Supply Chain Technologies into High Street Fashion and Airline Industries - Case Study Example

An evaluation of how supply chain technologies and business process re-engineering are influencing the theory and practice of operations management in the supply chains of b) High Street fashion and c) airline industries Introduction The paper is divided into three parts. The first part is an overview of the two industries - high street fashion and airlines - in general, their key challenges, and the traditional theories and practice of operations management in their supply chains. The second part looks at recent development trends in supply chain technologies and business process re-engineering, whilst the third part provides examples of their effects. Overview of Industries High Street Fashion The U.K. high street fashion industry is a complex business with an estimated 44.5 billion in annual revenues (Barlow, 2006). It includes a wide range of enterprises in the apparel, footwear, home textiles, and accessories markets, full-price and discount retailers, and design source and selling companies. Some have their own manufacturing facilities whilst others outsource production but retain control over parts of the production process. Dominating the highly-competitive UK fashion market is Marks & Spencer, followed by discount fashion specialist brands such as Primark and TK Maxx, all competing with Burberry, Italy's Prada, Chloe (France), Hugo Boss (Germany), and Donna Karan (U.S.). Fashion and apparel manufacturing has almost disappeared in the U.K. due to cheap imports from China, which has likewise developed into a manufacturing base for the established global brands. U.K. manufacturing is focused on specialist fashion clothing and luxury products, mostly for wealthy customers in developed countries. The industry is marked by the integration of manufacturers and retailers, with the top three U.K. fashion retailers - M&S, Next, and Arcadia - remaining vertically integrated, producing and retailing their own brands. The other high street fashion brands prefer specialist retailers, outsourcing their production in different countries and sending the finished products to the U.K. The industry continues to be driven by retailers rather than manufacturers and marked by the growing polarisation between discounters and full-price retailers. The highly competitive nature of the business will continue to intensify. Full-price retailers need to capitalise on young consumer demand for distinctive designs, quality materials, and individual styles sold as "fast fashion" with items offered for a limited time before new styles are released (Doshi, 2006). The industry's operational requirements have changed in the last twenty years, since the time when high street fashion houses sourced most of their raw materials from U.K. textile manufacturers. These were then transformed by U.K. designers, most with their own production facilities, into wearable apparel or accessories for domestic and export sales. Under this traditional system, high street fashion houses competed on the basis of designs, quality brand image, and productivity and were able to command higher margins. However, with the rise of global production centres in Asia and Latin America, not only for textiles but also for finished high-quality apparel, most high street fashion houses are being squeezed towards the higher value-added design and brand marketing activities and feeling greater pressure to outsource production and improve operational management efficiencies. Aside from the growing power of consumers, price discounting pressures, and design copyright problems, the industry faces the following major operations management issues: 1) complexity of the supply chain; 2) speed to product launch and delivery; 3) managing the product mix; 4) inventory control maintenance; and 5) fast-changing technologies. Airlines The airline industry consists of a wide range of companies, from those with a single airplane carrying mail or cargo through full-service international airlines operating hundreds of airplanes of various types. These companies can be categorised according to their geographical scope: intercontinental (Asia to Europe), intra-continental (within Europe), regional (Asia only), or domestic (China). The industry has undergone considerable changes in patterns of ownership (from government-owned to independent for-profit companies), cycles of regulation and de-regulation, demand traffic (derived from needs such as business passenger, cargo shipments, or leisure passengers), and seasonality (day-of-week, time-of-day, and directional variations). Growth rates ranged of 15% were common in the 1950s and 1960s, but these dropped to 5-6% in the 1980s and 1990s. Price drops spurred by de-regulation have seen growth spurts in over-all traffic, but the industry remains cyclical, characterised by terrifying business booms and busts resulting in low profitability even in good years with net profit margins of 2-3% after interest and tax (Doganis, 2002, p. 175-178). Despite being a mature industry, airline companies have not earned back the cost of capital with profits in good times not being to offset dramatic losses in bad times. A trend of consolidation exists with airlines forming new business combinations ranging from loose, limited bilateral partnerships to long-term, multi-faceted alliances of groups of companies, to equity arrangements, actual mergers or takeovers. Most consolidation takes place within a country as governments often restrict inter-country ownership and mergers (Belobaba, 2002). The purpose of consolidation is to achieve greater economies of scale and efficiencies in the two biggest passenger markets, the