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Fashion Clothing Industry

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 01 May 2017

CHAPTER 1

1. INTRODUCTION AND BACKGROUND

1.1. WORKING TITLE

Supply Chain in The Fashion Clothing Industry.

1.2. WHY THIS RESEARCH TOPIC

The fashion industry is the most dynamic and challenging industry. The migration of fashion manufacturing from UK, and, in general, from established markets to offshore countries has played a crucial role in transforming the way fashion is created and consumed in the contemporary world, together with the complex nature of consumption that represents fashion today (Fernie, 2003)

Christopher, Lowson and Peck (2004), defined the fashion markets as having short life-cycles, being high volatile with low predictability and also the buying decision are made by impulse, characteristics that emphases the need for quick response (QR). Furthermore, Christopher et al (2004) identified three lead-times, that should be managed by companies to be successful in the fashion markets; these are: time-to-market (how quick a company can transform the trends into the final product), time-to-serve and time-to-react which emphases the importance of agility in fashion supply networks.

The UK clothing retail sector is still relatively fragmented with a large number of small players and independents. The top 25 clothing chains account for just over 50% of the market, or 70% of specialist sales. (Mintel, 2009)

In today’s economic climate it can be easily seen that the gap between those retailers that are doing well and those that are doing badly gets wider every week.

For the purpose of this research I have chosen to analyse the following companies: GAP, Zara and Hennes and Mauritz (H&M).

Although there are many players in the fashion clothing, I have chosen these three as they all have pursued a different strategy, all have different operations performance objectives, and the impact of the economic downturn affected each one differently.

After I have analysed their strategy, I will conduct a financial analyses, to identify which company is likely to succeed in these conditions and also I will try to identify the strategy behind its success.

H&M is a global fashion retailer which operates in 34 countries and has about 73,000 employees all working to the same philosophy “to bring fashion and quality at the best price”. (H&M, 2009)

H&M does not own any factories, nor own any stores, but instead buys its goods from around 800 independent suppliers, primarily in Asia and Europe, it has about 20 production offices around the world, mainly in Asia and Europe and rents store space from international and local landlords. (Idem.)

H&M is driven by strong values such as salesmanship, simplicity, constant improvements, cost-consciousness and entrepreneurship. Its own designers interpret fashion trends and create fashions that are accessible to all. (Idem.)

Quality is a central issue for H&M, 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. (Idem.)

H&M’s growth target is to increase the number of stores by 10 – 15 percent per year, while increasing sales in existing stores. The growth, which will be financed entirely with the company’s own funds, will proceed with an emphasis on quality and continued high profitability. (Idem)

Regarding that during the first half of the current financial year H&M opened 93 new stores, the sales increased by 21%. However, in comparable unites, the sales decreased 3%, showing that it had not been immune to recession. Moreover, from December 2008 to June 2009 the like-for-like (LFL) sales decreased, with the exception of April when there had been an 8% LFL increase

Inditex is engaged in activities relating to textiles design, production and distribution. The group is structured into more than 100 different companies, all of which operate in the fashion industry. (Datamonitor, 2008)

Zara, the leading chain of the Spanish fashion giant, INDITEX, is present in 72 countries, with a network of 1.314 stores in prime locations of major cities.

In the 2008 financial year, The Spanish Group has outperformed the market by recording a 12 per cent rise in full-year underlying sales, with an 11% increase in the gross profit and an increase in the net profit reaching €1.2bn.

However, although INDITEX opened 95 new stores in 28 countries in the first quarter of 2009, bringing its total number of stores worldwide to 4,359, and its net sales increased by 8% in local currencies, the net income compared to the last year’s figures decreased by 16%.

