INTERNATIONAL SUPPLY CHAIN MANAGEMENT BSB Written Examination Stimulus Material Case Study - Hennes & Mauritz (H&M)

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1 INTERNATIONAL SUPPLY CHAIN MANAGEMENT BSB Written Examination Stimulus Material Case Study - Hennes & Mauritz (H&M) Key facts: H&M was established in Västerås, Sweden in 1947 by Erling Persson and sells clothes and cosmetics around the world. Some brief facts about H&M: H&M offers fashion for women, men, teenagers and children The collections are created centrally by around 100 in-house designers together with buyers and pattern makers H&M also sells own-brand cosmetics, accessories and footwear The stores are refreshed daily with new fashion items Online shopping is currently available in Sweden, Norway, Denmark, Finland, the Netherlands, Germany, Austria and the UK H&M does not own any factories, but instead buys its goods from around 700 independent suppliers, primarily in Asia and Europe H&M has about 16 production offices around the world, mainly in Asia and Europe H&M employs about 76,000 people worldwide The turnover in 2009 was SEK 118,697 million Today H&M operates in 38 countries, with around 2,000 stores and has 76,000 employees all working to the same philosophy: To bring you fashion and quality at the best price Germany is the biggest market, followed by the UK and Sweden Organisation: Corporate management is based at H&M s head office in Stockholm. Stockholm is also where the main departments for design and buying, finance, accounts, expansion, interior design and display, advertising, communications, IR, HR, logistics, security, IT and CSR and environment are located. H&M has 16 country offices that are responsible for the various departments in each sales country. H&M also has around 16 production offices which take care of contacts with the approximately 700 independent suppliers that H&M works with.

2 H&M s Business Concept: H&M s business concept is to give the customer unbeatable value by offering fashion and quality at the best price. To be sure they can offer the latest fashions they have a design and buying department that creates their clothing collections. To ensure the best price by: having few middlemen buying large volumes having a broad, in-depth knowledge of design, fashion and textiles buying the right products from the right market being cost-conscious at every stage having efficient distribution H&M is driven by strong values such as simplicity, continuous improvement, team spirit, cost-consciousness and entrepreneurship. H&M s own designers interpret fashion trends and create fashions that are accessible to all. The stores are revitalised daily with new items. Quality is a central issue, from the idea stage all the way to the end customer. The quality work includes extensive testing, as well as ensuring that the goods are produced with the least possible environmental impact and under good working conditions. H&M does not own any production factories. Production of goods is outsourced to independent suppliers, primarily in Asia and Europe, through H&M s local production offices. Nor does H&M own any of its stores. Instead H&M rents store space from international and local landlords. Product range: H&M offers a broad and varied range that allows customers to find their own personal style. The collections are created with H&M s broad clientele in mind and the aim is to satisfy many different tastes and requirements. H&M is aimed at everyone with an interest in fashion. Customers should always be able to find clothes and accessories at H&M for every occasion. The collections are extensive and new items come into the stores every day. Women The women s collections are intended for fashion-minded women of all ages. The extensive range includes everything from modern basics to tailored classics, sportswear, maternity clothes and cuttingedge fashion. The collections are complemented by matching accessories,

3 underwear and shoes. Men The men s collections include everything from timeless tailored pieces to modern basics, leisurewear and seasonal fashions that reflect the latest trends. Matching accessories, underwear and shoes are also included in the men s collection. Children The children s range is divided into various concepts: 0 18 months, years, and 9 14 years. The collections are intended to be as fashionable as they are practical, durable, safe and comfortable. Divided H&M s Divided department offers fashion with a younger look. The range includes denim and street fashions for all occasions, from everyday looks to partywear, complemented by matching accessories and underwear. &denim The jeans concept &denim includes everything from traditional five-pocket jeans to trendy fashion jeans. Since 2007, a selection of denim models in organic cotton has been available. Cosmetics H&M s cosmetics department provides a wide range of makeup, skin care and body care products. The range is constantly updated with new colours, scents and products that reflect contemporary fashions. H&M does not permit animal testing of its cosmetic products either during the production process or in finished form. All suppliers must guarantee that their contents, packaging and labelling meet EU quality and safety requirements.

