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Presentation on Apparel Supply Chain at Kellogg
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Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang
Winning in Apparel Retail: Portfolio View of Supply Chain
Content
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 2
US Apparel Retail & Its Challenges
Portfolio Model for Supply Chain
Case Studies of US Retailers
Putting It All Together
Questions & Answers
US Apparel is ~$300B industry, which is growing at 3% CAGR primarily driven by volume
35
34
108
79
2004
243
32
32
104
75
2003
236
33
32
100
71
Clothing accessories
Childrenswear
Women’s outerwear
Men’s outerwear
2008
270
40
39
109
82
2007
273
39
38
113
84
2006
265
37
36
110
82
2005
255
CAGR (2003-08)
Value Vol. Price
2.7% 4.9% -2.2%
3.1%
4.4%
-1.3%
1.7% 5.8% -3.9%
4.0% 5.2% -1.1%
3.9% 9.8% -5.3%
US Apparel Retail Sales in USD billion
Source: Euromonitor 2009
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 3
Asymmetric structures are emerging with the balance of power tipping towards the retailer
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 4
Retailer
Textile Manufacturer
Textile Manufacturer
Textile Manufacturer
Clothing Manufacturer
Clothing Manufacturer
Clothing Manufacturer
Co
nsu
me
rs
POS
POS
POS
• Control over distribution • Consumer’s focus on
‘complete shopping experience’ compared to ‘product characteristics’
Source: Guercini & Runfola, “SOURCING STRATEGIES IN CLOTHING RETAIL FIRMS: PRODUCT COMPLEXITY VERSUS OVERSEAS SUPPLY CHAIN”
The industry is inherently characterized by high uncertainty, and need for speed and flexibility
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 5
High Uncertainty + Need for Speed to market
Short Product Lifecycle Tremendous Variety
Seasonality in Demand Complex Supply Processes
• Fashion products which comprise roughly 35% of retail market, has life cycle of ~10 wks
• Seasonal products, which comprise 45% of market, has lifecycle of 20 weeks on average
• From fashion basics to haute couture, consumers have unlimited choice
• Highly fragmented market – top 20 retailers contribute only 20% of retail sales
• Extreme seasonality – assortment changes every 8-12 weeks
• Demand is almost non-existent outside of a product’s specific seasonal area
• PBS system used for mass production, which focuses on extreme specialization
• A pair of pants can take 40 days for 40 operations, with only 24 min of direct labor
Content
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 6
US Apparel Retail & Its Challenges
Portfolio Model for Supply Chain
Case Studies of US Retailers
Putting It All Together
Questions & Answers
Strategic Alignment
Development of a portfolio model is imperative in addressing the uncertainty in apparel retail
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 7
Addressing Uncertainty
Product Segmentation
Integration Strategy
Channel Strategy
How to tailor supply chain management for different product segments?
When should the retailer vertically integrate and when should it not?
How should clicks-and- mortar companies manage SC?
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 8
1. Product Segmentation
Apparel products can be classified into 6 different categories based on the fashion pyramid
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 9
Basic Commodities
Fashion Basics
Better Fashion
Fast Fashion
Designer
Haute Couture
Knits, underwear, socks
Dress shirts, casual slacks, and knit sportswear
Moderately priced dresses and suits
Higher-priced, ready to wear fashion
High quality, expensive fashion
Custom made haute couture
The Fashion Pyramid
• More fashion content • More product
differentiation • Greater demand
uncertainty • Higher quality fabric • Higher price • Shorter product cycle • Shorter production
runs
Source: Doeringer & Crean, 2005. “Can Fast Fashion Save the U.S. Apparel Industry?”
Supply chain strategy should be aligned to various product characteristics
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 10
Demand Characteristics
Structural Complexity
Available Variants
Customer Experience
• Functional products with predictable demand, long lifecycle, low margin, few variants, match with a physically efficient SC
• Innovative products with unpredictable demand, short lifecycle, high margin, many variants, require market- responsive strategy
• For complex products, decoupling point should be more upstream to increase accuracy in responding to customer needs
• With large number of components, it would be better to rely on a small number of suppliers and improve relationships with them
• Need to tailor SC strategy based on number of variants
• For instance, if the number of variants is high companies need to shift push-pull boundary further upstream, pool uncertainty or vertically integrate to increase control
• Higher the customer experience the stronger the need for high service level, identification between retail store and brand personality and consequently for increasing control over the retail network
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 11
2. Supply Chain Integration
Vertical integration decision depends on asset specificity, scale and demand uncertainty
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 12
Asset Specificity
Firm Scale Demand
Uncertainty
If products are too specific to the firm and requires lot of customization, there is more value in vertical integration
High demand uncertainty with high asset specificity requires greater control of the supply chain
Larger the scale, lesser is the benefit of
increasing surplus from outsourcing
Vertical integration decision would lead to 4 types of retailer involvement in supply chain
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 13
Design Sourcing Production Logistics Marketing Sales & Distr.
