Fashion Clothing Industry
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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.
2. Research Methodology
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.
3. Literature Review
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
“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)
Source of Advantage
Basis of Competition
Key Supply Chain Contributor
Brand and unique technology
Desirable and innovative products
Time to market and time to volume
Lowest prices in the product category
Efficient low-cost infrastructure
Tailored to meet customer-specific needs
Designed “from the customer in”
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
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 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).
“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)
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).
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 emphases responsiveness.
Furthermore, Mason-Jones, Naylor and Towill (2000) draws a comparison of the attributes of lean and agile supply:
Product life cycle
Long term contractual
Immediate and volatile
Table2. Comparison of The Attributes of Lean And Agile Supply Chain
“In the volatile unpredictable marketplace for fashion goods, both stock-out and obsolescence costs are punitive.” (Christopher and Towill, 2000)
Another supply chain approach is “leagility” which, according to Christopher and Towill (2001), its goal is to build an agile response upon a lean platform. “Leagile” takes the view that a combination of lean and agile approaches be combined at a decoupling point for optimal supply chain management.
Forecast at generic level
Economic batch quantities
Christopher (2005) suggests that agility will be used downstream and leanness upstream from the decoupling point in the supply chain. Therefore, leagile enables cost effectiveness of the upstream chain and high service levels in a volatile marketplace in the downstream chain. However, Van Hoek (2000) argues that although a leagile approach to supply chain management may work at an operational level, it fundamentally challenge the concept of agility, as it has to fit with an agile approach to supply chain management in order to be applied properly.
3.2.6. Agile Supply Chains
In today's fast changing environment powerful forces are re-shaping the global business scene: financial and economic upheaval in the Far East, Latin America and Russia is creating a tidal-wave of change in the competitive environment. Organisations that once felt insulated from overseas low-priced competitors now find that they too must not only continue to constantly create new value for customers, but must do so at a lower price.
To meet the challenge of simultaneously reducing cost and enhancing customer value requires a radically different approach to the way the business responds to marketplace demand. One of the keys to success is the creation of an agile supply chain on a worldwide scale.
The concept of “agility” as opposed to just being efficient, effective, lean, customer focused, able to add value, quality driven, proactive rather than reactive, etc., has been the source of considerable debate and academic conjecture.
Agile supply chains have been recognized as a key area of operations strategy since at least the early 1990s.
According to Goldsby, (2005), agile systems are built around flexibility, emphasizing flexible batch sizes, quick changeovers, or manufacturing products to specific customer orders. For instance, Levi's took the initiative by providing the “perfect pair” service which offers custom-made jeans delivered to the customers in just three weeks. This initiative accounted for a 300% rise in sales at early test sites (Christopher, 1997)
Ismail et al., (2002) states that turbulence is a central driver for agile supply chains and encapsulates the idea of continuous, uncertain and potentially disruptive change in a variety of factors, both internal and external, that can be found within the manufacturing environment of a company.
In Naylor et al., (1999) view, agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace
Supply chain agility can be achieved by systematically developing and acquiring capabilities that can make the supply chain act rapidly and diversely to environmental and competitive changes (Khan K et al., 2006).
Agile supply chains are capable of rapid adaptation in response to unexpected and unpredicted changes and events, market opportunities, and customer requirements (Nayyar and Bantel, 1994; Goldman et al., 1994).
Supply chain agility can be founded on business processes and structures which facilitate speed, adaptation and robustness, and which are capable of achieving competitive performance in a highly dynamic and unpredictable business environment (Christopher, 2000).
However, it seems to be a consensus in the literature in the way that agility represents the ability of an organisation's supply chain processes to provide a strategic advantage by responding to marketplace uncertainty.
Christopher (2005) extended the definition of agility into a wider business context by relating agility in supply chains to both the enterprises' processes and the interfaces between those processes and the market. Companies that focus on agility are market-sensitive and will profit by exploiting their supply chains to rapidly and cost effectively respond to unpredictable changes.