4 From idea to store: H&M creates and plans its collections centrally. In this work it is incredibly important to understand what customers want from the idea, through the creation of a new product to the customer buying it. H&M s designers, pattern makers and buyers agree on the trends that will inspire H&M s fashion in the coming season and try to find a good balance between modern basics, current fashions and high fashion. H&M outsources the production of the items to independent suppliers, mainly in Asia and Europe. Millions of items are involved and these are sent out to the stores via a number of distribution centres. Getting the right item to the right store at the right time is the key to H&M customers always finding something new and exciting. Idea and Design: H&M s own designers, pattern makers and buyers create the collections together. Taking the world as inspiration, styles are identified that are right for the times and trends are adapted to fashions that work. It is about creating a good balance between fashion, quality and the best price. The idea and design work is a continual creative process. To pick up on forthcoming trends H&M constantly monitors the world around it and draws inspiration from street fashion, films, travel and other cultures, the media, trend institutes, trade fairs and exhibitions as well as fashion history. The overall themes are often planned up to a year in advance, while the very latest trends are picked up at short notice. Always with a focus on the customer H&M s collections always emerge with the customer in focus. To meet demand from customers of all ages, each with their own particular style, H&M offers many different concepts. Trends and influences are adapted to styles and models that will suit the customers. The themes, colours, fabrics, silhouettes and garment types are decided in order to create the new season s collections. Planning the range: H&M builds up its range by putting together a balanced mix of modern basics, current fashions and high fashion within each concept. A number of different factors affect the final composition of the range. What sold well last season is combined with the coming season s big trends, colours and models. The aim is that the range should reflect what customers want at all times. Customer demand in different markets and in different stores determines the mix of the product range. Once again, the previous season s sales form a

5 good guide. The size of the stores, their location and whether it is a city store or a regional store also have a bearing on how the product range is distributed. High fashion garments that are produced in limited quantities, for example, will be sold only in stores in the big cities. Modern basics such as jackets, tops and trousers in a range of colours and in the current season s cut are ordered in larger volumes and distributed to more stores. Concept teams find the right merchandise mix, which have their own team of designers, buyers, assistants, pattern makers, a section manager and a controller. The number of people working on the teams varies depending on the concept. They are all united by their common interest in fashion and trends and by their understanding of what customers want. The teams produce the right mix of merchandise for each concept. Buying production: H&M does not own any factories. Instead, clothes and other products are bought in from around 700 independent suppliers, primarily in Asia and Europe. The buying department plans the range, but the practical aspects are then dealt with by H&M s production offices. The production offices, where most of the employees are drawn from the local population, keep in constant contact with the suppliers. The production offices are responsible for placing the order with the right supplier and for the items being produced at the right price, being of good quality and being delivered at the right time. They also carry out checks to ensure that production takes place under good working conditions. Ensuring the safety and quality of the items also takes place at the production offices and is the result of extensive testing, including checking for shrinkage, twisting and colourfastness, as well as checking that the chemical requirements have been met. The lead time can vary from a couple of weeks up to six months. It is important to know the right time to order each item. A short lead time is not necessarily best, since the right lead time is always a matter of getting the right balance between price, time and quality. For high-volume fashion basics and children s wear it is advantageous to place orders far in advance. Trendier garments in smaller volumes require considerably shorter lead times. Buying and production H&M purchases garments from around 750 suppliers: 60% of production takes place in Asia and the remainder mainly in Europe. The production

