Analysing Retail Customers Moving To Offshore Suppliers

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Stevenson's was a vertically integrated part of Coats Viyella (CV) supply chain, which was dealing in dyed garments like knitwear, hosiery and woven fabrics (Stratton, 2008). CV group majorly catered to high street retailers, which is why Stevenson's received majority of its business from CV. However, when CV pulled out of its dyeing business in 2001, it also reduced the market share for Stevenson's (Stratton, 2008).

Most of the retail customers of Stevenson moved to offshore suppliers since they were able to reduce their expenses by purchasing dyed products in bulk from Far East. "As high numbers of companies are moving sizeable aspects of their businesses offshore to other regions of the world such as Eastern Europe, China and Southeast Asia, in order to take advantage of the reduced cost and the wide range of suppliers available" (Hill, 2005). The merchandising team that represented the retail customer assumed that moving the garment manufacturing process to offshore suppliers would be a cost effective decision (Stratton, 2008). Hence, Stevenson's retail customers opted to move their operations to the Far East Suppliers with the hope of benefiting from the low cost offers.

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Moving to off shore suppliers might have helped in reducing cost but it also increased the lead time which caused customer dissatisfaction and excess of supply as compared to the demand (Hill, 2005). This resulted in retailers forecasting the latest fashion trend way in advance. Moreover, if their forecast is inaccurate it can further result in stock pileup. Organizations moving off shore are ready to face the consequences of increased lead time, by keeping the cost low (Hill, 2005). Hence the above mentioned circumstances pushed the retail customers of Stevenson to move to offshore suppliers.

1.2 How did this strategic choice impact the retailer's performance?

The strategic choice of moving to offshore suppliers for cheaper products has created a negative effect on the retailer's performance. It has also hindered their performance in the chosen market. The effect of the strategic choice can be summarised as:

Lead time

Colour Shortage

Stock-outs

Lead time also increased as the retail customers moved offshore as it took approximately 18 - 20 weeks to ship the finished product. Christopher and Towill (2000) claims that the retail customers were not able to meet the demand uncertainty because of an increase in lead time. Increase in lead time can also occur due to process change and delays. Also, it might force the customers to look for alternate suppliers which will cause a decrease in customer's market share (Lawrie and Ouoc, 2005).

The offshore dealing restricted the choice of colours to the retail customers since they had to finalise the colour way in advance, which means that by the time the stock reaches the store the colour might not be either in demand or the fashion trend for the season. Also lack of quick response caused a reduction in demand for certain colours. This is a functional arrangement for the suppliers, since they require longer lead time to plan and control their inventory levels (Stratton, 2008).

Market is characterised by high variable demand and high inventory stock. Since they decided to move offshore, some of the best selling colours for the season like beige and black were out of stock. Due to this retailers faced further problems since they had to markdown the price of old items of the same range. Moreover, the retailers could not sell the newly arrived stock at the estimated price since the customer would not want to pay more for an item which is almost at the end of its shelf life. The whole process proved to be segmented, lengthy and monotonous (Stratton, 2008).

1.3 Outline and evaluate the strengths and weakness of Stevenson's offer to the retailers and how it might have been developed to exploit specific markets?

To the retailers Stevenson offers:

Dyeing Garments (lamb wool, acrylic, cashmere, cotton and mohair)

Pressed and hung the garments

Labelling the garments

Garments packaging

Delivery

Strengths and weaknesses of Stevenson's offer

The factors which Stevenson anticipated would make this additional offer appealing to their retail customers were:

5-10 days lead time were offered to the retailers at the finishing facility before delivery, from colour choice to distribution depot (Stratton, 2008).

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Stevenson took advantage of the growing market. Stevenson got offer from far-east for packaging and delivery of garments to the retailers for display. Most occasions recovery work has to be done for some garments due to some error, this made them to charge £1.50 - £3.00 for a garment for re-dyeing, dye fixing and making the garment machine washable (Stratton,2008).