It has been suggested by Harrison, A., Christopher, M. and van Hoek, R. (1999) that agile supply chain are: market sensitive, virtual, network-based and process aligned.
Christopher et al (2004) emphasises the crucial importance of understanding the customers in the fashion retailing. Moreover, in their view, the improvements in the use of information technology to capture “real-time” data, and as a consequence it will be put less reliance on forecasts and it will be created a virtual SC . An integrated process will be created between the business partners through sharing information. And finally, the network plays a significant part in the agile SC as this where the coordination and structure takes place in order to meet the customer expectations.
In conclusion, the supply chain of the new environment will have to contend with: turbulent markets that change rapidly and unpredictably, highly fragmented ‘niche' markets instead of mass markets, ever greater rates of technological innovation in products and processes, shorter product life-cycles, growing demand for tailored products (mass customisation), the delivery of complete “solutions” to customers, comprising products and service and all of the above to be achieved at lower cost.
Agility implies responsiveness from one end of the supply chain to the other. It focuses upon eliminating the barriers to quick response, be they organisational or technical.
3.2.7. Quick Response (QR)
Quick Response is an SCM approach based on the concepts of reducing inventory holding costs, postponing the commitments of resources in manufacture until a clearer picture of demand is known and having flexible manufacturing systems that are able to respond (Bruce, Moore and Birtwistle, 2004)
According to Fernie (1994) and Hines (2001), QR had been introduced in USA during the mid 1980s in order to compete with the offshore manufacturers, when Kurt Salmon Associates (KSA) acknowledged deficiencies in the fashion supply chain. KSA projected that only 11 weeks out of the 66-week lead-time in the pipeline are spent on the actual processes, and the rest are wasted in the form of work-in-process and finished inventories at various stages of the complex system, meaning a loss of 25 billions $ each year.
QR is “a mode of operations in which a manufacturing or service industry strives to provide products and services to its customers in the precise quantities, varieties and within time-frames that those customers require” (Gunston and Harding, 1987:44).
QR may be regarded as a combination of the just-in-time system, and IT systems such as electronic data interchange (EDI), electronic point of sale (EPoS), computer aided design (CAD) in order to create a more efficient SC. Therefore it will be created a long term relationships between the upstream and downstream side of the SC (Appendix A) to reduce the lead-time maximise customer satisfaction (Christopher et al, 2004, Forza and Vinelli, 1997, Slack et al, 2006).
As emphasised by Kurt Salmon Associates (1997), the main purpose of introducing a QR strategy lies in the reduced inventory and the reduced risk of forecasting.
In conclusion, QR is design to overcome the impact of seasonality in operations.
According to Lowson (2002) the traditional approach is to manufacture the products before the season starts and to deliver from half to two thirds the amount estimated to be sold in the following season. In the contrast, QR strategy takes a totally different approach. The retailer orders the least possible inventory prior to the season. From the very beginning of the season, the retailer gathers the point of sale (PoS) data and analyse it to get early indicators of style, colour, size, etc. The manufacturers are guided, on a daily or a weekly bases, by the PoS information.
3.3. Framework for company analyses
Ellis and Williams, (1993) came up with the following framework for company analyses.
The above model seems to be very exhaustive, however it will not be used in this research as it will be focused only on objective measures and in particular it will be concerned with the impact of the operations on the business performance.
Although management is a key issue in any company which can make the difference between success and failure its quality is very difficult to assess with objective measures therefore it will not be considered in the case study.
As one objective of this research is to assess the performance of the entire length of the supply chain the framework proposed by Cousins, Lamming, Lawson and Squire (2008) will also be taken into consideration.
However, due to the fact that the supplier performance and the customer satisfaction are, typically, assessed through more subjective non-financial measures, these will be excluded from the present research. Thus, when assessing the supply chain, first, it will be considered the time (with its components: on-time deliveries, customer response time, and stock-out) as the most important factor in the fashion supply chain. Secondly, the author considered as equal most important factors to be the cost (total distribution cost and total inventory cost) and the quality and flexibility.