6 offices have a mediating function between the internal buying department and external suppliers, ensuring that: buyers orders are placed with the right supplier, the goods are produced at the right price and quality the suppliers conform to the company s code of conduct as for working conditions. Production offices also deal with sample garments and other checking and testing, which is a major factor in reducing lead times. The decision of which supplier is the right one, is not only a matter of cost-efficiency but also depends on other factors such as transport times, import quotas and quality aspects. To minimise risk, buying is carried out on an ongoing basis throughout the year. In recent years, H&M has reduced the average lead time by 15-20% through developments in the buying process. Flexibility and short lead times diminish the risk of buying the wrong items and allow stores to restock quickly with the best selling products. In technical terms, H&M operates with two main collections per year, one in spring and one in autumn. Within each season, however, there are a number of sub-collections so that customers can always find new goods in stores. The aim of the company is to find the optimal time (and supplier) to order each item. In this context, quick is not always the best while trendier garments require very short lead times, many fashion basics or children s wear may be ordered well in advance. For goods which are selling well, the company is able, on average, to get supplementary orders in a few weeks. Green logistics: The right product has to arrive at the right place, at the right time and at the right cost. Logistics is a challenge for every fashion company. In addition H&M demands the greenest possible transportation, which is in line with the ongoing ambitious work towards sustainability. One example is that the airfreight volumes have been halved in just a few years. H&M monitors the environmental performance of logistic service providers such as shipping lines and road hauliers. Goods sent from producers in Asia are transported almost exclusively by ocean. Within Europe, H&M s ambition is to increase the share of movements by rail over road. More than 90 percent of all transports are done via ocean, rail or road. Air is used only in exceptional cases when faster deliveries are required. The merchandise arrives at one of the distribution centres located in the different sales markets. After unpacking and allocation the garments are distributed to the stores. These centres are in some cases supporting the stores in a geographic region consisting of several sales countries. The individual stores do not have backup stocks; they are replenished as required

7 from central stockrooms. As soon as a product is sold a request is sent for replenishment. Every day, the H&M stores receive new goods. The keywords for H&M logistics are simplicity, reliability and transparency. Simplicity logistics must not become too complicated. Reliability the fastest is not always the best. Instead H&M prioritises the most reliable and greenest method. Transparency information exchange between all links in the logistical chain. Stores that inspire: The store is H&M s most important place for meeting customers, which is why the right store design is the be-all and end-all. Guidelines for store design and display windows are drawn up at Head Office. The store and its display windows are the most important communication channel H&M has with its customers, and that s why their design is so important. Either every other, or every three years, H&M creates a completely new interiors programme for a large number of stores. The starting point comes from a special, new store on an interesting market. Guidance and inspiration for customers The interiors programme has to work around different conditions and be adapted to suit. In this way each store becomes unique. When we set up new stores we often choose the premises because of its location not because of how it looks. The aim is for stores to be inviting and inspiring. They should appeal to a wide public so that everyone feels comfortable in them, whatever their background. The store s most important task is to create a clear framework for a range that is constantly changing. The aim is to offer a varied shopping experience throughout the whole store. The display window is perhaps the most important part of the store, as it is the first meeting the customer has with H&M. Displays in the windows and most important areas are changed every ten to 14 days, all over the world. The guidelines for the displays in more than 5,000 H&M windows are created in a large test store at Head Office in Stockholm. They need to inspire customers and emphasise the best of their collections. The clothes should look inviting and be displayed with accessories and footwear, sometimes combined in a way that customers themselves wouldn t have thought of. The layout of the display windows should suggest an association or a feeling, without taking focus away from the clothes. The store environment should be inspiring, but also make it easy for customers to find what they are looking for easily. That s why the way that garments are presented is crucial to making it simple for customers to differentiate between different styles or departments.

8 Online and catalogue shopping complements the stores For more than 25 years, H&M customers in Scandinavia have been able to shop from home through a catalogue, and since 1998 via the internet too. The strength is the freedom of choice, with customers being able to choose which sales channel suits them best at the time. Although the stores are H&M s main sales channel, catalogue and online sales strengthen H&M s profile and increase the service provided to customers, thereby making H&M even more accessible. In the future, customers from even more H&M countries will be able to shop via the internet and catalogue, despite the fact that the most of the expansion is happening through stores. Corporate responsibility: H&M s business concept is to offer customers fashion and quality at the best price. At H&M, quality is about more than making sure that products meet or exceed customers' expectations. It also means that they have to be manufactured under good conditions and that customers must be satisfied with the company. Taking responsibility for how operations affect people and the environment is also an essential prerequisite for H&M's continued profitability and growth. Some examples of how H&M act in a corporately responsible manner: Supply chain working conditions The choice of countries of manufacture places particularly high demands on H&M. They are aware of the risk of human rights violations and noncompliance with local labour law and internationally agreed labour standards. At the same time, they are convinced that there is an opportunity to contribute to better working conditions for all the hundreds of thousands of people who make their products. Code of Conduct Since H&M do not have direct control over this production, they have drawn up guidelines for suppliers, which together form a Code of Conduct. This Code of Conduct is based on the UN Convention on the Rights of the Child and ILO s conventions on working conditions and rights at work. It is there so that they can be sure that products are produced under good working conditions. The Code includes requirements concerning: working environment a ban on child labour fire safety