WEAKNESS

The main weakness from the retailer point of view is that the operation of garments are done in various places, garments are knitted offshore and dyed and finished in UK. For the retailers it is very difficult to track if some problems arise in garment's quality, since it goes through different suppliers.

Stevenson's garment dye work is more expensive than the offshore suppliers, where the offshore charges from manufacturing garments to delivery of garments.

In evaluating the strengths and weakness, the nature of the product is determined by the demand pattern and grouped as functional and innovative products (Fisher, 1997).

Fig 1.1 Demand Characteristics

Fisher (1997) also asserted that the category of the product, would determine the type of process to adopt, so a functional or innovative product would require an efficient or responsive process respectively. Fig 1.2 shows how an efficient or responsive process responds to the needs of functional or innovative products respectively

Fig 1.2: Physically Efficient versus Market-Responsive Supply Chains in relation to functional and innovative products respectively.

From Fig 1, knitwear can be classed as an innovative product which requires a responsive process or supply chain, so if the strengths of Stevenson's offer such as speed, quality and flexibility are considered in relation with Fig 1.2, cost should not be a weakness for the retailers as knitwear is an innovative product which is also characterised by high profit margins. Fisher also shares this view; he states that "for any company with innovative products, the rewards from investments in improving supply chain responsiveness are usually much greater than the reward from investments in improving the chain's efficiency" (Fisher, 1997: 109). Furthermore, the offer strived to reduce the amount of demand uncertainty usually associated with innovative products by buffering with inventory that is storing the ecru garments till they were dyed. Thus by Stevenson's aligning its services through its offer in order to cater to the needs of the market, the offer proved to be highly responsive to the market. However the retailers who were represented by merchandising teams did not share this reasoning and this could be because their agenda as purchase representatives would primarily be to drive down cost. So this conflict of interests is one which would have to be resolved within the organization, in order for the retailers to compete effectively in their chosen markets.

Regarding the issue of accountability as a weakness, the offer did not address this. Although knitwear is an innovative product characterised by high profit margins, the issue of lack of accountability had to be addressed.

How Stevenson's might have developed the offer to exploit specific markets

The biggest advantage for Stevenson's is there dyeing machines and semi automated dye mixing which makes them to process the garments and complete their dyeing process in 11 hours. Colour shortages are avoided since they usually have 5 to 10 days before delivering the garments to retailer.

In the Knitwear industry, shortages of colour were a common issue since it is very difficult to forecast and the yarn dyeing route adopted by the retailers. The retailers are required to commit the colours 18 to 20 weeks in advance; it increases the risk and limiting the retailer's ability to respond to uncertain colour demand. For example in 2002 a survey was conducted by Stevenson's in 11 major retail stores, focussing on stock level of various colours (beige, green, blue, pink, red and black) and garment sizes. The availability of the garment size was roughly in line with those but that was not the case with colour, the major shortages were black and beige and excess in red which marked down the price. It took time for the retailers to stock black and beige garments which caused a lot of problems for the retailers. But Stevenson's with their semi automated machines provide a wide range of colour options and reduced their risk of shortages. From the survey, range of colour is difficult to analyze, instead of dispatching it in huge volumes it is better to dispatch in small volumes with different colour choices, since the survey showed there were excess in red.

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This shows that the Stevenson's are ahead of its competitors in the garment dyeing industry, which provides variety of colour choices and giving them an edge.

2.1 What underpins the success of ZARA in its chosen market?

Zara attracts well-heeled customers in luxury shopping districts all over the world. Its owner, Amancio Ortega, persist his philosophy which he learnt in his early stage to run Zara and underpin its success. His philosophy is "you need to have five fingers touching the factory and five touching the customer". It could be translated as "control what happens to your product until the customer buys it".

Supply chain is playing an important role to make Zara stays at the "successful level", because the supplier and the retailer are the same company. Moreover, Zara set systems to run with the retail shops at par with the factories.