4.1. Zara - INDITEX
“This business is all about reducing response time. In fashion, stock is like food. It goes bad quick” (Dutta, 2002).
Inditex is one of the world's largest fashion distributors, with eight sales formats -Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe - boasting 4.359 stores in 73 countries. (Inditex, 2009)
The Inditex Group is comprised of over one hundred companies associated with the business of textile design, manufacturing and distribution.
Thanks to its achievements and the uniqueness of its management model based on innovation and flexibility, Inditex is one of the largest fashion distribution groups.
INDITEX's philosophy - creativity and quality design together with a rapid response to market demands - has resulted in fast international expansion and excellent response to their sales concepts.
The first Zara shop opened its doors in 1975 in La Coruña (Spain), the city that saw the Group's early beginnings and which is now home to its central offices. Its stores can now be found in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. (Dawson et al, 2007)
The company believes that is in their integration along the SC that allows them to respond to customer demand quickly and flexibly while keeping stock to a minimum (Slack et al, 2006).
4.2. The Gap
The Gap, based in San Francisco, had been founded in 1969 and had achieved stellar growth and profitability through the 1980s and much of the 1990s with what was described as an “unpretentious real clothes stance”. The Group operate five of the most recognized apparel brands in the world — Gap, Banana Republic, Old Navy, Piperlime and Athleta (Mintel, 2008), through which the company retails casual clothing, personal care products, and accessories (Datamonitor, 2008). The company has strong position in Europe through subsidiaries in UK, France and Ireland (Mintel, 2008).
Today, Gap Inc. is one of the world's largest specialty retailers, employing 150,000 people in more than 3,167 stores worldwide. In the fiscal year 2008 Gap recorded revenues of $15,763 million, which was 11% lower than the year before mainly due to the under-performance of the Gap and Old Navy brands. However, the company recorded 7.4% increase in the operating profit ($1,315 million) over 2007, and 7.1% increase on the net profit ($833 million) in the corresponding period (Datamonitor, 2008).
4.3. Hennes and Mauritz
Hennes and Mauritz (H&M), founded as Hennes (hers) in Sweden in 1947, was another high performing apparel retailer. While it was considered Inditex's closest competitor, there were a number of key differences. H&M outsourced all its production, half of it to European suppliers, implying lead times that were good by industry standards but significantly longer than Zara's. H&M had been quicker to internationalize, generating more than half its sales outside its home country by 1990, 10 years earlier than Inditex. H&M also had adopted a more focused approach, entering one country at a time—with an emphasis on northern Europe—and building a distribution centre in each one. Unlike Inditex, H&M operated a single format, although it marketed its clothes under numerous labels or concepts to different customer segments. H&M also tended to have slightly lower prices than Zara, engaged in extensive advertising like most other apparel retailers, employed fewer designers (60% fewer than Zara, although Zara was still 40% smaller), and refurbished its stores less frequently. H&M's price earnings ratio, while still high, had declined to levels comparable to Inditex's because of a fashion miss that had reduced net income by 17% in 2000 and because of a recent announcement that an aggressive effort to expand in the United States was being slowed down.
4.4. The attributes of the Agile Supply Chain and Quick Response to the Fashion Retailers
“Fast fashion is successful because it competes with (and not in spite of) operations” (Caro, 2008).
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 J, 2003).
Martin Christopher et al (2004), defined the fashion markets as having short life-cycles, being highly volatile and low predictable and also the buying decision are made by impulse, characteristics that emphases the need for quick response (QR).
Fashion retailing has changed dramatically in the past years. Fashion became “fast complex and furious” with more demanding customer for unique products and a very high degree of uncertainty (Slack et al, 2006:232).
