hoek, 1999) that an agile supply chain has a number of characteristics. Specifically the agile supply chain is: - Market sensitive: it is closely connected to end-user trends - Virtual: it relies on shared information across all supply chain partners - Network-based: it gains flexibility by using the strengths of specialist players - Process aligned: it has a high degree of process interconnectivity between the network members. Figure 2 suggests that four crucial dimensions considered may affect and create an agile supply chain for organizations competing in fashion industries. 2.2 The Specific Nature of Fashion Markets It is believed that the fashion industry is a collection of creative, economic and administrative activity which is a process that aims to design, manufacture, marketing and sale of fashion-products. The fashion industry can be divided into the following four segments: Primary segment is formed by manufacturers of raw materials, accessories, special equipment, software design process (CAD / Computer Aided Design; CAM / Computer Aided Manufacturing, and others); Secondary segment (fashion-business) is manufacturers of prefabricated fashion-product. This segment may include: 1. The direct producers, those usually large companies, self-producing all the elements of fashionproduct (from design to production) on its own production facilities. An example is the American jeans company Levi Strauss and Co). 2. Contractors - are companies engaged in the production of fashion-product developed by another organization. As a general rule, contractors have their own network of outlets. Organizations-customers in this case are involved in intellectually creative and management activities, as well as quality control of manufactured fashion-product. Cooperation with contractors is the most common among large companies in Europe and the United States. Market industries are diversified and usually located in China, Sri Lanka, Vietnam, Bangladesh, India, Pakistan. 3. Licensing Group is a list of companies that in addition to development and production of fashionproducts also involved in the sale of licenses for the use of its brand name to other less well-known companies. Thus, in 1970 the company Pierre Cardin has sold more than 800 licenses worth about one billion US dollars. Trading segment consists of retailers of fashion-product (retailers). This can be boutiques, specialty shops, shopping malls, factory stores, mail-order catalogs, online shopping and TV shopping. A

5 Journal of Human and Social Science Research / ISSN separate group among retailers is franchise companies receiving from the manufacturers the fashionproduct and the strategy of marketing communications, design of commercial premises, and the concept of visual merchandising and management principles within the company. Auxiliary segment is a specialized media (glossy magazines and television), advertising and PRagencies, fashion-consulting agencies and independent consultants. The essence of fashion-consulting is to collect and organize information related to current trends in the fashion-industry, prediction or generalization of the fashion trends for a particular product or industry as a whole. Examples are companies such as The Fashion Service (forecasting fashion trends), Stylists' Information Service (Market Analysis and forecasts for the various segments of fashion-business) and the International Color Authority (forecasting and color palettes of color). Thus, the fashion industry is a complex of self-regulating system consisting of dynamic interrelated segments which coordinates its effective operation and is ensures success of each other and the system as a whole. It is necessary to specify that fashion markets as typically exhibiting the following characteristics: short life-cycles, high volatility, low predictability, high impulse purchasing. 2.3 H & M Company s Case H&M (Hennes & Mauritz AB) is a Swedish company selling men's, women's and children's clothing, shoes and accessories under the same brand, as well as under several other brands. The company does not have its own factories and cooperates mainly with Asian companies. The quality of manufactured clothing is average but the prices are consistent and democratic. The company has more than 2,200 stores in 40 countries Financial Results The profit of the Swedish group of companies H&M in the third quarter of fiscal year excluding VAT increased by 21% and amounted to 38.8 billion kronor or ($ 5.4 billion). The total number of stores as of August 31, 2014 reached 3,341 (against 2,964 a year earlier) as of company s Annual Report (2013). Fig. 3. Expansion