Gap plc is part of the Gap Inc. which is a leading international fashion retailer which operating more than 3,100 stores worldwide and employing more than 134,000 people around the world. (Gap, 2009)

Gap plc has been hit hard by the recession. Its sales declined across all four of Gap’s divisions leading to a 14 per cent slump in first-quarter profits at the clothing giant. In the quarter to May 2nd, 2009 earnings were 15m (£135.5m), down from 49m (£156.9m) the year before. First-quarter net sales were $3.13bn (£1.97bn) compared with $3.38bn (£2.13bn) the year before. Comparable store sales fell 8 per cent (Retail Week, 2009)

Taking into consideration the situation underlined above, the question that arises is how some companies thrive in recession while others fail.

Is it the “state of art” Supply Chain Management and very much compressed product development cycle that enables Zara to have such outstanding results in this crises? Is it the “new science” of fast fashion that makes H&M successful? Are the large volumes the factor that makes Primark still operates with a reasonable margin? What do these successful players have in common? Or is the continuous focus on cutting costs the key to success in the recession?

Although, at a first glance, the answer to the above questions might be simply yes, the strategies pursued by these companies are more complex and the root for success will be carefully analysed in this research paper.

1.3. Research objectives

v Analyse the supply chain for the high-street fashion clothing with particular focus on the current economic situation.

v Identified three fashion retail companies in order to investigate to what extent the economic downturn has affected their business and to analyse and identify Critical Factors for Success and Strategic Capabilities

v Investigate current opinion and analyses of the effects of the economic downturn on business operations to identify expect opinion on how businesses should manage their operations to adapt their strategies in order to survive and prosper

v Make tentative recommendations for strategic approaches likely to be most successful for the fashion retailers in the current business cycle.

CHAPTER 2

2. Research Methodology

2.1. Introduction

In the present research there had been taken two procedures. The first step is to find, analyse and discuss previous theories in the field of Supply Chain Management (SCM) in the Fashion Industry. Secondly, on the bases of these theories and by using qualitative and quantitative methods, it will be analysed the impact of the recession on the chosen fashion retailers and how they compete through the Supply Chain (SC).

In order to conduct this research, in an proper academic way, and to understand the latest thinking on the topic, the author studied a number of academic journals such as: Harvard Business Review, Supply Chain Management: An International Journal, Journal of Operations Management, International Journal of Physical Distribution & Logistics Management, Journal of Business Logistics, Journal of Fashion Marketing and Management, International Journal of Agile Management Systems, Supply Chain Management Review and Industrial Management & Data Systems Journal.

2.2. Research Philosophy

According to Saunders, Lewis and Thornhill, (2003) there are three approaches to the research philosophy: the positivistic research philosophy, the interpretivistic research philosophy, and the realistic research philosophy.

In the positivism, the most vital assumption is that there only exists one reality which can be discovered and studied by separating it into different parts, therefore a particular analyses will be put on highly structured methodology to facilitate replication (Gill and Johnson, 1997). The association between the parts can also be known through data analyses which may lead to future predict on the phenomenon that already had started. (DePoy and Gitlin, 1998).

According to Remenyi, Williams, Money, and Swartz, E. (1998: 35) the strongest argument in the interpretivism is discover the “details of the situation to understand the reality or perhaps a reality that works behind them”. Thus, an interpretivist interacts with the environment and seeks to make sense of it through their own interpretation of events.

“Realism is based on the belief that a reality exists that is independent of human thoughts and beliefs” (Saunders et al, 2003:84). In the business and management the realism indicate the presence of large-scales forces that affect people without that affect people without their awareness of the impact of such forces (Saunders et al, 2003).

In the light of the research philosophies mentioned above, the main philosophy in the current research paper is the positivism although elements of interpretivism and realism might occur.

2.3. Research Approach

According to Saunders et al (2003) there are two approaches that could be taken in a research paper: deductive and inductive.

Knowing the different research approaches will enable the author to adapt the research design to cater for the limitations (Easterby-Smith, Thorpe and Lowe, 2002).