Fast fashion has widely been acknowledged in fashion press and within the industry as being a key strategy for success for modern fashion retailers. (Barnes and Greenwood, 2006). Retailers like Zara and H&M have become well known for adopting a strategy of constantly renewing their product ranges with fashion-led styles that attract media attention and entice their mostly young female customers into the stores frequently. (Dawson et al, 2007). As we have moved into the twenty-first century, retailers like Zara and H&M have shifted the focus of competitive advantage from price towards fast response to changing fashion trends and consumer demand. (Barnes and Greenwood, 2006)
The contemporary fashion industry remains highly competitive, with additional pressure for fashion companies to compete not only on price, but also their ability to deliver newness and “refresh” product (Christopher et al., 2004). Frings (2002) notes that the fashion industry relies on the constant changing of product, correlating with consumer change - their change of lifestyle and need for difference. Socio-cultural changes are creating a faster pace of living and as Sproles and Burns (1994) advocate, mass society is orientated toward continuous change and progress. Consumer needs are then changing at a much more frequent pace.
The fact that a number of companies (such as Zara, Dell and Toyota) have managed to record extraordinary success while doing ordinary things (such as selling clothes or making computers or cars) has made us more fully aware that what these organisations products can have a significant less importance than the way that they produce it. This holds true even today, when the product life cycle is getting shorter and shorter, and more emphasis is being placed on technological product innovation as a mean to add value.
Central to the way that companies produce things is the way that they manage their supply chains, the collection and distribution of all the inputs to the production process. Some companies take this to extremes. For example, Olam, a Singapore-based commodities trader, says that in practice it is “in the business of supply-chain management” (The Economist, 2009). It undertakes all the processes involved in getting soft commodities such as cocoa and coffee from the grower's farm to the factories of Olam customers such as Sara Lee. Its competitive advantage lies in the superiority of its processes, not its commodities. (idem)
To quote Collins (2001) “Good is the enemy of great.” Companies with top-performing supply chains are never satisfied with just good. For them, change is seen as an opportunity. They continuously learn from other industries and have a passion for excellence. They have also been some of the earliest adopters of principles-based leadership for sustainability and corporate social responsibility. While other companies are caught up in organizational blame games and groupthink, the Supply Chain Top 25 leaders are more likely to have a consistent, common vision for global supply chain excellence.
Traditionally, the way companies ensured that the right components were ready at the right time was to hold huge stocks of them in warehouses which could be drawn down as and when required (Appendix G). However this situation changed, dramatically, with Toyota's just-in-time system (JIT), companies became more aware of the cost of sitting on warehouses full of stock and tried to manage their supply chains so that inputs arrived only when they were needed (Mentzer et al, 2001).
Moreover, in a sense the very process of globalisation has retarded agility. For example, many companies in their search for lower production costs have moved much of their manufacturing and assembly offshore, the main driver for such moves often being low labour costs. However, in so doing they run the risk of extending their lead-times significantly thus generating the need for more inventory in the pipeline. As a result their agility is reduced. Some organisations such as Dell Computers, have actually sought to reverse this trend by bringing manufacturing back closer to their main markets. (FT, 2009) Other companies are using low cost sources of supply to manufacture products where there is a predictable demand and using more local, flexible facilities for producing less predictable, more volatile products.
A recent IBM study on 400 senior supply chain professionals worldwide, found the supply chain challenges and also how should the supply chain be managed in the today's volatile environment.
According to the above study, the most important challenge of a supply chain, in the retail industry, is having visibility. Although SC visibility had been very much acknowledged in the last five to ten years, in today's environment there is a shift towards real time SC. Thus, the real time data plays a very important part in managing the retail operations more effectively and meet the customer's expectations. In addition the supply chain should be integrated. Moreover, there are three improvements that can be implemented in the SC through SC visibility. Firstly, having visibility in the SC it would be easier to see where the excess costs lie, therefore, there is the cost reduction opportunity. Secondly, having a platform for the future, plays a very significant part in managing the new operations. And finally, is knowing the roots of the shrinking problems. In conclusion, having visibility in the SC does not imply, building more warehouses or working harder, but to take advantage of the new technology and make the supply chain smarter.
