Crocs Inc. was started in the year 2002 in the state of Colorado of USA. It is one of the fastest growing companies in the world, manufacturing footwear range for consumers of all age as Crocs (brand). Crocs, is sold over 100 countries across the world. Their unique product of sale is known as Croslite (made of special plastic king). This is their trade secret, is considered to be original tech in the industry. This becomes its competitive advantage over time as it provided its consumers with high comfort, light weight and bright in colors and new age design, above all was odor free. Main reason behind the company’s success in its short stint of a decade and high increase in popularity is due to its efficient supply chain.
This paper is has the critical analysis of the footwear industry in general and the supply chain of Crocs Inc.
The idea of this assignment is to demonstrate some of the concepts and theories thought in class while applying them in the company’s current scenario. The argument has been made with opposition to vertical integration of the organization to achieve its competitive advantage by improving on its success and strive for its (Crocs Inc.) sustainable growth and development in the years to come.
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This paper will show the constraints and the shortfalls of the existing supply chain of the organization. The case has been studied by reviewing the organization on par with the industry using Porter’s Five Forces model. The organizations suffering as a result of Forrester effect is proven, also the 3PL is used to review and analyze the supply chain. Kaizen theory of the Japanese philosophy is used for better management of supply chain.
Porter’s Five Forces Analysis
Entry Barriers: Entry for new players is quite easy due to need of low capital and easy governmental policies. Economies of scale to be achieved are a little difficult owing to too many players in the market. There is easy availability and accessibility to raw materials.
Supplier Power: Shoes are more or less made from the similar material with varying differences in the property of the raw to suit the quality standards of each organization and the raw materials are available abundantly and there are enough suppliers too to meet the demand.
Threat of Substitutes: Low cost of entry and changing technology is any day an imminent threat for substitutes, large players however would be able to overcome this with constant improvement to current product portfolio.
Buyer Power: Customer is king, footwear industry today is more like fashion industry due to the commodity turning out to be more of an accessory than essential. This means ever changing needs of customer wants.
Rivalry: Most simple entry and exit methods means, immense competition, this however has never proven a failure or threat to large players who are already established in the industry. With very sound supply chain and good rapport with their suppliers and distributors, they dominate the fast changing market. Crocs Inc. is one such organization which has laid strong foot hold.
The above factors gives us a clear picture that it not only large players who are key in the market, however even small players have access and might turn out to be successful with few differences in their product if it is found to be of interest of the consumers.
With having the industry standard before us, I have analyzed that the supreme popularity of the organization in discussion has years to go before it could hit the maturity stage of the product life cycle (PLC). The general PLC of the industry shows in the below diagram that the industry takes some time to mature and decline.
According to Christopher, M.(2005). Crocs Inc. uses global strategy for logistics. He elaborates that Crocs. Inc. has different production facilities catering to varied markets, with centralized inventory they have a specific localization scheme, average (general) semi- finished goods level and small scale order directed by their suppliers and distributors from the local markets. This gives them the capacity to cater to sudden fluctuation in the market demand with little or no impact on their supply power.
The reason for Croc to fail despite doing well with their supply chain and their continuous improvement to they failed because they had rapid ramp up of raw material orders placed under the assumption of meeting out excess market demand. However they did not realize that customer demand on fashion goods don’t last longer compared to regulars. To give a better understanding, I have added pictorial representation of the outcome Forrester (Bullwhip) Effect is.
Outcome of Forrester Effect
What they failed to realize was that customer demand is rarely perfectly stable and it becomes essential for every business to come up with accurate demand forecasts. As mentioned earlier in the industry analysis, the “customer power” is very strong and it was necessary for Crocs to stretch its perception of customer demand as far as possible. Usually, companies resort to holding reserve stocks due to overcome forecasting errors but that is not the case with Crocs. They believe in holding excess capacity and their ability to produce the required stock as and when required. In my opinion they were not entirely correct! Misperceptions of the stakeholdersâ€Ÿ risk and time delays caused panic ordering by suppliers due to unfulfilled market demand. Forecasting errors and constantly changing inventory control strictures created variations in lead time and replenishment of stocks.