Firstly, Zara centralizes the design and production centre in La Coruna where they give the designers large variety of the latest designs. It takes merely 15 days from designing to production and to deliver to the store.

Secondly, because of the limited availability of Zara's product people always wanted to find the latest ones. Zara's designers create about 40,000 new products per year and selected 10,000 of those are launched in the market. These new design products are similar to the latest designer creations with the lower price. Therefore, if the customers see that only a few items are displayed at the Zara shop, they might think that "If I don't buy it now, I'll lose my chance". Moreover, the other strategy in the Zara shop is keeping some racks empty. This could encourage customers to buy the substitutes products.

Thirdly, the product arrival time is precise in very Zara shop. The store managers in Spain and southern Europe post the orders twice a week with a strict timeline at 3:00pm on Wednesday and 6:00pm on Saturday. (The other countries deadline for the orders is 3:00pm Tuesday and 6:00pm Friday) If they miss the deadline on Wednesday, it need to wait until Saturday. After the orders are placed into the truck, it would be shipped to the nearest airport and then posted directly to the European stores. All trucks connect with a special arrangement freight which could ensure that it matches the bi-weekly order schedule. When the orders arrive at the store, it could be put on the racks immediately because the products were pre-price, tagged and ironed. Therefore, it could rise up the rhythm. In addition, because the customers know the exact delivery time for the new product, they would visit the store more frequently on these days.

2.2 Outline the production and distribution system

We think the production and distribution system of Zara matched agile strategy of supply chain (See the Figure 1 "Matching Supply Chains with Products.") (Fisher, 1997). In the case of Zara, we can see that Zara identifies its products as innovative goods in production system, Fisher (1997) explains innovative products is about people have unpredictable variable demand and short product life cycle. For instance, Ferdows, Lewis, and Machuca (2004, pp.107) states 'its retail concept depends on the regular creation and rapid replenishment of small batches of new goods'. Due to Zara's "fast fashion" system perform fast response for its innovative production, Zara centralised design and production centre together, 200 designers create approximately 40,000 new designs annually, from which 10,000 are selected for production.

Fig. 1, Matching Supply Chains with Products

(Source: Fisher, 1997, p109 modified.)

In distribution system, Zara chose responsive supply chains. Fisher (1997, pp.108) defined primary purpose of market-responsive process is 'respond quickly to unpredictable demand in order to minimize stock-outs, forced market-downs, and obsolete inventory'. We analyzed variable functions for Zara's production and distribution system in responsive supply chains (See the Table.1, "Physically Efficient Versus Market-Responsive Supply Chains"), (Fisher, 1997).

Table.1, Physically Efficient Versus Market-Responsive Supply Chains

(Source: Fisher, 1997, p108.)

Firstly, in the analysis of its product-design strategy, Zara aligns with mass designers, market specialists, and procurement and production planners for fast response. For example, Zara added capacity of information technology tools such as PDAs and telephone conversations to exchange informal information fast between market specialists and designers, one designers refines colours and textures on a computer-aided design system, they transmit the specs directly to the relevant cutting machines and other systems in factory, all of process is for making the overall supply chain more fast response. Secondly, For the analysis of approach to choosing suppliers and manufacturing focus, approach to choosing suppliers means companies can get materials for fast speed, flexibility, and high quality from suppliers, and manufacturing focus means companies could add more buffer capacity to leverage the assets for manufacture (Fisher, 1997).