The second most important challenge for the SC in the current climate, according to the same study, is the cost containment. “Supply chain is at the heart of the business” thus managing the SC costs will translate into managing the product costs. First of all, this can be achieved through SC agility and responsiveness and secondly, by changing the levers that control change in the supply chain, to move more costs from fixed to variable. Moreover, the current climate forces the fashion retailers to fundamentally change their SC within the organisation. For instance, historically, organisations had at least two, third party logistic organisations employed in order to trade off one against the other. On the other hand, in the current economic downturn, many retailers prefer to work with just one third party logistic organisation, in order to gain economies of scale. However, the retailers should not disregard the customer in order for the cost reduction to be sustainable. In conclusion, to manage the SC costs effectively, in the present downturn, an organisation needs to acknowledge the impact of the external dynamics and be flexible to deal with the continuously changing external factors.
And, finally, the top third SC challenge faced by the organisations in the current recession is meeting the ever changing customer expectations. In this recession, consumer loyalty is shifting from the Brand loyalty to the Value loyalty. The changing customer behaviour creates volatility, new markets or rapid changes in existing markets, therefore, SC needs to be more flexible and responsiveness to meet customer's expectations. Another way of meeting customer demands is by having integrated multi-channels SC. Companies need to address the divide in offerings between online and offline products and promotions. Customers today demand a standard experience regardless of channel, and as such companies need to unify their marketing approach, pricing policy and delivery route (Fowler, 2007).
As working for the same company, the “web” and store teams are likely to view each other as competitors, to integrate these channels in the supply chain, it is important to integrate the teams and mindsets. This will, no doubt, result in duplicate positions and an opportunity to reduce headcount. Each needs to develop a firm understanding of each other processes and priorities, and respect those in building the new, collaborative multi channel supply chain (idem).
Most successful retailers built multi-channels incrementally. Below are some examples of sales-channels adopted in the current environment that are expected by the customers as standards.
4.5. Zara, H&M and Gap. Contrasting Supply Chain Stages
In the fast fashion market, both Zara and H&M emphasize the importance of design. Moreover, the boundary between high and fast fashion had started to blur. For instance, in 2004, H&M recruited high fashion designer Karl Lagerfeld, Stella McCartney and Roberto Cavalli, previously noted for their work with exclusive brands, and Jimmy Choo, this year in an effort to distance itself from the growing number of budget clothing retailers on the high street. (Pearson, 2009; Slack et al, 2006). H&M position was: “We make affordable high-fashion. To collaborate with Jimmy Choo, which is known for luxury and glamour, is a fun way to prove that.” (FT, 2009)
Both Zara and H&M have moved away from the traditional industry practice of offering 2 collections a year. Their “seasonless cycle” involves introducing new product on a regular basis throughout the year (Appendix G). This enables designers to meet the customer's expectation more accurately. However, Zara is taking a even more extreme approach. It designs a garment, it manufactures a batch, send it to the stores and very often the design is never repeated again.
Zara has challenged many of the traditional ways of operating within the retail clothing sector (Dowson, Larke and Mukoyama, 2007).
Instead of trying to create demand for new trends in the summer and winter seasons using the catwalks of fashion shows, Zara studies the demands of the customers in its stores and then tries to deliver an appropriate design at lightning speed (Hines and Bruce, 2007). Data on what sells and what customers want to see goes directly to their headquarters in La Coruña, where teams of about 300 designers make about 30,000 items a year, none of which stays in the stores for over a month (Slack, et al, 2006), in comparison with 2,000-4,000 items offered by H&M or Gap. Moreover, while H&M has offered lines by star designers, as previously outlined, as well as celebrity collaborations with Madonna and Kylie Minogue, the Zara design comes mostly from its young and innovative designers. Starting with basic fabric dyeing, almost all Zara's clothes take shape in a design-and-manufacturing centre in La Coruna. Designers talk daily to store managers, to discover which items are most in demand. Supported by real-time sales data, they then feed repeat orders and fresh designs into the manufacturing plant. This, in turn, ships the desired items directly to the stores twice a week, eliminating the need for warehouses and keeping inventories low. In the process, Zara has become the most profitable arm of Inditex, a holding company of eight retail brands, and one of the biggest success stories in Spanish business. (INDITEX, Annual Report, 2008)
4.5.2. Manufacturing and Distribution
In the highly volatile, low predictable and short life-cycled world of fashion, as described by Christopher et al, (2004), even seemingly well-targeted designs could become obsolete in the months it takes to get plans to contract manufacturers, production, then ship items to warehouses and eventually to retail locations.