U.S. and E.U. The traditional operational management efficiency target for the industry revolved around speed, with airlines using technology to cut flight time. Until the 1970s, cost was not a problem, since regulations assured airlines of comfortable margins on ticket sales. However, the competition turned from speed to passenger capacity, payload, and range after U.S. deregulation in 1978, which lowered barriers to entry and allowed start-ups to enter during a business cycle downturn. When the economy rebounded, the established airlines dominated their routes through aggressive pricing and additional capacity offerings, often killing the start-ups. New services and higher flight frequencies caused a boom in airline passenger traffic in the 1980s. By the 1980s, almost half of the total flights in the world took place in the U.S. Towards the late 1990s the trend switched to low-cost airlines that offered a consistent, often high-quality product, using new aircraft, and at very affordable ticket prices. Commercial viability became a serious cost threat at established, or legacy, airlines (Belobaba, 2002). The higher cost base of legacy airlines made it difficult for them to compete with the growing number of budget airlines. This in turn has put tremendous pressure on airlines to cut costs and squeeze out every efficiency and cost saving from all aspects of its operations management, especially in the following performance areas: 1) operating costs; 2) ticket sales; 3) airport operations and supply chains; 4) airline personnel; and 5) service quality. Trends and Developments in Operations Management of Supply Chains Given these dramatic changes caused by globalisation and technology innovation -growing power of customers, developing countries as centres of production, increased competition amongst suppliers and for customers, the growth of the Internet as a customer contact channel, and advances in information technology (IT), to name a few - the operations management of high street fashion and airline industries are under pressure to deliver performance whilst maintaining high standards of product and service delivery. Like other sectors of the economy, the two industries' operations strategies - capacity, supply networks, process technology, and development and organisation - are being transformed by recent trends in business process re-engineering and supply chain management to meet the needs of the market without sacrificing any of their industry-specific performance objectives: quality, service, dependability, flexibility, and cost. Business Process Re-engineering (BPR) Hammer (1990) used BPR to refer to the use of information technology to radically redesign business processes. Subsequent usage led BPR to mean any form of business process redesign that involves the analysis and design of workflows and processes within and between organisations (Davenport & Short, 1990) or the critical analysis and radical redesign of existing business processes to achieve breakthrough improvements in performance measures (Hammer and Champy, 1993). These definitions highlight BPR's key features: analysis of an organisation's work processes for the purpose of radically changing it to improve business performance. Organisations see BPR as a solution to a problem currently being experienced (e.g., poor competitiveness and financial losses, etc.) or to potential problems foreseen (e.g., effects of technological changes and new competitors, etc.). BPR goes beyond incremental changes to business processes. Compared to Total Quality Management (TQM) that helps an organisation to incrementally improve the way it does things, BPR helps an organisation change the way it does things (Hazeltine, 1994). There is a major difference, which accounts for the negative attitude workers have towards BPR. Doing things in new ways may entail laying employees off. Though this may be the case with computerisation or simplification of work processes caused by technology, worker lay-offs need not be the norm. A key insight into how BPR works is to see a business organisation as a system, a framework of processes and procedures used to ensure that the organisation can fulfil all tasks required to achieve its objectives (EFQM, 1999). "System" refers to documented models of work, organising or management control frameworks. The existence and use of the systems concept to manage organisations can affect business performance because systems are typically formal and documented in the form of policies and procedures designed to establish order in complex human organisations. However, if the organisation starts being poorly managed such that systems acquire more importance than attainment of objectives, BPR becomes a solution because it demands changing systems that have constrained instead of facilitated work performance. Every organisation needs systems to guarantee order and clarity of operational detail, but there has to be balance between level of systematisation in a business and the freedom to exercise creativity and initiative in working towards common objectives. BPR gives firms the opportunity to radically change its operating systems to regain that balance. Amongst the common BPR initiatives are Six Sigma (quality excellence standards), Enterprise Resource Planning (ERP, an IT solution integrating all aspects of operations) and Customer Relationship Management (CRM, IT-based, linking customers with operations management). Supply Chain Management (SCM) Supply-chain management simply refers to the management of the entire set of production, distribution, and marketing processes by which a consumer is supplied with a desired product. Some prefer the term 'demand chain' on the grounds that