Adopting a 3PL system
3PL is best suited for large organizations like Crocs. Inc. as they have lot of their cash flow being blocked (this replicates dead assets). This would have a severe impact over time as it was centralized inventory and logistics channel they adapted to.
Free up resources: The organization had funds blocked. It proved highly uneconomical to them despite the high ROA of the company in 2007 at 34 % (Hoyt, D. and Silverman, A., Exhibit 4, p.18) . Crocs had over a million pair of footwear in excess. Instead of investing such huge capital they can share the burden and risk as well by outsourcing.
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Cost advantage: There is no concrete evidence for what made them loose their cost advantage over their competitors. In my honest opinion this might have occurred by acquiring/ buying out factors in China and Mexico where outsourced parties were running the show. Assumption of making more profit margins would have led to inverse effect. They must have also forgotten that new entrants to the market use more advanced and cost efficient equipment. Using obsolete machinery and dyes is of no economic benefit any longer.
Core competencies: Crocs. Inc.’s greatest advantage was their immaculate supply chain model, however due lack of constant development and early adoption of owned manufacturing made them go off-track from concentration on their core competence of supply chain. Using 3PL will help them stay focused. The organization must have spent the money and time on R&D and market analysis rather than wasting on owned- manufacturing.
Inventory management: Crocs. Inc. had the work inventory management. They had a steady increase in their inventory level which was not matching their product cycle. At a given point their inventory were close to three times there fixed assets (Hoyt, D. and Silverman, A., Exhibit 2, p.16). This is all despite their high profit margin. Ultimately their inventory turnover ratio was way below industry average (Hoyt, D. and Silverman, A., Exhibit 2, p.16 and Exhibit 4, p.18).
One more flaw in Crocs. Inc. supply chain model was that it was conservative to add more cream agility to the model changes were discarded which led to distortion of supply and demand phenomenon.
In my opinion application of Kaizen model to achieve better integration of supply chain in Crocs. Inc. The organization has to keep a close eye on it direct strategy product line and should be cautious in selection of suppliers for raw materials. This is required to keep up its competitive advantage and cost escalation at check. To add to this management has to keep moulds and compounding products under watch. 3PL Organizations should take over secondary supplies. This would be applicable for cost advantage only if low cost production hubs (countries) are chosen. By doing this warehousing and raw-material inventory costs and problems are solved, this is transferred to the manufacturer.
Of course, this is only an illustration and this is what my seriously limited knowledge in shoe making could conjure in terms of the Kraljic matrix for Crocs. Notwithstanding this ignorance, it can be noted that the Leverage Items and the Strategic items are likely to affect Crocs Inc. more than the items on the bottom row. Consequently, it may be recommended that Crocs strives to achieve vertical integration on the items on the top row and similarly, it may outsource/contract-out the Non-critical and Bottleneck items. In doing so, Crocs should be careful in selecting the suppliers for its raw materials and be able to achieve competitive pricing. As for the machinery and equipment, the firm might find it more suitable to procure it on behalf of the contract manufacturer rather than relying on the latter. Strategically, it should try and find suppliers for leverage items that are closer to the manufacturing facilities otherwise, the transportation costs of raw materials might outweigh the benefits of the same. On the other hand, Strategic items should be kept under the direct control of the Crocs management as the moulds and compounding are the two key advantages that Crocs has over its competitors. Non-critical items like colors and replacement parts should be given to 3PL organizations and so should the bottle neck items. Point to be noted here is that since the actual production of the products can be outsourced to countries with low labor costs, the labor is termed as a bottleneck item. Similarly, warehousing would become the contract manufacturer’s worry and Crocs need keep only limited warehousing facilities under its direct control.
