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Choosing to go offshore may have saved the retailers direct costs in terms of procurement, but overall it had a negative impact as lead times increased considerably and retailers could not postpone colour decisions. Postponement helped retailers to become flexible and appropriately respond to uncertain demand (Fisher, 1997). Now that the colour decision had to be made before production began, this was contrary to the requirement of the retailers.
Innovative products such as fashion usually require an supply chain flexibility (SCF) (Gilmore and Pine, 1997) to immediately handle changes in demand. Offshore procurement took away the agility of the retailers' upstream supply chain, as retailers had to commit to colour and quantity in advance based on forecasts which lead to speculation in place of postponement.
Apparently, cost as a decision factor overrode supply chain's agility when the retailers made procurement decisions. Speculation allowed retailers to enjoy economies of scale and lower logistical costs (Pagh and Cooper, 1998). The retailers ended up with huge stocks of colours which were not popular, due to inaccurate forecasts. The unwanted stocks were marked down, reducing margins and shortage of popular colours meant loss of revenue and reputation. At times the required colours did arrive, but quite late in the season, when other products had already been marked-down. The new colours could not be sold at higher prices. This meant notional loss of margins which could have actually been realised if the lead times were shorter.
There were also quality issues with offshore procurement due to errors and oversights. This increased costs as erroneous stocks had to be reworked onshore, giving some relief to Stevenson's as they got the recovery business.
As a whole the decision to procure from offshore suppliers was detrimental to the retailers in terms of supply chain and operational capabilities and having certain negative financial implications as well.
Outline and evaluate the strengths and weaknesses of Stevenson's offer to the retailers and how it might have been developed to exploit specific markets?
Stevenson's, to fully utilise their dyeing capacity and expertise, decided to offer a complete fast response package of dyeing and finishing to its retail customers, promising agility in the retailers' supply chain with a lead time of 10 days. Under the new scheme, the process design would be changed and process of dyeing would be last second last in the sequence. This would ensure that not much remains to be done after dyeing and before delivery. Offshore suppliers would manufacture the garments in ecru yarn instead of dyed yarn and complete majority finishing processes offshore. The assembled and nearly finished ecru garments would then be stored at Stevenson's in UK, garment dyed and fully-finished onshore and delivered to the retailers, on demand.
The primary strength of this offer was that garment dyeing would allow retailers to postpone the colour-decisions to nearly the start of the season. Another significant strength was that the lead times could be reduced drastically. Stevenson's claimed a lead time of 10 days for dyeing and finishing the garments. Yarn dyeing not required anymore, offshore suppliers could now supply in approximately 12 weeks. Therefore after dyeing the total lead time would be 7 weeks.
The offer had certain weaknesses as well. Stevenson's claim that retailers would enjoy certain savings offsetting the additional cost of garment dyeing, thus making garment dyeing expensive by £0.35 only as compared to yarn dyeing, was not verifiable. Even if verified, it was uncertain that the retailers could negotiate such savings with offshore suppliers. Therefore these savings were not guaranteed. Moreover the retailers' merchandisers would perceive this offer as increasing their workload and risking their performance because it would require their personal involvement.
The drawbacks could have been countered by modifying the offer. To ensure savings to the retailers, Stevenson's could itself start procuring from offshore suppliers and become a vendor to the retailers on the lines of an OEM supplier or it could mediate in negotiations between retailers and their offshore suppliers to ensure that retailers to get the savings. It could also have loss sharing arrangements, similar to Coats Viyella, in case of quality issues that would come up when retailer acquire from offshore, and excess stocks.
ZARA Case - 'Rapid Fire Fulfilment'
What underpins the success of Zara in its chosen market?
Fast Fashion is the concept of reducing lead times between conceptualization of a design and it being ready and displayed for sale (Barnes and Lea-Greenwood, 2006). Success in the fast fashion market is about knowing what customers want and delivering it, thus fast fashion is driven by customer "pull" (Doyle et al, 2006) but the most important aspect of it, as the name suggests, is the swiftness with which the product is delivered. Apparently Zara does this much better than the competition.