Brand Manufacturers
Specialty Retailer
Mass Merchandizers
Focuses on fast fashion or highly seasonal mass market products; requires agility
Focuses on better fashion or fashion basics; seasonal product lines require an agile and lean supply chain
Focuses on mass market products; requires a lean supply chain
Focuses on branding; product lifecycles are typically longer; requires higher quality than agility
Brand Marketers
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 14
2. Channel Strategy
Most apparel retailers are engaging multi-channel strategy through offline and online formats
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 15
+
Clicks-and-Mortar Reports say retailers experience higher store traffic from customers
who visited store websites
Multi-channel firms are faced with option of centralized and de-centralized inventory management
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 16
Supplier/ Manufacturer
Warehouse
Store #1
Store #2
Store #3
Store #4
Online + Store Customers
Supplier/ Manufacturer
Warehouse (for stores)
Store #1
Store #2
Store #3
Store #4
Store Customers
Warehouse (for online)
Online Customers
De-centralized model Centralized model
Store warehouses
contain online inventory as
well
Store warehouses contain only
store inventory
Centralized online
inventory
A threshold determines the transition from one inventory management model to another
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 17
De-centralized Online Inventory
Management
Centralized Online Inventory
Management
Factors determining transition:
Online demand as % of total demand
Service level & Backorder constraints
Transportation, handling and fixed cost of operations
1
2
3
A total cost of operation (TCO) view is required to determine the operating models
Source: Bendoly et.al., 2006. Service and cost benefits through clicks-and-mortar integration: Implications for the centralization/decentralization debate
Low Online Demand High Online Demand
Content
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 18
US Apparel Retail & Its Challenges
Portfolio Model for Supply Chain
Case Studies of US Retailers
Putting It All Together
Questions & Answers
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 19
Zappos: The Premier Online Destination for Shoes
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 20
0 1.6 8.6 32 70 184
370
597
840
1000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Gross Annual Sales (in Millions)
Zappos: Strengths, Weaknesses & Differentiation
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 21
Brick & Mortar Catalog Zappos
Selection Limited by physical constraints of store
Slow information update
Largest Selection
Availability Limited by physical constraints of store
Slow information update
Real-time information
Targeting Better able to target geographically
Better able to target by mailing address & customer identity
Online search format attempts to please everyone
Reach Limited by geographical constraints of store
Limited by costs of mail
National reach
Shopping Experience
Option to try on and experience the good
Can’t try on Can’t try on
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 22
Basic Commodities
Fashion Basics
Better Fashion
Fast Fashion
Designer
x Brands x Styles x Colors x Sizes = Millions of SKUs
Central Warehouse
Online Customers
•Custom solution
•Real-time pricing
•Fulfillment infrastructure
•Dropped the “Drop Ship”
Inventory Management
System
•Real-time inventory, pricing, discount data
•Vendors help with merchandising
Vendor Extranet
•Outlet stores
•“Powered by Zappos”
•6PM Acquisition
•Overstock Partnership
Excess Inventory Solutions
Suppliers
Customer Need Infrastructure Integration Tools
Find anything you want Whenever you want it
Zappos: Excellence in Selection
• Free overnight shipping
• Free returns
• Extensive product info
• 24 Hour customer solutions call center
Within 1 day, 11%
Within 2 days, 49%
Within 3 days, 18%
Within 4 days, 21%
5 days or more, 1%
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 23
High Responsiveness
High Transportation
Costs
Percentage of Customers
Reachable by Ground
Shipping
Lowering the Cost of Transportation Powered by Service™
Zappos: Excellence in Service
Zappos: Takeaways
WOW!
Wide Assortment
Online-only Channel
Tailored Vertical
Integration
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 24
Selection Service
Can Zappos continue to wow customers while maintaining low costs?