In our analysis about approach to choosing suppliers and manufacturing focus for Zara, it did well about leverage its assets which are able to response variable demand of customers in supply chain. Zara produces roughly half of its products in its own factories. It buys 40% of its fabric and dye stuff from other Inditex companies. More vertical integration disappeared in Zara supply chain. Zara think more assets can actually increasing more flexibility for production control over schedules. For Classic colours sweaters, Zara would like outsource to suppliers in Europe, North Africa, and Asia. But for women's suits in new seasonal colours, Zara want to reserves the manufacturing of the more complicated products, Zara uses local subcontractors for simple step production like sewing and Zara is their primary customer. Zara's factories use just-in-time systems that allow the company to customize its processes and exploit innovations. For example, like Benetton, Zara uses "postponement" to gain more speed and flexibility, purchasing more than 50% of its fabrics undyed so that it can react faster to midseason colour changes. Zara can ramp up or down production of specific garments quickly and conveniently because it normally operates many of its factories for only a single shift. These highly automated factories can operate extra hours if need be to meet seasonal or unforeseen demands. For analysis of inventory strategy and lead-time focus, Inventory strategy means company deploy significant buffer to store for finished goods, and lead-time focus means companies could invest more capacity aim to reduce lead time (Fisher, 1997). In our analysis of inventory strategy and lead-time focus for Zara, it shows strong inventory's capacity and strict rhythm of distribution in its supply chain. 500,000-square-meter distribution centre in La Coruna, which ships approximately 2.5 million items twice per week for ever store, and also Zara have opened new inventory which is about 120,000 square meter logistics centre in Spain. Shipments reach most European stores in 24 hours, U.S. stores in 48 hours, and Japanese shops in 72 hours, so store managers know exactly when the shipments will come in. When the trucks arrive at the stores, all the items have already been pre-priced and tagged, and then store managers can put them on display without having to iron them. The need for control at this stage is minimized because the shipments are 98.9% accurate with less than 0.5% shrinkage. Finally, because regular customers know exactly when the new deliveries come, they visit the stores more frequently on those days. This strict rhythm of distribution can reduce inventory which is about 10% inventory compared with H&M (14%) and Gap (15%). It maintains a higher profit margin on sales, and grows its revenues (Ferdows, Lewis, and Machuca, 2004).

2.3How well do the design and production systems meet the needs of the business?

Zara has established a perfect responsive supply chain to meet the need of the customer and business target. This is shown by Zara company can design, product and deliver a new garment and distribute it on the worldwide store in barely two weeks(Ferdows etal, 2005).

In zara store, customer can always find very specific new products; however, they are in limited supply. In addition, customers do not have second choice when they change their mind (Badia, 2009). Because Zara wants to adopt a brand management model which is fast, limit and variety. Therefore, production model need to make sure it synchronises with the fashion in order to continue developing new style and rapidly responsive to customer demands. Ferdows (2005) claim that Zara's designer create nearly 40,000 new designs garment each year and get a higher profit margin on sales than its rivals (Benetton, H&M and Gap). For instance, Zara consists three different parts of halls; they are women's, men's and children's clothing. In particular, market specialist will collect the store information (customer feedback) and meet the store manager to discuss the new design trend from the customer taste and perspective. Then, the designer will work on a CAD system to demonstrate the design and associated specifications to the suppler (Kaminsky, 2008). If the supply dissatisfy with the design sample, it will be transmitted to the relevant cutting machine and other systems in-house manufacture. This quick responsive process not only saves loyal customer, but also improve company reputation that do not need any advertising (Ferdows etal, 2005).

Zara has invested amount of capital in production and distribution facilities in order to improve the supply chain' responsiveness update and fluctuating need. For example, "Zara opened a new 100 euro million, 120,000-square-meter logistics centre in Zaragoza, northeast of Madrid, in October 2003 (Ferdows etal, 2005)". In addition, Zara Company would increase nearly 400 temporary employees to maintain lead times at peak season. These good strategy make Zara become more quick than its competitor. For instance, Zara can accord the needs of the various markets product in a timely adjustment of product Species and production process. Then, Zara need less than 3 weeks to design, produce and deliver to the group's 1564 stores worldwide to sell the new garment, but the traditional model takes 6 to 9 months. Badia (2008) argue that Zara supply chain has more speed and flexibility in the business transaction. Because Zara operates its factories for just one shift, this highly automated equipment can operate long hours to meet dispatch demand or seasonal change. Therefore, Zara's success to meet the market uncertainty is they have the operation ability to manage transition in the supply chain.