However, Zara really excels in getting locally targeted designs quickly onto store shelves. For instance, when Madonna played a set of concerts in Spain, teenage girls arrived to the final show wearing a similar outfit she wore during her first performance, bought from Zara. Another very well known example would be that within three weeks of the World Trade Centre attacks, Zara had a black collection throughout the world (Dawson et al, 2007). The average time for a Zara concept to go from idea to appearance in store is 15 days in contrast with its rivals who receive new styles once or twice a season (Inditex, 2009). Furthermore, smaller tweaks can be in stores within just 10 days. What is even more striking is the fact that Zara is twelve times faster than Gap, despite offering approximately ten times more unique products.
Inditex has centralised its shipping logistics information and control onto a single web platform (Perry, 2009). It is being used to enhance the retailer's fast fashion rapid replenishment model around the world. Improved information on inbound shipments helps Inditex's distribution centres to proactively support its chains' continuous store replenishment requirements. (idem) The owner of Zara, Pull & Bear and Bershka has chosen to introduce the GT Nexus trade and logistics portal as a global ocean freight information system. It provides detailed container status and event information, documentation management and automates interaction with the retailer's ocean carriers. Inditex is also trying to completely remove paper documentation from its ocean freight transaction processes, and also plans to expand this to air freight. (INDITEX, 2009)
On the contrast, H&M takes three to five months to go from creation to delivery, and they are still considered one of the best in the market. Other retailers need an average of six months to design a new collection and then another three months to manufacture it. VF Corp (Lee, Wrangler) can take 9 months just to design a pair of jeans, while J. Jill needs a year to go from concept to shelves.
At the heart of Zara's success is a vertically integrated business model spanning design, just-in-time production, marketing and sales, with the company seemingly breaking all the established rules within fashion retailing (Dawson, et al, 2007). This gives the group more flexibility than its rivals have to respond to the fashion trends. Unlike other international clothing chains, such as Hennes & Mauritz (H&M) which buys clothes from more than 900 firms and Gap, Zara makes almost 60% of its merchandise in-house, (Appendix ) rather than relying on a network of disparate and often slow-moving suppliers.
In an interview, taken by The Economist, with Richard Hyman, one of the UK's most influential analysts and the Managing Director of Verdict, a retail consultancy owned by Datamonitor, he argues that “Vertical integration has gone out of fashion in the consumer economy”, and that “Zara is a spectacular exception to the rule.”
Moreover, inventory optimization models help Zara determine how many of which items in which sizes should be delivered to stores during twice-a-week shipments, ensuring stores are stocked with the right merchandise. Outside the distribution centre in La Coruña, fabric is cut and dyed by robots in 23 highly automated factories (Inditex, 2009). Zara is so vertically integrated, as the firm makes 40% of its own fabric and purchases most of its dyes from its own subsidiary. About half of the cloth arrives undyed so the firm can respond as any mid-season fashion shifts occur. After cutting and dying, many items are stitched together through a network of local cooperatives that have worked with Inditex. The firm does leverage contract manufacturers (mostly in Turkey and Asia) to produce staple items with longer shelf lives, such as t-shirts and jeans, but this volume accounts for only about 12% of its total volume (idem).
Zara, has also invested into highly automated warehouses, close to their production centres that stores packs and assemble individual orders for their retail networks. In 2001, Zara created a very high controversy due to the fact that it announced to build another warehouse in spite of using only half of the capacity of its previous one (Slack et al, 2006). At the present, all of the items the firm sells end up in a 5 million square foot distribution centre in La Coruña, or the second warehouse, built in 2002 in Zaragoza in Spain's northeast (Inditex, 2009).
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