An inductive logic is a system of reasoning that extends deductive logic to less-than-certain inferences. In a valid deductive argument the premises logically entail the conclusion, where such entailment means that the truth of the premises provides a guarantee of the truth of the conclusion. Similarly, in a good inductive argument the premises should provide some degree of support for the conclusion, where such support means that the truth of the premises indicates with some degree of strength that the conclusion is true.

Deductive reasoning works from the more general to the more specific. In this respect, the research might begin with thinking up a theory about a topic of interest which could be narrow down into more specific hypotheses to be tested. Furthermore, the observations should be collected to address the hypotheses. This ultimately leads to the hypotheses being tested with specific data, a confirmation (or not) of the original theories. (Robson, 1993)

In the light of the above information, this research paper will be base manly on deductive reasoning as its purpose is not to formulate new theories but to test them. The author does not intend to formulate new theories on the Supply Chain but to test the hypotheses that the Supply Chain in the Fashion industry should be Agile in order to for the Fashion Retailers to thrive in the turmoil or to stay ahead of the competition.

2.4. Research Collection

Taking into consideration the time constraints, and also the fact that there is already a significant amount of data which can be analysed, this research will be based only on secondary research. Furthermore, the secondary data is likely to be of a higher quality than the primary data that could be obtained by limited means (Stewart and Kamins, 1993). Also, the outputs from a larger research would result in more reliable information.

For an overview about the topic, it will be reviewed the literature, which, also, will point out the most interesting area for further investigation.

And finally, it will be considered a financial analyses framework to for the three companies chosen for the case study.

2.4.1. Apparel industry statistics

After a thoroughly research of the literature, a deeper investigation will be carried out on apparel industry and on the three retailers GAP, Zara and H&M. Although there are many players in the apparel industry I have chosen these three as they all have pursued a different strategy, all have different operations performance objectives, and the impact of the economic downturn may affect each one differently. After I have analysed their strategy, I will conduct a financial analyses to identify which company is likely to succeed in these conditions and also I will try to identify the strategy behind its success.

Using the data from the companies’ annual report, data from independent research companies, such as Mintel, Key Notes or Fame, and also from journals like The Economist of The Financial Time, to avoid biases, it will be identified the strategies that companies uses and how does this impact on their profitability. And finally, it will be evaluated the strategic capabilities and CSF necessary to thrive in the economical turmoil.

2.5. Research limitations

For the purpose of this research, I have decided to limit the threshold of the information I collect to two years, to ensure that my findings are relevant and up to date.

2.6. Research ethics

Regarding that this research will use only secondary and already published information, there will be no confidentiality issue. However, if unpublished data will be used, and confidential information will be disclosed, it will not be included in this research in a way to breach confidentiality in the dissertation.

CHAPTER 3

3. Literature Review

3.1. Introduction

The rationale of this research is that Quick Response (QR) is the Supply Chain (SC) approach in the high-street fashion retailing industry in the current economic downturn. Thus, this literature review sets the research in context by exploring the different and overlapping academic disciplines covered by this research topic and identifying those disciplines that are most relevant.

Moreover this research paper will financially analyse companies that have implemented QR in contrast with those that do not have, therefore, in the second part of this literature review it will be set a framework for this financially analyses.

3.2. Supply Chain and Supply Chain Management

3.2.1. Overview

“In the new marketplace there is strong case for arguing that individual companies no longer compete with stand-alone companies, but rather that supply chain now competes against supply chain” (Christopher, 1997:22)

The Oxford Dictionary of Business (1996, p. 485) defines the supply chain as “series of linked stages in a supply network along which a particular set of goods or service flows”.

Another definition notes a 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 delivered to the ultimate consumer (Christopher 1992). In other words, a supply chain consists of multiple firms, both upstream (the supply side) and downstream (the demand side), and the ultimate consumer.

