Emile Thomachot ID Number: 73940271 Erasmus Student Year 2008/2009 8267 Words Agile and Lean Supply Chain in Fashion Retailing PER/ Project Miss Omera Khan, Supply Chain Management teacher
Table of Contents Introduction... 3 Fashion Retailing Area... 4 1. Introduction... 4 2. Organisation... 4 3. Specification in Fashion Retailing... 5 4. The Environment of Fashion Retailing... 6 Textile industry in a crisis context in 2008 2009... 7 Fashion Supply Chain Management... 9 1. Introduction... 9 2. The key elements in a supply chain... 10 Mix Agile and Lean Supply Chain... 12 1. Lean and Agile Supply Chain... 12 2. The integration of agility in the supply chain... 13 3. Mix lean and agile to create an hybrid supply chain... 14 Case studies... 17 New Look... 17 H&M... 21 Case Studies Comparison... 24 Conclusion... 25 2
Introduction Fashion retailing has to answer to a wide range of issues. Indeed customers expected ever more in product availability, in broader assortments, in trendy designs and in delivery time. It is very hard for retailers to give every times an efficient answer because they cannot rely solely on pushing sales up every year to sustain profit growth especially when economy is not going very well. One of the solutions is provided by the use of an efficient and modern supply chain management. Innovative supply chain is able to reduce costs and increase the customer satisfaction. Some methods are putting forward to develop innovative supply chain approaches for fashion retailing. Quick response solutions are frequently used, these systems offer advantages at reducing leading time, lowering inventory cost and maintaining or even increasing product availability. Quick response programs have received enormous attention and many retailers have improved their operations with a lot of success. Other methods have been explored as the concept of risk pooling and cross-docking. The just-in-time delivery is restrictive because it obliges suppliers to deliver ready merchandises to retail stores following the retailers schedules. Supply chain has to be very reactive and aware with consumer demand. The project will present the fashion retailing area in a crisis context with the design of its reactive supply chain. Two case studies will illustrate the concepts. 3
Fashion Retailing Area 1. Introduction Retailing has become a significant force during the past century. For example it represents more than 200 000 companies which represent around 10 percent of the workforce in UK (Broadbridge, 1998). In the clothing and footwear area the consumer spending increased from 34,849 in 1999 to 39,452 in 2003 (Retail Pocket Book 2005). The fashion has steadily increased. Retailers have grown, first at home and then abroad to become some of the world s largest companies and in some cases exceeding manufacturers in terms of global reach. In the twentieth century variety store appeared in the UK. From 1920 to 1939 the number of such outlets increased from 300 to 1200. The characteristics of these shops are different in three ways and contributed to its popularity to the end of the last century: Display The customers were invited to look around in the shop. Low price Discounts and low prices were clearly indicated at the point of sale. High level of self service The customers were not expected to be served but left to shop by themselves among the rows of merchandise. After the Second World War multiples retailers continued the process of consolidating their national market but increasingly turned to foreign markets by granting franchises or acquiring existent companies. Retailers such as Carrefour or Benetton have competed in many national markets and earned an important proportion of their sales and profits from foreign outlets. 2. Organisation The retail system uses an organisation which consists to sell good directly to the ultimate consumers. It plays an important role because retailing involves all the business activities. Manufacturer Wholesaler Retailer Consumer The Traditional Process of Distribution of Goods Since retailers sell goods and services only in single units, the retailers customers are the ultimate or final consumers who buy products or services for their own use and not for resale to others; this differentiates retailers from manufacturers and wholesalers (Retailing, Tony Kent and Ogenyi Omar, 2003). Retailers buy goods from manufacturers and wholesalers and resell them in the same or 4
different forms. It is the interface between the product and the customers, they have to make the product attractive and to produce the appeal for the product. 3. Specification in Fashion Retailing Fashion is observed as the word used to describe trends which affirm us in our spontaneous way. Fashion is now applicable to as well in clothes industry as in companies operating in other sector as leather goods, shoes, accessories and jewelleries. A. Brun and C. Castelli propose to share the fashion industry in three dimensions to achieve a full understanding of this model. We have to analyze the product characteristics, the Brand value and the retail channel relevance. Product The product is important for creating differences in the competences in terms of manufacturing and distributing products. Products characteristics emerge immediately and cannot be neglected to compete in fashion market. It is important to notice that the textile product has changed. In the past centuries, clothes were seeing as a useful product as can be the food. Nowadays, the purchase decisions are more based on want rather than need (Jones and Hayes 2002). Brand Retailers successes depend often on the alignment between substance and the image perceived by customers. Aaker (1991) determined that in fashion market the brand relevance is growing as a source of value for manufacturers in at least five ways: 1) the brand values help consumers in retrieving and processing information, 2) provide a basis for differentiation and positioning of a product, 3) involve product attributes and customers benefits that give consumers a reason to buy and use the brand, 4) create mental associations that produce positive attitudes and feelings that are transferred to the brand and 5) provide the basis for product extension. There are a lot of examples which confirm the potential success of a product thanks to the brand value. A. Brun and C. Castelli (2008) cite Gucci s efficient internal control to assure the quality of the product and the respect of their luxury position. A value brand has to release product oriented towards building the brand image. Sometimes, it is important to put forward products with a low profitability potential but with a high value image. 5