While competitors start a season with stocks produced before season start, equaling 60% -80% of sales, Zara holds only 20% - 40% of a season's sales as inventory at season start. Being part of Inditex, a vertically integrated group, Zara also enjoys greater control over its supply chain compared to outsourcing as Ellram (1991) in this regard says that internalizing operations allows an enterprise to enhance control over the way its brings its products to the market. Low inventories and a highly responsive supply chain make Zara capable of altering current designs, introducing new designs and increasing or decreasing production, based on pull coming from the retail stores, amidst the season. Zara can produce a new garment, from scratch, and display it in its stores within 2-3 weeks while the industry standard rests at 9 months of designing and planning (Hill, 2005).
All of the nearly 10,000 new designs that Zara launch each year, based on popular couture designs and customer feedback, are produced in limited quantities. This leads to planned scarcity in the stores. According to Hines & Bruce (2007) customers do not postpone the buying decision fearing that the same design may never come to the store again once it is sold. This creates an aura of exclusivity around each design and the brand itself.
Thus Zara's absolute control over its rapid fire supply chain and its ability to feel the pulse of the market and respond to the consumer pull, with information flowing from consumer to Zara and products from Zara to consumer much more swiftly compared to the competition, provide a firm foundation for its success.
Outline the Production system and distribution system for Zara?
Zara's quick response supply chain is neither a purely LEAN system nor purely agile rather it is a hybrid of the two (Christopher, 2000); an approach now popularly Called Leagile (Van Hoek, 2000; Bruce et al., 2004). Zara does most of design and production in-house with minimal dependence on outsourcing while competitors outsource most of their production. To ensure control on the supply chain, Zara does not even outsource activities such as warehousing and logistics.
A team of 200 young designers create nearly 40,000 designs a year of which nearly 10,000 are selected for production each year. Once finalized, the designs are refined on CAD software which directly transmits the specs to automatic cutting machines in the factory and materials required are acquired on JIT basis thus no inventory is maintained. The movement of cut pieces is tracked using bar codes so that right pieces are assembled. The pieces are sent to local sewing contractors for sewing operations, sewing being the only operation outsourced by Zara. The sewing contractors are local and close to Zara's factory to ensure that quality and schedules can be followed strictly. Zara maintains excess capacity to ensure that there are no bottlenecks or constraints, throughout the supply chain, during demand peaks.
The garments are pressed, price tagged and usually placed on hangers for transportation, all within 8 hours of being received from contractors, at the Zara's distribution centre in La Coruna. The distribution follows a strict schedule from accepting orders only twice a week to sending out shipments twice a week. All transport runs to fixed schedules as well. Consignments reach stores in Europe within 24 hours, in USA within 48 hours and rest of the world within 48 to 72 hours. Stores put garments on display on receipt. Inventory is tracked continuously, including inventory on display to ensure there is no excess inventory.
How well do the design and production systems meet the needs of the business?
Success in the innovative sectors is based on various critical factors as: Market information about customer wants, time factor and cost factor (Bruce and Daly, 2006). Any design and production system is expected to fulfill these needs for the fashion business to be successful.
The design process at Zara is different as designers are not isolated. They share the same working space with buyers and market specialists. Designing at Zara is a team effort as designers depend on inputs from market specialists to ensure that designs confirm to the wants of the target market and on buyers and productions planners who ensure commercial feasibility of designs. The red-tape of formal approvals is removed as designs are improved while still in progress thus quickening the process of design selection. This helps the designers create nearly 40,000 new designs every year of which 10,000 are launched by Zara, giving unparalleled variety to customers.