this places the key focus on the consumers' requirements. However, whilst consumers may determine the market size and preference, they do not play an active role in the management of the chain. In practice, for the competitive performance of the chain to improve, one or more of the supplier members of the chain must take the initiative. Hofer and Schendel (1978) were the first to suggest that an analysis of internal resources should be extended to major subcontractors, transforming suppliers into partners of corporate strategy development and management. As globalisation pressured firms to cut costs to remain competitive, the notion of co-ordinated supply chains developed as a logical application of Porter's value chain (1985) and the TQM concept of quality chains (Deming, 1986; Juran, 1964). A supply chain therefore is the linkage formed amongst the supply of inputs from primary sources to the end-customer. SCM aligns all the key suppliers that are core to the creation of value to customers to act in ways that are consistent with the firm's strategic goals especially with regard to quality management and logistics. The challenges posed by the complex network of suppliers and customers have to be met by the development of new professional skills amongst operations managers: the ability to coordinate all SCM activities, to meet financial and performance targets, meet all customer service requirements, and deal with the conflict of interest between different business models amongst shippers and logistics service providers. These require SCM innovations such as Vendor-Managed Inventory, Collaborative Planning, Advanced Planning and Scheduling, Network Design and Supply Chain Optimisation, and a host of software tools. SCM experts have identified seven different areas of dynamic complexity through which businesses need to manoeuvre: product flows, growth and underinvestment, process quality and workload, product life cycles, buyer-supplier relationships, market dominance and standardisation, and organisational change (Davenport and Short, 1990; Simchi-Levi, Kaminsky, and Simchi-Levi, 2003). BPR and SCM in the Fashion and Airlines Industries High Street Fashion Growing consumer power: The growing power of consumers leads to demands for wide variety and frequent changes in fashion choices. They expect immediate availability of perfect matching sets of garments and accessories in their preferred colour and size combinations in the same store. In terms of satisfying the consumer's needs, retailers and all companies in the supply chain can anticipate expectations and requirements of customers. From design to production and to final sale, all in the supply chain need to check that stores are stocked with the correct requirements when the consumer needs to buy. Companies that respond quickly to customer requirements can remain profitable in an environment of rapid global competition and increasing material and operational costs. Complex supply chains: The fashion industry is distinguished by global supply chains and complicated logistics. Labour and transportation costs often determine where production takes place and outsourcing of all or part of production is common. Companies throughout the industry have to deal with global sourcing and need to evaluate their sourcing strategies. Production work is often done across multiple places, which may be in different countries. Setting up of cutting, sewing, subcontracting and transportation, and the synchronisation with raw material supply, is a tedious process that BPR and SCM are facilitating. Speed of launch and delivery: Due to the many pre-production steps (yarn or fabric selection, garment development, specification and sampling), the industry can take some time to introduce a new product in the market. Both the complexity of the supply chain and the global nature of production add to the industry's long lead times. Long time-to-market and long lead times do not correlate with the need to react immediately to changes in customers requirements. Ever-changing seasons and trends highlight that product life cycles are short. Even for cyclic demands where the life cycle may continue further, there are often small changes to design, and colour or size combinations may be changed. The logistics of managing the number of styles and maintaining stock-keeping units is a complex process that new SCM technologies facilitate. Managing product mix: Fashion producers are pressured to constantly design and develop new product lines, and to maintain this speed and flexibility to satisfy ever faster shifting customer demand, they have to produce many types of products. Globalisation has diversified fashion, and customers become aware of trends very quickly through the Internet, so fashion products change frequently. Producers have to manage brand awareness and loyalty to maintain their position. Companies are forced to produce multiple collections each year, so they need to overcome the added challenge of arranging a mix of repetitive lines and collection-driven products, and a requirement to segment their product range and arrange the different segments in a suitable way. Fashion companies have to work on design and demand planning, sourcing, production, distribution and sale, monitoring each step so they avoid stock outs or production over-runs. Inventory control management: Fashion companies need to balance inventory levels and unforeseen demand surges, which they can do with ERP software packages that can order raw materials, help manage production activities, and schedule deliveries. Product life cycles are mainly unpredictable, so for collection-driven brands, entire floor sets must be in the retail stores when these products