The Supply Chain Council (2003) uses the definition: “The supply chain — a term increasingly used by logistics professionals — encompasses every effort involved in producing and delivering a final product, from the supplier’s supplier to the customer’s customer: four basic processes — plan, source, make, deliver — broadly define these efforts, which include managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.” Thus the supply chain management is concerned with managing the flow of materials and information between a string of operations that form the strands of chains of a supply network (Appendix A, Appendix B and Appendix C)

Quinn (1997, P. 1) defines the supply chain as ‘all those activities associated with moving goods from the raw- materials stage through to the end user: This includes sourcing and procurement, production scheduling, order processing, inventory management, transportation, warehousing, and customer service. Importantly, it also embodies the information systems so necessary to monitor all of those activities’.

The commonality within these definitions is that supply chains involve more than one organization, which are somehow connected with each other in order to deliver goods and services to the end consumer.

The definition of “supply chain” seems to be more common across authors than the definition of “supply chain management” (La Londe and Masters, 1994; Lambert, Stock, and Ellram, 1998). La Londe and Masters (1994) argued that a supply chain is a set of firms that pass materials forward. Normally, several independent firms are involved in manufacturing a product and placing it in the hands of the end user in a supply chain—raw material and component producers, product assemblers, wholesalers, retailer merchants and transportation companies are all members of a supply chain. Under the same circumstances, Lambert, Stock, and Ellram (1998) define a supply chain as the alignment of firms that brings products or services to market.

The supply chain (SC) in the high-street fashion clothing industry is very complex. Often the supply chain is relatively long, with a number of parties involved (Jones, 2002). Therefore, careful management of the SC is required in order to reduce lead times and achieve quick response (QR), emphasising the need of using an approach such as agility.

Supply chain management is defined as the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole (Mentzer, Myers and Stank, 2001, p. 18).

SCM requires traditionally separate materials functions to report to an executive responsible for coordinating the entire materials process, and also requires joint relationships with suppliers across multiple tiers. (Appendix B) SCM is a concept, “whose primary objective is to integrate and manage the sourcing, flow, and control of materials using a total systems perspective across multiple functions and multiple tiers of suppliers.” (Monczka, Trent, and Handfield, 1998:277)

In conclusion, as Cooper, Lambert and Pagh (1997:3) proposed Supply chain management is “… an integrative philosophy to manage the total flow of a distribution channel from supplier to the ultimate user.”

3.2.2. Criteria of a good Supply Chain Strategy

In La Londe and Masters (1994:38) view, Supply chain strategy includes: “… two or more firms in a supply chain entering into a long-term agreement; … the development of trust and commitment to the relationship; … the integration of logistics activities involving the sharing of demand and sales data; … the potential for a shift in the locus of control of the logistics process.”

According to Cohen and Roussel (2005), in order to gain competitive advantage, the supply chain management should be adaptive, aligned with the business strategy, with the customers’ needs and also aligned with the power position.

Supply Chain Strategy aligned with the Business Strategy. The supply chain strategy should drive forward the business strategy. (Appendix D)

Below is the basis of competition matrix as proposed by Cohen and Roussel (2005:22)

Primary Strategy

Source of Advantage

Basis of Competition

Key Supply Chain Contributor

Innovation

Brand and unique technology

Desirable and innovative products

Time to market and time to volume

Cost

Cost-efficient operations

Lowest prices in the product category

Efficient low-cost infrastructure

Service

Superb service

Tailored to meet customer-specific needs

Designed “from the customer in”

Quality

Safest, most reliable products

Product you can count on

Supply Chain excellence and quality control

Table1. The Basis of Competition Matrix

Competing on innovation.

Supply chain innovations are innovations in products, services and processes that affect supply chain management. Companies, whose main strategy is focused on innovation, will develop “must have” products which will benefit from significant consumer pull (Cohen and Roussel, 2005). However, Mentzer et al (2001) states that supply chain innovations should be associated with processes as they are more difficult to imitate by competitors than products or services, therefore creating a longer lasting competitive advantage.