Retail Channel A competitive fashion company has to be very efficient in the field of retailing and in the demanddriven supply chain. Being close to the customer is a goal of any market-oriented business, but in fashion it is vital (Christopher 2004). The success of a retail channel depends on the company s ability to plan operations, vision and image of the store depending on both the brands carried by the store and the specific target customer s requirements (Burt and Sparks, 2002). The key point is to find the correct alignment to assure customers durability, competitive advantages and a good store s turnover. For example if a retail company has strength on a special product category which represents an important source of income and which attracts an important proportion of customers, the company has to be flexible and has to apply time compression because this kind of product has to be always in stock. To conclude, product, brand and channel have to be taken into account to define strategies in the fashion retailing. 4. The Environment of Fashion Retailing In this crisis environment, consumers are becoming more price-conscious and cut their spending on clothing and fashion accessories. Fashion retailing shows a decline and the market is more and more competitive. There is a big competition between the mid-market retailers as Marks and Spencer and the low price retailers as Primark. The mid-market retailers have to fight back with their own price cuts and the investments of considerable resources to regain lost ground. At the same time, European companies such as Zara, Mango and H&M are strengthening their hold on foreign foreign markets, including UK, and introducing mid-market global fashion brands. Thought featuring a high degree of discounting and price consciousness, fashion retail business is highly dynamic with some successful examples of best practice. The relatively high margins of fashion retailing have always attracted people into this area. The most part of the fashion retailing do not hesitate to charge their price around 2.5 to 3.5 times more than the price the manufacturer charged them for a garment. In the hyper-competitive environment, fashion retailers have to obtain the maximum cost advantage from production resources worldwide and the same time need to maintain their strength in design and marketing. One of the strategies to achieve the relatively higher margins in fashion retailing has to be taking of cautious decisions on sourcing and buying. More and more retailers will look for increasing margins on fashion products through strategic sourcing, buying and supply chain management. 6
Textile industry in a crisis context in 2008 2009 During the financial crisis, fashion shows go on. The fashion area looks outside of the crisis which affects the stock exchange and the banks. In reality, it is not the case because the textile industry is not spared by the economic situation. Retailers represent in the United Kingdom a workforce around one in 10 percent. They are obliged to be confronted of trading problems. Consumers have dropped to spend because of house prices and unemployment. In retailer s side, the cost of buying in goods from overseas manufacturers is rising as a result of the fall in sterling. Retailers have another problem with credit insurers who stopped providing cover to a lot of retail chains. The consequence is that retailers are not more protected for non-payment of suppliers invoices in case of the retail company is going bust. In France the problems are similar. In August 2008, fashion and textile consumption fell by 8% in comparison with the same month one year ago (Distribilan 2008). Gildas Minvielle in charge of the IFM (French Institute of Fashion) economic sector notices that the return of inflation has a decisive influence on the consumer purchasing power. Moreover increase in prices in food and in energy areas has a detrimental effect on textile consumption. On the first eight months of the year, clothing sells fell by 1.7%. The most affected market is the mail order which has decreased by 4.6% in the same time. The other big losers are the independent shopkeepers which have to share the markets streets which the huge retailing companies like Zara or H&M. But crisis affects everyone. In UK, analysts say clothing sales have gone into steep decline since the start of the New Year school 2008. M&S and other retail companies were obliged to offer discounts at a time of the year when retailers hope to sell at full price. Even if the Swedish giant retailer Hennes and Mauritz (H&M) announced that results were rising for the third part of 2008 the increase was not as high as expected and they lost market value. Bhs offered 20% off everything in the beginning of November 2008 and even 50% off on selected lines. Sir Philip Green's Arcadia brands which include Top Shop, Dorothy Perkins and Miss Selfridge are also offering big price reductions. City retail specialist Freddie George said the M&S reduction was "a clear sign that sales are well behind budget in the lead up to Christmas". He is urging investors to sell M&S shares which sank to 200p at the end of 2008. This value is their lowest level for more than eight years. We have to imagine that just 18 months ago, they were estimated at 740p. Sports Direct's shares also hit a record low, losing 13% of their value to 32p. Investors who bought the shares when they came to the market less than two years ago have now seen 90% of their value disappeared. 7