Zara launch only few pieces to create an artificial shortage in order to influence consumer purchase intent. Zara is owned and operated company insist on almost all of the chain network, principles, and invested heavily to build their own factories and logistics systems in order to facilitate the "five fingers grasp the customer's needs, another five fingers to control production (Ferdows etal, 2005)", and quick response to market demand, to provide customers with "affordable fashion." ZARA success of the strategy benefited is the company's outstanding throughout the supply chain management, as well as support for rapid response supply chain IT system applications. ZARA rely on the trinity of design strategy, vertically integrated production management, excellent logistics and distribution systems as well as a unique sales management to achieve rapid design, rapid manufacturing, and rapid delivery. Finally, Zara achieving the shortest possible time to introduce new products in order to respond to customer needs and avoid the market variation.

GENERAL

Discuss the importance of supply chains focusing on market order winners/qualifiers, and aligning/subordinating the operations capability.

An efficient supply chain can lead an organisation to success. The goal of supply chain management is to provide the required product at the right time, right place and at a competitive price (Slack et al, 2006). A clear distinction had been made between Agile and Lean supply chain by Christopher and Towill (2000). 'Agility' means use of market knowledge and virtual corporation that can be used to find variety of opportunities in a dynamic market, whereas leanness develops a value chain which eliminates any waste by fully utilising the resources (Christopher and Towill, 2000).

Leanness and agility are the main factors which assist an organisation in achieving success via maximizing the profits and minimizing the waste. To attain this goal companies need to produce goods which have comparable features or qualities as that of its competitors, also called "market qualifiers". However, the company should also set apart from its competitors by providing unique characteristics to its product, also called "market winners". Weather a supply chain is lean or agile will depends entirely on these variations. Though market qualifiers are the most important, but both market winners and qualifiers are of great significance in a supply chain. As per Bicheno et al (1997) order qualifier is a route to enter the competition and order winner is help to win in the market share.

Order winners and qualifiers are represented by four key performance indicators in lean and agile supply chain (Eastham et al, 2001). They are:

Cost

Quality

Lead time

Service level

Fig 3: market qualifiers and market winners

(Source : Jones et al, 2000, p. 55)

Cost factor is associated with the cost of purchasing & ownership, where as quality is as aspect through which the expectations of buyers are met by the end product. Lead time is the time taken to deliver the product to the end user and service level is the consistency in meeting the lead time. According to Hill (2005) the order winner and qualifiers are attained by coordinating the processes in both lean and agile supply chains.

Fig 4: The Uncertainty Framework

(Source: Lee , 2002, p.109)

As per Lee (2002) every product should be managed in different pattern. A product with a stable demand and trustworthy supply should be handled in diverse way as compared to the product with unstable demand and undependable source of supply. Different kind of supply chains should be implemented for each product however it should be based on the certainity level of demand and supply. This can be understood through an example: lean supply chain pattern is used for functional products like Toyota cars, where cost is the market winner. In the case of innovative products, such as computers where organization use agile supply chain to produce it, service is perceived as the market winner. Some organisations function on 'leagile' supply chain to produce goods, such as fashion items, where focus is on market winners.

Desired results can be achieved by organisations who adapt agile production system by aligning its operational processes with market qualifiers and winners. The most prominent example is Dell's make to order concept (SCDigest, 2006). Since Dell placed its focus on service as the market winner it becomes the major PC supplier to the US business industry (Business Wire, 1998).

According to the case studies both Zara and Stevenson follow 'leagile' supply chain. Stevenson's adopted the agile supply chain by producing goods as per the customer preferences and followed the lean by reducing waste (Stratton, 2008). Whereas Zara utilized agile by displaying finished garments in its retail stores within 15 days, also we could see that Zara exhibited lean characteristics by producing good in-house in small batches and optimizing the output instead of maximising it (Ferdows, 2004).