A sophisticated Information, Communication and Technoloy infrastructure ensure seamless flow of information throughout the organisation. Specialised PDA are used by store managers to transfer sales and orders information as well as information about trends, customers' preferences and response towards new designs, to headquarters. Market specialists have regular phone conversations with store managers to keep themselves update about market scenario.
The vertically integrated supply chain of Zara jumps into action as and when a pull is received from the retail stores. The leagile supply chain maintains no inventory and produces only to deliver. Raw materials are also bought on "Just in Time" basis from upstream suppliers like Comditel, a sister concern. Most of the processes are in house with ample excess capacity maintained to ensure quick response during peak demand thus avoiding or widening any bottlenecks that may arise. Labour intensive processes, such as sewing, are outsourced for cost saving purposes but still it is ensured that sewing operators have excess capacity to deal with demand peaks as well. The level of vertical integration, as Bruce and Daly(2006) found, ensures speed of buying decisions as well as production processes.
Altogether the design system and a vertically integrated Leagile production and supply chain give Zara the capability to rapidly understand and respond to change in customer trends, increase or decrease in demands and realise higher margins than the competition, which pretty much is the essence of fast fashion.
Discuss the importance of supply chains focusing on market order winners/qualifiers and aligning/subordinating the operation capability?
Any strategic corporate decision, whether concerning the designing or redesigning of the supply chain, needs to result in creation of a competitive advantage (Slack et al, 2010). Slack et al (2010) has developed an improvement priority model and explains the effective order winners and qualifiers in relation to importance, performance and priority as they link to the success of business. (Figure 1)
Market order winners and qualifiers
Source : Winners and qualifiers (Slack, 2010)
Hill (2005) states that "qualifiers can get a service and product into a marketplace or onto a customer's shortlist", they do not in themselves win orders but provide the opportunity to compete. Conversely, "order winners having gained entry to the market is only the first step" (Slack et al, 2010). The aim is to know how to compete with competitors who have qualified in the same market. (Hill, 2005)
Slack (2010) states Order winners are factors that directly and significantly contribute to winning business. These are the most important aspects of the way companies define their competitive stance. Improving performance of an order winning factor will increase profitability and gain more market share. Qualifiers may not affect the success of a business in any major way, but they are important in some aspects. To Order winners and qualifiers can be added less important factors. These do not influence customer in any significant way but they influence operation activities.
However, there are no single supply chain strategy to suitable for all products and services. Supply chain strategy needs to match the specific demand characteristics of the products and market (Hilletofth, 2009)
How demand and supply chain determine supply chain strategy selection.
Source: Hilletofth, 2009, pp. 19
Hilletofth (2009) explains that the demand and supply can be different for various products and services. Same strategy cannot be applied to all products thus various products need to be matched with a suitable supply chain using the above diagram. There are two types of products and supply chain strategies, based on the predictability of demand and lead times of supply.
In addition, supply chain strategies should be match with competitive strategies. Chopra and Meindl (2001) state that both the competitive strategy and supply chain strategy need to be matched and have the same goal. This is called " strategy fit"
"LEAN" and agile get most focus when considering supply chain strategies (Slack et al, 2010). The core of LEAN thinking is reduction, or more specifically elimination, of waste from the production. Lean strategy originated from Toyota's production system (Slack et al, 2010).
Hilletofth (2009) states that "leaning form supply chain prospective means developing value stream to reduce all of waste and time". Lean supply chain is based on reducing time for all levels of the process and delivering quality performance. Christopher (2000) suggests that lean thinking can apply in situations where market demand is predictable and variety is low. Order winner under such conditions is cost. Toyota has produced the car with cheaper price and higher quality than its competitors which can meet the customer demand in the market (Hill, 2005). The objective is to achieve the market order winner that is cost, by aligning supply-chain strategy with lean thinking.