For now the top end of the market looks spared by the financial crisis. People who have the possibility to buy luxury garments are not affected by purchasing power problems. Nevertheless, luxury brand can be affected because of a lower rate of tourism frequentation. Fashion is made in Milan, is showed in Paris and is sold in New York. In Milan, the women's ready-towear sector will have to face a hard summer 2009. Gianfranco Ferré s owner, It Holding, was placed under guardianship the 26 th of February because they cannot meet their financial obligations. The Italian Government decided to offer a financial support to the Made in Italy brands the day after. Italian fashion sector achieves a turnover of 70 billion of Euros, half is realised with exportation, and employs 800.000 workers. The 2009 fashion week in Milan will not be as brilliant as the past years, because of the crisis about ten fashion shows has been cancelled. The famous Italian companies try to pick up with two different strategies. The first one consist in create new second brand less expensive. For example Moschino created Moschino Cheap and Chic with a new very colourful collection almost 30% less expensive. The other solution is to create an exclusive collection to appeal demanding costumers. Max Mara s coats were confectioned by the best artisans of the brand. The main trends for the winter 2009 are classic with dark colours. The fashion designers have decided to drop their daring and to return to the traditions. Crisisis is influencing not only the sales but also the trends. 8
Fashion Supply Chain Management 1. Introduction Supply Chain Management is the management of material and information flows both in and between facilities, such as vendors, manufacturing and assembly plants and distribution centers. Supply Chain Management is an area that has recently received a great deal of attention in the business community. (Douglas J. Thomas, Paul M. Griffin) All organizations have a different supply chain s organization adapted to the strategy and the domain of companies. The supply chain organises the product circuit from transformation until finished product and then distribute it to the customer. Supply chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Thus for example, a shirt manufacturer is a part of a supply chain that extends upstream through the weavers of fabrics to the manufacturer of fibres, and downstream through distributors and retailers to the final consumer. (Martin Christopher) The supply chain management is the fact to manage the chain of events during all the process. The aim is to link all events with a good efficiency in term of time, quality and costs. In addition, key to the success of a supply chain is the speed in which these activities can be accomplished. To be aware of customer needs and customer satisfaction are considerable leading points. Supply chain manager must take into account both long term and short term decisions. Strategic decisions deal with global policies. It is important to separate two kinds of actions, operational decisions which represent every day s activities and decisions taken to concrete global objectives. Operational decisions have to take into account the strategic decisions already in place. An organization must structure the supply chain through long-term analysis and at the same time focus on the day-to-day activities. (Richard G. Ligus) To be efficient in the supply chain strategy, managers must be aware of market demands and they have to know customer services, transport organizations, and pricing constraints. All these elements must be mixed to structure the supply chain effectively. Some of these factors can change constantly and unexpectedly. Supply chain managers must incorporate these risks into the strategy and the supply chain structure. 9
2. The key elements in a supply chain Supply chain combines six key elements, production, supply, inventory, location and transportation. 1) Production Production strategies are led by the focus on what the customers want and what the market demands. To be agile, the managers have to anticipate how many products they have to produce and to know if it is possible to outsource the products. These strategic decisions regarding production must also focus on capacity, quality and volume of goods, keeping in mind that customer demand and satisfaction must be met. 2) Supply Organizations must determine what they are able to produce or what they have to outsource. This point is important to if the company wants to reach a strategy both economically and efficiently and keep a high quality products and services. Companies must carefully select suppliers and they have to take into account several characteristics. Focus should be on developing velocity, quality, flexibility or payments facilities. In the same time, outsourcers must keeping on reducing costs or maintaining low cost levels. Strategic decisions should be made to determine the core capabilities of a facility and outsourcing partnerships should grow from these decisions. (Richard G. Ligus) 3) Inventory Inventory is a critical issue in effective supply chain. Supply managers have to find the border between too much inventory and not enough inventory. It is necessary to meet the right market demand, too much inventory can cost between 20 and 40 percent of product s value. Operational inventory decisions revolved around optimal levels of stock at each location to ensure customer satisfaction as the market demands fluctuate. (Richard G. Ligus). These decisions are critical to the day to day operation of strategy and to keep customer satisfaction levels high. 10
End-of-month inventory level, for example, is a key performance measure for retail buyers, but customer service level (tracked by some sort of out-of-stock measure) is also applied. Buyers stock up at the beginning of the month to ensure high levels of customer service, then let inventory drop at the end of the month to "meet" their inventory goals (disregarding the effect on service level measures). The adverse effect is even more pronounced when end-of quarter incentives are tied to financial reporting. The combined result of this behavior is a monthly order spike to the supplier. (Matt Waller) 4) Location The location is linked with the consumer market. These decisions depend on market demands. Managers have to take into account some constraints as the placement of production places and the stocking facilities to place products in right locations to the market served. Location decisions are long term choices and are fully incorporate in a global strategy. In textile industries where products are lightweight and market driven, stocking places should be located close to the end-user. Decisions concerning location should also take into consideration tax and tariff issues, especially in interstate and worldwide distribution. Hokey Min and Gengui Zhou explain that the issue is to determine which warehouses to retain and which warehouses to phase-out in such a way that the restructured supply chain network minimized total logistics costs, while meeting capacity, demand and delivery requirements. 