9 working hours wages freedom of association Corporate Responsibility Example: Better Cotton As we wrote in our Sustainability Update message , cotton continues to be a main focus for H&M. Because of the challenges we ve seen in connection to cotton production H&M took a decision to initiate an active and long-term work on improvements. We address the issue in several ways, but the two main areas are how we can seriously contribute to a more sustainable cotton cultivation, and also to find a method that can operate at a large scale when it comes to track cotton's origin, so that we can choose which markets we want to purchase from with and which we want to avoid. We are happy to be able to share some very positive progress within this area with you. The first harvest of Better Cotton; H&M s aim for all cotton used in our product range to come from sustainable sources by 2020 at latest, and Better Cotton Initiative (BCI) is our main effort to achieve this goal. The very first cotton to meet the Better Cotton criteria has just been harvested and will be available in our stores spring Furthermore, Better Cotton is traceable. We have been involved with the BCI since its inception in 2004, and are an elected member of the organisation s council. The BCI is a long-term initiative that develops and promotes good farm practices allowing more cotton to be grown while reducing water and chemical use. The system has established minimum environmental and social requirements for cotton growing. H&M is one of the first companies to support BCI, for example by investing in training farmers in Pakistan, India, Brazil and West Africa. Traceability project; This fall we have just initiated a traceability project with an external service provider in Bangladesh and China. The aim for this project is to find methods which can realistically be used routinely and on a large scale to trace the origin of cotton. Our goal is to make it a natural part of our work. We are very happy about our progress described above, but it is also important to understand that when it comes to cotton from Uzbekistan this issue must also be addressed on a political level. H&M has written several letters between , most recently on 22 June 2010, to the Swedish Minister of Trade, Ewa Björling, to urge the Swedish government to act upon the issue of Uzbekistan. The Swedish Minister of Trade has confirmed that they have raised the issue bilaterally within the EU.

10 Cotton from Uzbekistan H&M takes a clear stand against child labour, and does not accept that underage workers are used anywhere in our supply chain including cotton cultivation. One of our concerns is the discovery of forced child labour in cotton cultivation in Uzbekistan. Although we do not have direct business relations with cotton producers, and the routes of global cotton trade are often complex, we seeks to avoid the use of Uzbek cotton where we can. In the same instance, Uzbekistan is one of the largest cotton producers in the world and avoiding the use of cotton from there is a serious challenge. So far, we have taken the following steps to avoid Uzbek cotton in our products: In the spring of 2008, we received confirmation from the around ten suppliers in Bangladesh who have their own spinning mills and source their own raw cotton that they do not buy cotton from Uzbekistan. The majority of the cotton used in products made in Bangladesh originates from Uzbekistan. Therefore, our current efforts focus on Bangladesh. We have begun requesting that all our garment suppliers in Bangladesh declare the country of origin of the cotton, yarn and fabric used for each H&M order. We are investigating methods which can realistically be used routinely and on a large scale to trace the origin of cotton, to be able to promote or avoid certain markets. This year, we will initiate a pilot project with an external service provider. We aim for all cotton in H&M's range to come from sustainable sources by 2020 at the latest. We will never accept child or forced labour, and therefore, as long as the government of Uzbekistan continues to compel children as workers in its cotton fields, Uzbek cotton will not be an option for H&M or those involved in our supply chain. This case study is based on information in the public domain (collated and edited by Stephen Kelly) and used the following sources: