Winning in Apparel Retail: Portfolio View of Supply Chain

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


Asymmetric structures are emerging with the balance of power tipping towards the retailer


Retailer

Textile 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


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






Questions & Answers

Strategic Alignment

Development of a portfolio model is imperative in addressing the uncertainty in apparel retail


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?


1. Product Segmentation

Apparel products can be classified into 6 different categories based on the fashion pyramid


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


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


2. Supply Chain Integration

Vertical integration decision depends on asset specificity, scale and demand uncertainty


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


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


2. Channel Strategy

Most apparel retailers are engaging multi-channel strategy through offline and online formats


+

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


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


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






Questions & Answers

Zappos: The Premier Online Destination for Shoes


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


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


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%


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


Selection Service

Can Zappos continue to wow customers while maintaining low costs?

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


• 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


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.


• 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






Questions & Answers

Summarizing…


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?


Winning in Apparel Retail: Portfolio View of Supply Chain

Documents

Transcript of Winning in Apparel Retail: Portfolio View of Supply Chain