5) Transportation Customer demands and products updating, critical in textile companies, must be determined to choose the mode of transport used. To be reactive and to get the product very quickly, air transports are the most efficient means of transports but the costs are high. Shipping by boat or rail is less expensive but slower, using sea or rail can also give the opportunity to collect more products and having more stock in warehouse to meet quick demands by the customer. It is wise to keep in mind that since 30% of the cost of a product is encompassed by transportation, using the correct transport mode is a critical strategic decision. (Richard G. Ligus) In many cases, the most efficient strategy is to couple slow and fast means of transports with the assurances of smooth distributions of goods. 11
Mix Agile and Lean Supply Chain An agile supply chain is characterized by its ability to give to the consumer the good product in the good moment. The agile supply chain is adapted for markets that need a fast response. The textile is maybe the market that needs the most efficient supply chain because of the short life-cycles of the collections and the change in terms of trends. A slow-moving logistic chain makes the companies to rearrange their organization. The key for fashion companies is the creation of responsive supply chains that ensure fast response. To become more responsive to the needs of the market requires more than speed, it also requires a high level of manoeuvrability that today has come to be termed agility Martin Christopher. 1. Lean and Agile Supply Chain One of the main key characteristic of an agile supply chain is the flexibility. These characteristic can be apply in the different levels of the supply chain like the information systems, the organisational structures and the logistics processes. It is important to distinguish a lean approach and an agile approach in a company. Some companies used to choose a lean approach because they work with products where demand is predictable and where the requirement for variety is low and volume is high. Characteristic Lean Agile Logistics focus Eliminate waste Customers and markets Partnerships Long-term, stable Fluid clusters Key measure Output measure such as productivity and cost Measure capabilities, and focus on customer satisfaction Process focus Work standardization, conformance to standards Focus on operator selfmanagement to maximize autonomy Logistics planning Stable, fixed period Instantaneous response Comparison between a lean and an agile supply chain In brief, a lean supply chain works for high volume with a low variety in predictable environments. An agile supply chain is needed when demand is volatile and when the requirement for variety is high. The agility could be defined as the capacity for a company to respond rapidly to changes in demand in terms of volume and variety. 12
2. The integration of agility in the supply chain Agility is has been developed in many companies to match the demand quickly. It is a recent area continuing in improvement for around 30 years thanks to the globalisation. The easier way to present an agile supply chain is to distinguish its most important characteristics. The agile supply chain Market sensitive: The supply chain is capable of reading, analysing and responding to real demand. The company has to success in doing an adjustment to the forecasts and to the trends of the market. A lot of organisations have little direct forward from the marketplace, so they have obliged to make forecast based upon past sales and convert these forecasts into inventory. Virtual The virtual supply chain relies on sharing information across all supply chain partners. These partners are all the players in the chain, from the fabric manufacturers to the garment makers to the retailer, are all working together. Process integration The process integration means collaborative working between buyers and suppliers to join product development, common systems and shared information. This collaboration ensures the development of tools like the co-managed inventory, the collaborative product design or the synchronous supply 13
Network based The network based represents the link between all the actors of the supply chain. The companies must have the best structure to manage the relations with their partners to be closer and more agile with the customers. 3. Mix lean and agile to create an hybrid supply chain Hybrid strategy The company is not obliged to apply a pure agile or lean supply chain approach. In some cases, they have to combine with these two strategies and then it is called a hybrid strategy. Thanks to a hybrid supply chain strategy the firms can distinguish stable and predictable products and apply the good supply in each product. The aim of the company is to find the optimal time to order each item. In this context, quick is not always the best. In fashion retailing, trendier garments require very short lead times but many fashion basics or children s wear may be ordered well in advance. For products which are selling well, the company is able, on average, to get supplementary orders in a few weeks. Another approach is the leagile supply chain. Leagile means that a combination of lean and agile approaches can be combined at a decoupling point for optimal supply chain management. Agility will be used downstream and leanness upstream from the decoupling point in the supply chain. Thus, leagile enables cost effectiveness of the upstream chain and high service levels in a volatile marketplace in the downstream chain. (Mason-Jones) The example of Benetton illustrates the leagile supply chain. o Example: BENETTON The organisation of the brand Benetton has achieved to match the agility and the lean supply chain. Benetton chose to make all the garments in the same natural colour and then dye them. The idea represents a real innovation in the supply chain management. They can produce a large quantity of basic clothes and after respond very quickly to the colour that the customer wants in a special moment of the year. They can easily follow the trends. This innovation was called "tinto in capo" which means dye upon the garment. Benetton does economies in the manufacturing level, thus they do direct orders in advance (lean supply chain). The garment colours are not predictable, so Benetton uses the agile supply chain to adapt their production. The product differentiation is moved to the very last production level. The garments are dyed in various colors upon receiving information from the demand of the textile market. They successes in the forecasting, errors are reduced to a minimum. 14
o Example: ZARA Zara is now the most efficiency supply chain in the textile market. The success of this brand used to be explaining by the organisation of its supply chain. Its rapid growth comes from its ability to establish an agile supply chain which incorporates lean advantages. Zara produces almost the half of its garments from low cost manufactures in Asia as finished goods. The rest are produced by quick response in Spain or in North Africa by subcontractors that work exclusively for Zara s parent, Inditex. In return Zara gives its technical and logistical supports to their subcontractors. This organization ensures a great flexibility to respond to the demand. The supply is close to the expected sales, but in case of sudden changes they can adapt the production. Sometime Zara is stock outing but they have the capacity to adjust their supply and they have not obsolete stock. The choice of this hybrid supply chain has enabled Zara to develop the most effective quick-response system in the fashion textile market. Decoupling point The decoupling point is the point where product differentiation happens, or in other words where products take their final shape. It is the final point beyond which no changes can be made and it will go to the customer in the shape, size, and color that has been determined at the decoupling point. It is easy to understand that if the goods are produced on demand rather than on forecast they will be all sold. In the last example Benetton moved the decoupling point closer to the point of sale. Thanks to that they can adapt their quantity in the right time. Benetton applies the best hybrid strategy in its supply chain, lean before the decoupling point, agile after the decoupling point. Supplier relationships To accelerate the response to a changing market, the quality of the supplier relationships are essential. The communications between suppliers can limit the efficiency of a manufacturer to respond rapidly to customer demand. It is as well often a good way to reduce the production time. These relations involve a share of information between two different companies. Some of them do not want to show their internal organisation and planning. In fact to be really useful, the companies have just to be closer to their keys suppliers, not all of them. It is not suitable to create too many close relationships with several suppliers. It is important to identify the most useful partners in the supply chain organization to link systems and processes. Create a network with different suppliers ensure a synchronisation with the production and the needs of the company. Now, a lot of companies try to establish a strong connectivity between their 15
suppliers, it involves multiple collaborative working relationships in all the levels of the company. It is not a simple exchange of information on demand or inventory levels. The reduction of complexity In some slow working supply chain, the problem is a result of a too complicate organisational structure. These difficulties tend to increase when the companies grow. The managers have to watch the organisation structures and the management processes which have been chosen. They have not to hesitate about eliminate a non-value activity which makes the process more complicate. It is better to regroup similar process for reducing the organisational complexity. A good way to develop an easy process is the development of a human resource strategy that leads to multi-skilling and encourages cross-functional working.scott Wharton, the old Tesco networking development director told that If it s simple and visible, it s controllable. Complexity leads to errors. The agile supply chain is characterised by three critical lead-times: time to market, time to serve and time to react. Hybrid supply chain does necessitate important changes in organisational structures and strategies. Market sensitivity, virtual integration, networked logistical systems and process integration all become fundamental to achieving a quick-response capability. 16
Case studies The aim of the research is to underline the supply chain management approaches in the fashion retailing. This is addressed through case studies of two companies. New Look History New Look is knew as one of the most fashionable and reactive UK textile retailer. New Look has been operating since 1969 with only one store. It was founded by Tom Singh. In 1988 the company opens its market into France and in 1990 New Look represented 70 stores in both UK and France. In 1994 New Look opens its 200 th store. Their shares were listed on the stock market in 1998 with a relative success. New Look opens its first flagship store in London and take complete ownership of Mim in France and open stores in the Republic of Ireland. In 2004 New Look become a private company with Phil Wrigley as new Chief Executive, the shareholders approved the takeover after a 699 million offer by the private equity firms Apax Partners and Permira. Phil Wrigley developed in 2006 New Look in Belgium and France and the first franchise store in Dubai. These decisions are in line with a global development strategy. In 2008 they expend the company to the United Arab Emirates and they open their largest store in the new shop area in Liverpool. In 2009 New Look celebrates its 40 th birthday and opens its first store in Russia. Company New Look sells garments, lingerie, shoes, and accessories. The company has around 885 stores all around the world. The shops are spread in UK, Ireland, Belgium, France, and the Middle East under the New Look and Mims banners. New Look has 607 stores in the UK and Ireland, a further 23 stores in France and Belgium, and 19 franchise stores in Saudi Arabia, UAE, Kuwait, and Bahrain. In addition there are 291 stores trading under the name Mim in France and Belgium. (2009 www.newlook.co.uk) The retailer began selling apparel online in 2007. About 75% of total product offering are sold online in the UK, New Look plans to introduce transactional websites in France and Belgium. Most of the products are private label. They sell women s wear, men s wear, teenage wear, children s wear, footwear and accessories. The stores propose as well plus-sized and maternity apparels. New Look Group is an independently family-owned which is categorized as a low cost fashion retailing company. New Look targets teens and pre-teens, teen girls, and their mums with value priced clothing. The main competitors are M&S, Next and Top Shop. 17