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 25
Zara has positioned itself as a brand selling “medium quality fashion clothing at affordable prices”
• with
• Four weeks to complete a product cycle • Two new collections to its 4,430 shops worldwide every week • 20,000 new designs a year
Responsiveness
Efficiency
• Higher Gross Margin (46%) compared to industry average(41.6%) • Compensate higher manufacturing costs (15-20% higher) by having
1. Lower advertising costs 2. Lower markdowns
Sensing and responding to market trends immediately
Maintain lower cost structure leading to affordable prices
Key strength – Maintaining a highly responsive supply chain at low operating costs
• World's largest clothing retailer since 2008 with 4700 stores in 76 countries and annual sales of about €11 billion in 2009 • Parent company, Inditex posted 17% profit increase in Q1 2010 • Rapid global expansion and strategy of opening one store a day for many years
Zara planned its supply chain structure to match unique product characteristics and customer needs in Fast Fashion
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 27 27
Fast Fashion
High product variety
Speed to Market
High Returnability
High demand variability
Constant innovation
Medium pricing
Moderate Quality
Fashion-sensitive
Exclusive focus on Fast Fashion segment for men and women. Target age: Infants -45
About 85% of Zara’s in-house production happens after the season starts, resulting in high forecast accuracy
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 28 28
Fast Fashion Industry
Zara
1st Quarter 2nd Quarter 3rd quarter 4th quarter 5th quarter
Visit to exhibitions
Design Introduction to collection
Manufacturing Distribution and Sales
Manufacturing
Sales
markd
ow
ns
Design and raw material sourcing
External manufacturing
Internal manufacturing
Season
65% 35%
55% 45%
15% 85%
• 50% owned manufacturing Most fashionable items – Uncertain demand and smaller production quantity 20 fully owned factories in Spain
• 50% direct sourcing (40% Asia and 10% Europe & North Africa) Price sensitive basic items
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 29
• Single-channel strategy – traditional focus on retail store expansion • Recently launched online stores in 10 countries in Europe • Late entry into online space compared to competitors like GAP(1997) and H&M(2007) • Zara’s online strategy of offering full collections has resulted in supply chain challenges
Supply chain challenges
Online channel strategy
Low customer satisfaction Low profitability
• Provide all store SKUs online • Prices identical to store prices • Delivery options
- Free store pick-up in 3-5 days - Home shipping in 48 hours
• Free return option within 30 days
• Centralized distribution system in Spain • Jump in product return rates and left over inventory • Dependent on increase in demand to justify transportation costs • Challenges of online sales forecast
As rivals invested heavily in Internet retailing, Zara focused its efforts on increasing its physical presence
Solution Change in online product assortment and tailored supply chain strategy for the online channel
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 30
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 31
Ralph Lauren is a $5 billion business with operations in wholesale, retail and licensing
Global leader in the design, marketing and distribution of premium lifestyle products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings.
FY 2010 Revenues: $4,978M Operating Income: $707M
51% 45%
4%
Revenue by Business
62% 27%
11%
Operating Income by Business
Wholesale
Retail
Licensing
With a combination of basic and innovative products, RL uses a tailored supply chain
• Inventory in wholesale and retail segments owned by the company - 22% of current assets.
• Inventory turnover (3.7) below industry average (4.1).
• Replenishment lead times vary from 5 days to 5 months depending on the SKU.
• Automated Replenishment System to facilitate rapid processing of basic replenishment orders, movements of goods and collection of information for planning.
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 32 Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 32
Basic Commodities
Fashion Basics
Better Fashion
Fast Fashion
Designer
Haute Couture
High Value
Varying Demand
Medium to High Variety
Sourcing and Production fully outsourced with Asia, Europe and South America constituting 95% of production
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang
Design Sourcing Production Logistics Marketing Sales & Distr.
In-house, strictly under Mr. Ralph Lauren
Fully outsourced with no facilities owned or operated by Ralph Lauren.
Fully outsourced to 3-PLs
In-house strictly Combination of own stores, retailers and licensed partners.
Not sustainable for products specific to RL with low-scale and uncertain demand
Conscious about projecting an innovative interpretation of American style with strong international appeal. Branding and advertising is done internally.
Suppliers work under close supervision of the company. Company staff at manufacturing facilities ensure product and quality control. Increased exposure to escalating cotton prices in China and global air fuel prices.
Licensed partners own inventory and PPE. Company assistance for shop-in-shops, marketing, branding and packaging. Licenses in China and South Korea reclaimed to assume complete control of supply chain.
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 34
• Multi-channel – own stores, department stores, online.
• Tailored approach to product selection • Some home furnishing products cannot be bought online. • Certain full-price items can only be bought at a Ralph Lauren store.
• Focus in every channel is to reinforce the luxury image and distinct sensibility
of the brand • Assistance to licensed partners for marketing, branding and packaging.
Channel strategy tailored to reinforce brand experience
Content
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 35
US Apparel Retail & Its Challenges
Portfolio Model for Supply Chain
Case Studies of US Retailers
Putting It All Together
Questions & Answers
Summarizing…
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 36
US Apparel Retail industry is faced with demand uncertainty and need for speed to market
A portfolio view of supply chain – taking into account product segments, integration strategy and clicks-and-mortal channel management – will help
address these challenges
Companies like Ralph Lauren, ZARA and Zappos have effective adopted tailored integrated
strategies to become successful
Questions?
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 37