Competing on cost

This strategy demands highly efficient, integrated operations and the supply chain plays a critical role in keeping both product and supply chain costs down. The lo-cost supply chain focuses on efficiency-based metrics such as asset utilization, inventory days of supply, product costs and totally chain costs (Cohen and Roussel, 2005).

Most apparel manufacturers outsource their production to emerging markets where costs are significantly lower. However this low-cost approach has also drawbacks: low flexibility and also can affect profit margins at the retail level. More often, the missed revenue and the reduced margins associated with a poorly aligned supply chain strategy are not included when assessing the total impact of supply chain strategic choices.

However, Zara, the flagship brand of the Spanish retail group Inditex, chose a very different model (Pich and van der Heyden, 2002). It positioned itself as a designer-boutique alternative for the price-conscious but trendy consumer. To deliver its strategy it manufactures almost 50% in-house, an industry exception.

Zara, (and also Sweden’s Hennes and Mauritz (H&M)) have created production models that deliver inexpensive fashion apparel in weeks, rather than months. Zara makes and manufactures its designs in Spain (Dutta, 2002). This allows the retailer to design, produce, and deliver a garment in 15 days to US stores according to a 2005 profile on Zara by Harvard Business School’s Working Knowledge (Kiley, 2006).

Although Zara’s manufacturing costs are 15-20% higher than the competition, it differentiate itself and stays ahead of the competition through its state-of-art supply chain (Cohen and Roussel, 2005)

3.2.3. Supply Chain (Operations) Strategy

Slack et al, (2006) emphases the role of the operations strategy.

Firstly, in their views, it should articulate a “vision” for the operations function’s contribution to the overall strategy. Moreover, Hays and Wheelwright (1984) offer a simple approach to the association of the operations capabilities and the overall business strategy (Appendix E). In their perspective, operations are moving from implementing the strategy through supporting the strategy, and finally, driving the strategy

Secondly, it should set the performance objectives (See detailed in 3.2.4. section).

Thirdly it should take the decision which will shape the operation’s capabilities, to build a sustainable competitive advantage. As resources are limited, every business has to pursue a specific set of decisions to improve their performance objective.

And, lastly, the operations strategy should fit with the market requirements. Slack et al, (2006) put forward a an operations strategy matrix which help us understand better how the operations strategy forms through the reconciliation strategic decisions to objectives.

3.2.4. Supply Chain (Operations) Objectives

There had been suggested by several authors, specific objectives to improve profitability, competitive advantage, and customer satisfaction of a supply chain. For instance, a key objective of SCM is to lower the costs required to provide the necessary level of customer service to a specific segment (Houlihan, 1988; Jones and Riley, 1985; Stevens, 1989). Another key objective is to improve customer service through increased inventory availability and reduced order cycle time (Cooper and Ellram, 1993). However, as we will see in this research a strategy based on increased inventory is very obsolete and can no longer achieve competitive advantage in the today’s environment. In addition, customer service objectives are also accomplished through a customer-enriching supply system focused on developing innovative solutions and synchronizing the flow of products, services, and information to create unique, individualized sources of customer service value (Ross, 1998). Finally, low cost and differentiated service help build a competitive advantage for the supply chain (Cavinato, 1992; Cooper et al., 1997; Cooper and Ellram, 1993; Cooper, Lambert, and Pagh, 1997; Tyndall, Christopher, Wolfgang, and Kamauff, 1998). As such, SCM is concerned with improving both efficiency (i.e., cost reduction) and effectiveness (i.e., customer service) in a strategic context (i.e., creating customer value and satisfaction through integrated supply chain management) to obtain competitive advantage that ultimately brings profitability.

Moreover, Slack, Chambers, Johnston and Betts (2006) came up with five performance objectives for any Supply chain: quality, speed (agility), dependability, flexibility and cost.

Taking Vokurka and Fliedner’s (1998) manufacturing sand cone model to the broader supply chain, will result in a sequential method where managers can identify the concentration areas for management efforts and available supply chain resources

Quality

Companies that compete on quality are known for their premium products and services and also for their consistence and reliable performance.