Discuss the importance of considering product and process design in establishing the strategic performance of the supply chain.

Importance of relationship between strategic performance and process management in a supply chain should always be considered by any company. As explained my Schmenner and Swink (1998) according to the Swift Even Flow theory the process is more productive when the flow of material is even and swift throughout the process. Since variation can occur due to both process and demand and to minimise this variation it is advisable to increase productivity.

Impact of variation on strategic performance of a supply chain can be explained with an example of Japanese Mazda and US Ford plant. Both the companies provide same parts for Ford cars. Ford discovered the the part that were produced my US Ford plant had much higher warranty then those produced my Mazda. When Ford investigated the issue further they found that part made in Japan had less variation as compared to the once produced in USA (Trietsch, 1999). Reducing variation saves production cost and also increases customer loyalty which is important to be a market order qualifier (Trietsch, 1999).

Goldratt (2004) explains the theory of constraints in his book "The Goal", in which he framed a series of steps to deal with them.

Goldratt's Theory of Constraints (Source: Goldratt, 2000)

Identify the system's constraint.

Decide how to exploit the system's constraints.

Subordinate the rest of the system to the decisions made above.

Elevate the constraints.

Repeat from step 1.

As the constraints are recognised they are cured by exploiting the factors and overcoming the bottlenecks by utilizing the full capacity and time. To achieve full efficiency the constraints are placed after the inventory. It then ensures that variation is less in market constraint to variable commotion in the entire workflow. Hence the market constraints are elevated and rectified (Goldratt, 2000).

To address the certainty of demand and supply to manage products separately the supply chain should be kept in front (Lee, 2002). Chances of tradeoff are high for example cost can slightly increase if customisation option is improved by responsive supply chain. The responsive process strategy may prove to be more costly (Lee, 2002).

Fig 6: Supply and Demand Uncertainty Grid

(Source: Lee, 2002, p.115)

According to Mapes et al (1997) by implementing programs for quality improvement, efficiency of cost and consistency in quality can be achieved. With the implementation on quick responsive strategy organisation will be able to pay more attention on quality and it wil also help them in reducing trade-off. Hence it will help in reducing cost by reducing the items returned or refunded.

With the help of Fisher model we can understand how the supply can be coordinated with functional or innovative products (Fisher 1997).

Fig 7: Fisher's (1997) Match and Mismatch Model (Source: Fisher, 1997; p.109)

Both functional and innovative products can be explained with the hel of stevenson's case, as efficient supply chain resulted in functional products and quick response supply chain resulted in innovative product. Fisher's model can be related with both Benetton's Italian apparel manufacturer postponement strategy and Stevenson's case, as the production on garments was functional, until they were dyed, as they become innovative at that point. Therefore creation of a single product can be related to both functional and innovative sections.

Fig 8: Supply chain comparison

(Source: Bowles, 2008)

A variation is demand can be controlled by postponing the innovation of a product as it will be beneficial for last moment modification of the final product to be in sync with the current trends (Bowles, 2008). The aim behind this is to have an enhanced control over the variations occurring due to changing demand (Hill, 2005).

Fig 9: Lean and Agile Diagram

(Source: Christopher & Towill, 2001)

As per Christopher and Towill (2001) when inventories and processes are strategically combined there is a drift from lean to agile. This means that organisations follow lean to attain 100% efficiency in product functionality and also follow agile as they are keen on supply chain which is demand driven. Hence it reveals that the selection of product and process scheme require an insight of market needs. Since the market is becoming more variable and unpredictable, which shifts the organisation to agile from lean (Christopher and Towill, 2001).

Therefore it is important to consider the product and process design while establishing the strategic performance of the supply chain as it is driven by certain factors like trade-offs, buffering, variation in demand, supply and process, and various other constraints that may arise. An efficient supply chain with better strategic performance can be created by considering all these factors.