Other improvements in the supply chain could be brought about by adopting the Kaizen and Kanban system in conjunction. This is not to say that these could act as replacements or alternatives to the Kraljic model. Where the Kraljic model shows us an approach to supply chain integration, Kaizen and Kanban (HBR on Supply Chain Management) provide us the means to maintain and continuously improve the supply chain process. Kaizen (Imai, M.) is based on five basic elements (Teamwork, self-discipline, high morale, quality and suggestions for improvement), and provides three key factors that will help Crocs achieve reduced wastage and inefficiency, improved internal working environment and standardization across the whole organization. On the other hand, there is a need to establish a demand-driven supply chain capable of reacting to actual customer requirements, which can be met through the concept of Kanban. Considering the successful implementation of this model by Wal-Mart, Crocs can establish an EPOS system to regulate replenishment and delivery from the distribution centers to the stores and from the suppliers to the Crocs’ distribution centers. This creates a more accurate and clear picture of customer demand and inventory management throughout the supply chain. This can create better inventory positioning at lower costs and an IT based infrastructure providing flexibility and higher value for the customers. These two methods offers the right solution for Crocs to work towards a supply chain system that is agile as well as lean, which is a better balance than the current system that is highly agile and less lean. GE had a similar process in place which was known as the Quick Response Program (Bartlett, C.A. and Wozny, M.), and it helped GE cut down production cycle in half and reduce inventory costs by more than 20%. The financial implications for Crocs by implementing the prescribed system are evident.
Furthermore, I can superimpose the Kaizen-Kanban combine on to the Karljic matrix and it may be inferred that Crocs needs to be lean for the processes it controls itself (Leverage and Strategic items) and be agile for the items that are being outsourced (Non-critical and bottleneck items). Besides the above, rather than depending on its own estimates of stocks, Crocs can use the Kanban system to provide a more accurate and real-time information about replenishment schedules, which will improve the efficiency of the production and inventory management processes.
Another important area where I feel Crocs Inc. could have faltered is in their ability to distinguish their products as either, innovative or functional (Fisher, M.) (Appendix E). According to Fisher, it is very important to match the supply chain with the type of product that the company has. And based on this type, the supply chain of the firm will be efficient or responsive. This is similar to what I have mentioned earlier in relation to the Kaizen and Kanban system and their correlation to the Lean and Agile supply chain systems. However, the underlying area according to Fisher’s model is the classification of the product. I would like to agree with Fisher here and elaborate this more specifically concerning the Crocs supply chain process. As recommended earlier, Crocs should aim to achieve a combined vertical and horizontal integration; vertically integrated for the critical and strategic processes and horizontally integrated for the non-critical and bottleneck processes. Similarly, Fisher’s model applies here in that the final product of Crocs Inc., their shoes, will be the innovative product, characterized by changing fashion trends, consumer demands, and new designs and therefore, Crocs should adopt a more responsive supply chain (may also be termed as Agile). On the other hand, the critical and strategic processes involving the procurement of its secret raw materials and moulds would be mentioned under functional products. As a result, Crocs should develop a more efficient supply chain for these products.
In relating this to the changes required in Crocs’ supply chain management it can be termed as the need for incremental change rather than undertaking transformational change. It is, after all, a change in the work culture of Crocs that is being suggested here and the aspect of change management cannot be overlooked at this point. If Ron Snyder is himself not convinced about this need for change he will not be able to implement the same through the organization. It makes me consider that applying the Eight Steps of Leading Change (Kotter, J.P.) would bring about a wonderfully methodical implementation plan of the proposed incremental change in the supply chain process at Crocs Inc.
As seen from the above discussion, Crocs revolutionary supply chain might have been so only for a short period of time. The current strategy at Crocs Inc. has led to inefficient production and excessive inventory due to inaccurate forecasts of customer demand. To add to this, the Forrester effect explained above leads to stock-outs, sub-optimal utilization of resources, poor customer service and financial costs all along the supply chain. To stretch this a bit further, the damage to the stakeholder image and loss of loyalty can lead to greater losses for the organization.
Of course, the company has continued to show increasing profit quarter after quarter but it has lost the faith of the stockholders in the market and with increasing competition, Crocs needs to alter its stance. The focus on core competencies, demand-driven supply chain and adding value to the end user is what Crocs needs to work at to improve its market position. Taking cues from Porter, it would be wise for Ron Snyder to rework Crocs’ approach towards gaining a competitive advantage through a Hybrid supply chain process combining both agility and leanness. Although Crocs did eventually shift to an IT based inventory management and planning process, it could have performed much better had it implemented this earlier. Moreover, referring back to Kotter, the change in corporate culture is also an area which Crocs could benefit from by being more flexible and reactive to market trends and consumer/supplier requirements.
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