Financial Result New Look is the third largest company in UK behind M&S and Next. During a crisis context they proclaim that they reached the objectives for 2008 notably for Christmas period. Despite unprecedented levels of discounting on the High Street New Look maintained its trading stance in line with last year and launched its Sale on Boxing Day. (New Look website). In 2005, New Look had a turnover of $1,350.2million with a gross profit of $719.7 million and 11,376 employees. In 2007, an irregular reporting interval announced a turnover of $1,745.7 million. Total group sales up to 14.5% thanks to good trade performance and store expansion in UK and Europe. The average customer age is 29 years and the average visitation is 34 times per years. New Look has a 5.0% value market share of the women s and girls outer and sportswear market. That makes it amongst the leading womenswear retailers in the UK. TNS Worldpanel announces that 37% of British women have purchased an item of women s or girls outer and sportswear from New Look which represents more than 9 million customers. New Look stays in 2008 the number one retailer by volume for women s jeans and footwear. (TNS Worldpanel Fashion, 52 weeks ended November 2008) Fast Fashion strategy As one of the UK s leading fashion retailers all you have to remember is that New Look is always on trend, always in fashion and always in style. In a market context where consumers expect trend and cheap clothes, New Look adopted for an updated offer with mode products. They take the opportunity to propose cheap clothes with a fast and flexible approach. Fast Fashion attracts people they want to take their fashion dose. The average time from the conception to the shop availability is around 10 weeks. The average lifecycle of a product is 6 to 8 weeks, after the product is not replaced. In store, the products are refreshed every day with the stocks and they are delivered three times a week. New Look positions itself in trend followers. They used prediction from trend agencies and create garment based on their observation. New Look has 25 designers who has to create garments and in the same time to take into account the supply chain issues. Designers have to work close to the buyers and the suppliers to assure an efficient organisation in terms of costs and availabilities in shops. They are involved in new sources finding and they adapt their products to the manufactures characteristics. This kind of organization makes New Look the most successful Fast fashion company in the UK. By closing the gap between company s merchandisers, suppliers, and buyers, New Look has enhanced the product process, for example the transport represents in term of time only 20% of the end-to end timeline. In her New Look case study Competing Through the Design-Supply Chain Interface, Miss Omera Khan notes that the key points of the efficient supply chain are in a quick move, a reduction of the product development time, a short planning lifecycles, a design in-house, a balance in portfolio of products and a planning to be lean or agile. 18
Supply Chain organization New Look is well knew for its quick response and its trendy garments. The supply chain process is deeply involved and contributes to this success. New Look developed tools to reach the objective of responding quickly to changes in term of trends, ordering the right products in right quantities, delivering the products to the correct destinations and selling them at low prices. Over 450,000 items are despatched every day via 80 lorries. New Look has two big centre of suppliers. The first is located in China and the second one in Turkey. They must design their supply chain to use these poles to be efficient. Chinese manufactures provide the less expensive products but with a long answer (between 3 and 4 weeks). As they cannot respond fast, they are used for the permanent and basic clothes and accessories. The orders and the restocking are planned in advance, this strategy is based on anticipation and predictions and this is a lean supply chain. Middle East manufactures are closer to the sell centres and they are able to bring garments in a short time. These suppliers are used for trendy and fashion products. The production is driven by the consumers and the trend setters companies, it is the agile side of New Look supply chain. This system is designed for UK and European shop centres. New Look has other shops in the Middle East and if in the future they plan to expend their extra-european market, this design will have to be rearranged. In a boutique in Bahrain, manufactures are located far from the end market. The challenge is to improve the efficiency of the global market as well as possible. New Look has opened two consolidation centres to reduce the import taxes and the shipping costs. Thanks to these centres located in Turkey and in Singapore, they are able to dispatch the products directly to the final markets. Before, they send all products to UK and after they dispatched it to the final market. This solution is a gain in term of time and costs. For example New Look save 1 per item in sending the products directly from the consolidation centre to the Middle East market, it is a solution that reduce as well the mark-downs and optimise the supply chain. By changing their global buying process New Look will save 55 million in operating costs as well as reducing product lead times by 3 weeks or more (Omera Khan). After the Christmas 2008, New Look reported good results and put in the foreground the efficiency of its supply chain, New Look continue to manage stocks tightly, reducing the need for markdown. (New Look website). We expect the Market will become more difficult in 2009 but we will continue to invest to drive growth in the UK and overseas and continue to develop our business to help us to do the best we can for our customers, continue our strong performance and achieve our goal to become a significant and successful global retailer. (Phil Wrigley, executive chairman) 19