6 Journal of Human and Social Science Research / ISSN Supply Chain Organization and the concept of H&M The principle activities of H&M is simple as the company is trying to sell fashionable and modern clothes at the lowest possible prices, while adhering to certain, though not very high quality standards. H&M is aimed at the mass market. H&M can be categorized as stores of fast fashion. The company's designers follow the latest collections of famous designers, isolated interesting trends and create a massive collection with the new trends. Thus, clothing is somewhat simplified but for the mass market it is not important. The range of shops is updated regularly. Interestingly, in contrast to Zara, H&M is very active and sometimes even aggressively advertise their stores and new collections. It must be emphasized that the company does not have its own production facilities. H&M is engaged only in marketing, fashion design, its sales and advertising. All garments are made on third-party companies located in Asian countries. About 30% of its merchandise is produced in China Strategy Entering new markets, H&M tries carefully studying by examining economic situation in the region, what are city's best places to start the promotion of the network, where and how best to sell, what are the trends, especially in the regulatory framework. Sometimes learning opportunities and risks require a few years however it is compensated by high profits and loyal customers. In addition to this strategy, H&M uses some more interesting approaches, allowing it to maintain market leadership. The widest range of fashionable clothes at affordable prices. H & M uses the minimum number of intermediaries, large volumes of purchases and invites best designers, fashion experts and tissues. Cooperation with the stars of fashion and show business. H&M has worked with Madonna, Roberto Cavalli, Karl Lagerfeld, Stella McCartney, Kylie Minogue, the Dutch designer duo Victor & Rolf. Distribution of tasks between departments in different countries. Swedish H&M office is primarily responsible for the marketing, advertising and design company and the office in Asia is mainly controlling a work cooperation with the manufacturers. Marketing channels. The most important distribution channels for H&M are stores. Annually their number is increased by 10-15%. In addition to shops, the company sells through catalogs and the Internet in Sweden, Norway, Denmark, Finland, the Netherlands, Germany and Austria. Efficiency tailoring. The company is constantly reducing costs, minimizes production costs, and seeks to reduce the number of intermediaries. Store location is the key to expansion. H&M prefers not to open a store until having an optimum space for that area. To create a boutique, the company conducts surveys of passers-by on the street, exploring nearby shops and traffic and correlates this information. The most important thing in each case is to choose the correct format. Growth of employees with the company. In H&M, 76% of management positions are held by women most of whom grew up in the company. The company employs the principle of job rotation. Thus, the key strategic goal of H&M is to increase the number of stores by 10-15% per year, while increasing sales on a comparable basis. The growth which will be fully self-financing and keep the focus on quality and high yield. For "five years" from 2004 to 2009, the company's sales including VAT increased by 88% and profit after tax by 125%. 3 RESULTS Supply Chain Management is the lucrative factor in fast fashion business. It transacts widely with suppliers and customers. As mentioned, the output of supply chain is not just a physical product but a combination of time, place, form and function of a product/service proposition (Cai-feng, 2009). The problems of supply chain management should be discussed at the highest level. Production planning, supply of raw materials and inventory management have to a part of supply chain management. Quality work and operating information system reflects the issues of quality supply chain management.

7 Journal of Human and Social Science Research / ISSN Defining the concept of SCM is still not settled and has many variations. A number of experts proposed to reduce the essence of simplicity SCM to the formula: the right product in the right place at the right time - with low costs and high service for the customer. It is obvious that this is not just about logistics. SCM is not just the problem of moving something from point A to point B. The purpose of the system is to create a value for organizations involved in the supply chain with a special emphasis on the end-user in the chain as discussed by Handfield and Nichols (1999). Supply chain management is the integration of key business processes, starting from the end user and covering all providers of goods, services and information that add value for customers and other interested parties. Definitely, the fashion industry where the companies are at the edge of competition try to look for new opportunities in supply and chain management. Thus, agility approach becomes a critical success that may be considered to be more proactive than reactive power to uncertain and unstable conditions of ever changing business environment. Cai-feng (2009) defines Agile Supply Chain (ASC) as a network s ability to consistently identify and capture business opportunities more quickly than its rivals do. Barnes and Greenwood (2006) definition can enrich it by adding: ASC is a quick response, describe shorter, more flexible, demand driven supply chains. 4 CONCLUSIONS This paper has provided a conceptual focus considering SCM as a vital resource affecting on fashion world. The part of the paper tried to discuss the volatility, agility and complexity considering the case of H&M retailer. Over the last years, H&M has been one of the companies introducing agile supply chain (ASC) in the fast fashion industry that resulted on its increased number of stores opened worldwide and a stable growing profit. This result can be explained by a high interaction level between consumers and designers, as well as a powerful strength to deliver the fashion products and items in a short and desired manner. A significant number of factors in H&M strategy also been put into the company s strategic pipeline. The agile supply chain of H&M is not only related to supply management, but also serves as an indicator that organization itself is agile and efficient. REFERENCES [1] Cooper et al., 1997 M.C. Cooper, D.M Lambert, J.D Pagh, Supply Chain Management- more than a new name for logistics. International Journal of Logistics Management, 8 (1)(1997) [2] Cooper, M. (1993). Characteristics of Supply Chain Management and the Implication for Purchasing and Logistics Strategy, International Journal of Logistics Management, 4 (2), pp [3] Fisher, M. (1997). What is the right Supply Chain for Your Product? Harvard Business Review, 3(2), pp [4] H&M Annual Report (2013). [5] Handfield, R.B. and Nichols, E.L. (1999), Introduction to Supply Chain Management, Prentice Hall [6] Jüttner, U. (2007). Demand Chain Management - Integrating Marketing and Supply Chain Management, Industrial Marketing Management, 36 (5), pp [7] Kaihara, T. (2001). Supply Chain Management with Market Economics. International Journal of Production Economics, 73 (1), pp [8] Li Cai-feng, (2009). Agile Supply Chain, Management Science and Engineering, 3 (2), pp [9] Villa, A. (2001). Introducing Some Supply Chain Management Problems, International Journal of Production Economics, 73 (1), pp [10] Christopher, M. (2004). Supply Chains: A Marketing Perspective, Oxford, [11] Harrison, A., Christopher, M. and van Hoek, R. (1999), Creating the Agile Supply Chain, Institute of Logistics & Transport, UK.

8 Journal of Human and Social Science Research / ISSN [12] Lambert, D. (2008). An Executive Summary of Supply Chain Management: Process, Partnerships, Performance, Jacksonville: The Hartley Press, Inc, [13] Mentzer, J.T. (2004). Fundamental of Supply Chain Management, Thousand Oaks, California: SAGE Publications, 2004.