Quality improvement focuses on the elimination of waste within the entire system, thereby improving profit margins through the minimization of unneeded resources. All other improvements within a company stem from its ability to perform quality operations (Ferdows and De Meyer, 1990), therefore quality must be the foundation for all other strategic improvements.

Dependability

Dependability of throughput time is a very desirable target as it reduces uncertainty within the supply chain (Slack et al, 2006). To fulfil these commitments, comes in help the new technologies as a strategic means of managing supply chains (Carter, Carter, Monczka, Slaight, and Swan, 2000).

Flexibility

“Change is a given. Market conditions shift, business strategies evolve, and new technologies emerge. If you are not paying attention, your supply cain can get out of sync” (Cohen and Roussel, 2005:32)

The fashion industry is the most dynamic and challenging industry. The migration of fashion manufacturing from UK, and, in general, from established markets to offshore countries has played a crucial role in transforming the way fashion is created and consumed in the contemporary world, together with the complex nature of consumption that represents fashion today (Fernie, 2003)

Thus, in the fashion industry, increasing flexibility is today required to respond to changing customer requirements and shorter product life cycles. Firms can no longer rely on mass production techniques targeting large volumes and cost efficiencies as in the past. Required now is a faster response and movement towards more flexible suppliers that facilitate this improvement in response flexibility. (Vokurka, Zank and Lund, 2002)

Speed

Slack et al (2006) suggests that speed can be regarded from two perspectives. The first approach is focused on how fast can be served the consumer. In the fashion industry this would translate in large inventory, reducing the chances of stock-out and consequently reducing the customers waiting time. However, large inventories account for higher costs. The second perspective takes into consideration the speed of products and services to move through the supply chain. One example from the fashion industry would be Zara which constantly innovate within its supply chains to operate faster, more agile product and information flow. Designers and planners use point-of-sale information to adjust plans and designs to focus on bestsellers which results into a significant shorter time to market, higher revenues and fewer markdowns (Todd, 2001) For instance, after only 3 weeks of the 9/11 attacks, Zara had a black clothes collection in its stores, all over the world (Mentzer et al (2001).

Cost

Ferdows and De Meyer (1990) argues that, as supply chains begin to improve their capabilities in conformance to their strategy, and to utilize their supply chain strengths, this will set the stage for a shift in focus toward cost efficiency improvements which are the results of the improvement of the other objectives. However this depend on how the supply chain is choosing to compete (Slack et al, 2006)

3.2.5. Lean, Agile or Leagile Supply Chains

Fisher (1997) suggests that supply chains serving different markets should be managed differently. For instance, in less predictable environments, where demand for variety is high, there is a need for agile supply chains. On the contrast, in high volume, low variety and predictable environments lean supply chains are preferable.

A number of issues arise when global logistics strategies are being devised. One key concern is the question of the appropriate degree of centralised direction as against local autonomy. Traditionally many companies have preferred to devolve decision-making to a local level. Yet, almost by definition, it is difficult to see how global supply chains can be optimised in terms of service and cost if they are planned and managed on a fragmented, local basis On the other hand the attractions of local autonomy are clear when it comes to responsiveness to market changes and the ability to “stay close to the customer”. (Mentzer et al, 2001).

A second related issue is the extent to which synergy can be released by global co-ordination and whether this is compatible with local decision-making in sourcing, production and distribution. Many global companies, for example, have sought to establish “centres of excellence”, particularly in R&D and in production, whereby resources or technologies are concentrated for greater focus. However, separating new product development and production from the market may not necessarily be sound practice, especially where those markets are not homogeneous.

Running in parallel with these two issues is the question of how the search for economies of scale in production and the benefits of standardisation can be reconciled with the need to meet different local requirements and to do so with ever higher levels of responsiveness.

Below, it can be seen that Chopra and Meindl (2007) draw a clear distinction between lean supply chains which emphases efficiency and agile supply chains which emp


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