Strong Partnerships New Look has established strong relationships with its suppliers. We build and retain strong, trusting relationships with all our suppliers, sharing the same values on quality, ethics, speed and ambition. Our great working relationships mean that both partners enjoy growth and long-lasting prosperity. (New Look website) The terms of these relations are a benefit work for both New Look and the suppliers. New Look provides their manufacturing knowledge and suppliers offer a great flexibility. This flexibility results in regular purchases driven by the demand. This strategy provides a reduction of risks for unsold products and markdowns. In another side it gives a better stock management because it reduces stock costs. New Look used to manufactured the same range of products both in Turkey and China. They choose the right place after analyzing the production time needed and the appropriate volume of production. Indeed, following the demand, they adapt the supply chain and they can be lean or agile. 20
H&M History H&M Hennes & Mauritz (H&M) is a Swedish company, engaged in the design, production and retailing of clothing items and accessories. They are famous for their concept of cheap and chic clothes. H&M proposes a large range of clothing products including underwear and sportswear, for men, women, children and teenagers, as well as cosmetic products and accessories. H&M was established in 1947 by Erling Persson. The first store was opened in Vasteras and called Hennes that means hers in Swedish. The company sold only women s clothes and in 1968, Erling Persson bought Mauritz Widforss, hunting and men's clothing store located in Stockholm. Then the retail company changed its name to Hennes and Mauritz later abbreviated to H&M. In the same time they began to sell men s clothing. Since 1982, H&M has continued to go through a period of rapid expansion. H&M is now controlled by the son of the billionaire founder Erling Persson, Stefan Persson who became CEO in 1990 and chairman of the Board in 1998 (the billionaire son of founder Erling Persson). Company H&M operates some 1,700 retail shops in 30 countries with its largest markets in Germany, the UK, Norway and Sweden. Germany is H&M's number one market, accounting for about 25% of sales. In Sweden, Norway, Denmark Finland, Austria and Netherlands, H&M sells garments and accessories on the internet. In Scandinavia, H&M sells garments and accessories by mail order catalogues. About 60% of its clothing is made in Asia, the rest is manufactured primarily in Europe. The company presents different concepts to offer a range of fashion clothes. They catch international trends to compose classic and basic ranges of clothes. It also includes underwear, sportswear, accessories and cosmetics. The company's largest department is women's wear, followed by children's wear, teenage fashion and men's wear. All the departments are in the majority of H&M, the stores are full-range stores, but the company has also concept stores which offer only garments for women, men, teenagers or children, or stores that sell only cosmetics, lingerie and accessories. H&M released its own private brands as Hennes, Label of Graded Goods (LOGG), and Big is Beautiful (BiB). Cosmetics range consists of make-up, body care and hair care products, these products are sold with its own brand. H&M offers as well accessories for women, men and teenagers. The company has around 100 designers, who work with a team of 55 pattern designers, about 100 buyers and a number of budget controllers to create H&M's clothing collections for women, men, children and teenagers. (Datamonitor) 21
Financial Results H&M has increased its revenues by 12.5 per cent each year in average since 2003. In the same time they double the number of employers and the net income. Since 2007 the margin is stable around 14 per cent. The number of stores amounted to 1,748 on 28 February 2009 versus 1,529 on 29 February 2008. (hm.com) In a crisis period, they continue to increase the sales event if past years the growth was more significant. Analyst estimates that the retailer is expected to drop by 5.0% at the end of this year as consumers cut spending. Germany, H&M's biggest market, is also expected to contract by around 5.0%, according to the International Monetary Fund. (Forbes.com) Sales Volume (hm.com) (Datamonitor) Supply Chain Organization The company outsources its manufacturing in Asia, Africa and Europe. About 30% of its merchandise is produced in China. H&M does not have any factories of its own and operates 22 production offices, ten are in Europe, ten are in Asia and one in Central America and Africa. 22
Around 700 people work at the production offices and the majority are recruited from the local population. H&M made contracts with approximately 750 suppliers, most of them are located in Bangladesh, China and Turkey. They all manufacture H&M s products. The production offices ensure that the buyer places his order with the right supplier, that the goods are produced at the right price and for the good quality. They control that production takes place under good working conditions, H&M as the majority of European retailers controls its suppliers. Ensuring the safety and quality of the goods largely takes place at the production offices and is the result of extensive testing, including checking for shrinkage, twisting, colourfastness and dry rubbing. (Simone Guercini & Andrea Runfola) Strategy H&M s method of production is customer-driven. The company focus its work on research and prediction of emerging trends. They use traditional research means and innovative ones such as street trends. In H&M lead