Agile supply chain strategy is market sensitive. That is to say, they are demand driven rather than forecast driven. Thus agile supply chain is capable of responding to real demand. (New and Westbrook, 2004) Dell is a good example of an agile supply chain. They produce what the market wants and needs, thus aligning operations with order winners and qualifiers. They respond to customers' order rapidly thus reducing lead times. Therefore they achieve market order winner by higher quality and service (Lowson et al, 1999).
Lean and agile may not be suitable for all products. Certain products and services require a combination of both the strategies, a hybrid strategy known as "Leagile"(Van Hoek, 2000; Bruce et al., 2004). In fashion industry, most successful companies like Zara and H&M use a leagile supply chain (Bruce et al, 2004). Leagile supply chain is required to reduce lead time, reduce waste and quicken response to achieve market order winners of flexibility and service levels.
Discuss the importance of considering product and process design in establishing the strategic performance of the supply chain?
It is of great importance to establish a resilient design within the supply chain through product and process design, which results in strong strategic outcome and takes into consideration, the limited variation factor.
When designing a product, number of components should be minimised to reduce material costs, thus yielding increased profitability. Research by Kluge (1997) suggests that a product become complex because of its design rather than customer, and complexity is neither seen nor valued by customers. In other words, the standardisation of parts reduces both complexity and variation within the design and supply chain.
According to Deming, there are two causes of variation: special and common. Special causes are those that hinder the constant performance of a product, service or process. Common causes on the other hand arise when special causes have been eliminated. They are inherent in the design of the process or system (Ho and Galloway, 1996).
The theory of Swift, Even Flow suggests that the more swift and even flow of materials leads to higher productivity of the process. In essence, the productivity of a process declines with an increase in variability associated with the flow (Schmenner, 2004).
"The Goal": Theory of Constraints as stated by Goldratt and Cox (2004) and steps to tackle them include:
Identify the system's constraints
Decide how to exploit the system's constraints
Subordinate the rest of the system to the decisions made above
Elevate the constraints
Go back to step 1
In "The Goal", role of constraints or "bottlenecks" is identified in context of a manufacturing process. Identifying constraints helps to remove them and enhance capacity utilization. Bottlenecks also act as a measure of and control for the flow of materials.
Supply Chain responsiveness matrix (Figure 2) four cell matrix represents the possible combination of products and supply chain priorities, thus helping managers to determine the suitability of their supply chain for their product type (Fisher, 1997).
Alderson, in 1950 was first to suggest the concept of postponement. Making changes in the product closer to the time of final purchase would allow efficient management of demand forecasts and reduce manufacturing lead time. Postponement suits innovative products as they have a high risk of obsolescence due to short lifecycles (Nawaz & Saleem, 2008).
Stevenson's had the capability to postpone colour choice in garment manufacture. This was done by producing garments prior to season using ecru and subsequently dyeing them. Finishing was done by external local finishers resulting in lead times of 4-6 weeks. When Coats Viyella Group's exit in 2001, bulk of the work was off-shored, resulting in longer lead times and early colour choices. Stevenson's found the way around by integrating dyeing and finishing processes. Although costlier this option ensured quick response thus getting some more business (Stratton, 2008).
Using the Fisher's model we can determine that till the point o f dyeing the garments were functional products but at the point of dyeing they transitioned into innovative products, thus requiring a responsive supply chain, in place of efficient, from that point onwards.
When talking about Zara, its objective is to reduce the time between design and display. Zara does this by reducing outsourcing to its barest minimum. The company manufactures and distributes products in small batches. It does not need to rely on external parties design and distribution functions. Zara's invests lavishly in production and distribution facilities to make its supply chain more responsive to new and fluctuating customer/market demands. As per Fisher's Model, Zara would require a responsive/Agile supply chain due to innovative nature of products.
Product and process designs are vital for supply chains as they affect the strategic performance of the chain and thus the whole organisation. Bottlenecks, constraints and wrong alignment of product type with supply-chain type can cause variations. Therefore an efficient management of supply-chains is essential for to avoid problems from arising in the supply chain which may affect its performance.