times vary from two to three weeks up to six months, depending on the nature of the goods. In recent years H&M has reduced the average lead time by 15, 20 per cent thanks to developments in the buying process. (DataBank Consulting) This activity is led by central staff and by national offices which are responsible for detecting new trends. H&M imposes strict terms on its suppliers in terms of price, time to deliver, quality, and location. Time is not a sufficient factor for working with H&M, suppliers have to be able to give samples of new products within 24 hours. (Stefan Breitkreuz ). H&M opted for a supply chain with two levels. The first supply-chain is mainly concerned with costefficiency, it is the lean model. It means that the manufactures are located in Asia to optimize the cost of the products mainly thanks to the low-wage. This first loop is characterised by large order volumes, long transportation distances, and slow lead time. The rapid reaction loop is used to adjust the offer with the demand. It is a quick response system to be close to the fashion and the trends. This agile supply chain ensures the possibility to have new garments in less than 2 weeks. Fabrics are mainly based in Europe to reduce the transport time. This system requires a strong logistic department which count 3200 people in H&M. The central warehouse is located in Hamburg, Germany. From there the clothes are distributed to regional warehouses around Europe, each country has a warehouse adapted to the country specificities (fashion, weather, habits...). The rest of the world is covered by 13 smaller warehouses. While the stock management is primarily handled within the H&M organisation, transport is contracted to third parties. Goods are inspected and allocated in a store or in the regional warehouse called Call off warehouse. The role of the warehouse is to dispatch items to stores according to selling trends. (DataBank Consulting, Stefan Breitkreuz and Datamonitor) 23
Case Studies Comparison Fashion retailing is characterised by volatile markets, short product lifecycles and high product variety. The sector has extremely variable margins. In predictable demand, contribution margin fluctuates between 5 and 20 per cent. For unpredictable demand it fluctuates between 20 and 60 per cent (the contribution margin equals price minus variable cost divided by price and is expressed as a percentage). In terms of risks, it is more dangerous to be based only on unpredictable demand and it can cost more than it is lucrative because of stocks or big discounts (Marshall L. Fisher). This is essential for the companies which are dealing with a high quality fashion product to be delivered with small products quantities. H&M and New Look are both based on a hybrid supply chain that mixes agile supply chain, for unpredictable demand and adjustment, and lean supply chain for predictable demand. The case studies illustrate that companies in the textile retail sector use both agile and lean strategies. With the special characteristics of the apparel sector, a combination of the two perspectives, lean and agile approaches, looks to be evident. To resume, companies in clothing need to be able to respond quickly to changing markets and be able to provide quick replacement. However, they are not able to store large quantities because products have a very short life cycle and fashion markets are seasonal. Low cost overseas manufactures are deeply used because they ensure the reduced prices demanded by retailers. It means that extended relationships with suppliers are key to supply chain management. H&M and New Look bank on their quick answer to meet market demand and on their hybrid supply chain to reduce their costs. Nevertheless they have not the same product strategy. New Look is a trend follower and H&M is a trend setter. H&M is more reactive than New Look. With Zara, H&M is a model in term of lead time. The company recognises that good relationships with suppliers are essential to exploit common technology and to obtain premium service from suppliers. These aspects are fundamental to meet the changing demands of the world retail market. We noticed that the relationships with retailer look different between H&M and New Look. New Look attaches more importance to the cooperation with suppliers, they work closely select confident manufactures to established a long term partnership and they are able to share their technology. H&M demands results in terms of quality and quick response. Suppliers have to manage their self but they have to ship the right product in the right time. Both have a similar strategy of international expansion, they are designing their supply chain to be adaptable for the new markets. H&M opens Call off warehouse to be close to the end market and more effective in term of transportation and stocking. New Look opens consolidation centres to reduce the tax import and the shipping costs. This solution is sufficient for the actual market but if New Look continues its massive extension, they will have to develop their network. 24
Conclusion This rapport has sought to present the fashion retailing in the supply chain side. It shows how the supply chain organisation is a key factor in the success of a clothing company. In a crisis context, the supply chain management takes a more important part in the company competitiveness. The cases have provided a greater understanding of the supply design in two major retail companies. The compromises between costs of production, lead time of supply and volatility of products require a continuous focus for improvement. Fashion sector could be able to be more efficient in responsiveness and developed relationships. The culture of organisations needs to change from adversarial to integrated relationships so that all partners in the chain can share the benefits. It is not just about products moving quicker from the design stage to the stores, it is also about being keenly responsive to customers needs. (G. Birtwistle, C. M. Moore and S. S. Fiorito) 25
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Joël Morio, Le Monde 02.10.08 (Newspaper) Julia Finch, The Guardian, Thursday 20 November 2008 (Newspaper) www.newlook.co.uk www.hoovers.com www.fashionunited.co.uk www.hm.com www.ebusiness-watch.org www.datamonitor.com 27