are introduced, or the chance to sell the goods is missed and obsolescence exposure is a high risk. For frequently-demanded products, stock outs is a major fault, so companies must keep a balancing action of keeping inventory at the necessary level to fulfil demand, whilst ensuring that they are not left out with obsolete inventory. Technological impact: Technology is affecting the whole range from design to demand, and operations management in a major way. Not only are computers powerful enough to churn out production and delivery schedules based on almost real-time demand and supply conditions, but they too are helping customers be more demanding on the design of the apparel and accessories they want. Technology allows the fashion industry to meet customer needs and whims at minimal cost. It is also not uncommon for a customer to see an accessory worn by a celebrity whilst watching on the Internet, and then the next day walk into a brand name store and demand the same product. Technology is creating challenges to designers as innovation results in improvements and variety to fabric design and production. Figure 1 gives an idea of the complex nature of the U.S. apparel industry supply chain and operations management, showing the different networks from natural and synthetic raw material suppliers to marketing outlets that need to be very closely coordinated (Gereffi, 2002). U.K. high street fashion houses are under relentless pressure to re-engineer their business models for them to remain competitive. Airlines Aside from increased consolidation, the industry has begun questioning the economic sense of expensive hub-and-spoke systems and is slowly shifting to more efficient point-to-point model of low-cost carriers. Manufacturers are responding to reduced order volumes by continuing to focus on cutting costs and prices across their supply and demand chains through collaboration, improved operations management, and sourcing strategies. Suppliers are moving up the value chain by supplying whole modules and subsystems as manufacturers increase outsourcing. In the U.K., for example, Doncasters Precision Forgings used venture capital to consolidate its niche production business to get better prices from its suppliers, which were then passed on to customers (Kearney, 2002, p. 10). Cutting down operating costs: In a mature industry with low fare new entrants and tiny operating margins, cost control along the supply chain is important for airlines with high levels of fixed and operating costs. The whole range of cost items - labour, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, handling services, sales distribution, catering, training, and insurance. The industry structure is such that airlines often act as tax collectors, with ticket prices including several fees, taxes, and surcharges over which they have little or no control. Analysis of 1992-1996 business performance showed that whilst airlines as a whole earned 6% return on capital employed (2 to 3.5% below the cost of capital), all the other companies in the supply chain earned more: airports (10%), catering (10-13%), handling (11-14%), aircraft lessors (15%), aircraft manufacturers (16%), and global distribution companies (30%) (Doganis, 2002, p. 331-332). Flexibility in ticket sales and pricing: For airlines to price their services to maximise profitability, they need yield management technology and pricing flexibility using differentiated pricing, a form of price discrimination, to sell air services at varying prices simultaneously to different segments. Advanced SCM and BPR IT systems allow them to influence their pricing based on schedules, load factors, forecasted total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. The growing number of Internet-based flight reservation systems is giving customers more power to dictate pricing. By-passing travel agents also negatively affect ticket marketing and sales. Improved IT systems also allow airlines to overbook on high-demand flights to reduce empty seats. Improving airport operations efficiency: Where an airline has established an engineering base at an airport then there may be considerable economic advantages in using that same airport as a preferred focus or hub for its flights. Congestion at many international airports has triggered intense competition for take-off and landing rights at particular times to attract profitable business travellers. With the help of SCM and BPR systems, airlines can avoid the negative impact of busy airports having a higher probability of delays in baggage and passenger handling. Suppliers in the airline industry supply chain are increasing their outsourcing to low-cost economies and limiting insourcing just to maintain demand. This has been the growing trend even for maintenance, repair, and operations of engines, aircraft, and handling equipment. The demand for quicker turnaround times at airports and minimal delays push the airlines to weigh the costs and benefits of having an in-house maintenance group as compared to globally outsourced maintenance solutions, as Airbus recently did with their A330/A340 (Kearney, 2002, p. 11). Human resources efficiency: Technology innovations are helping airlines do much more with less manpower as to cut costs, from flight crew hiring and training to security screening, check-in and ground crew coordination. These systems assist flight operations, passenger service, and maintenance, making turnaround faster and keeping planes in the air by ensuring no delays in parts ordering, installation, and deliveries (Belobaba, 2002). Improving procurement systems: One area where considerable SCM savings and value creation are taking place is in electronic procurement (eProcurement) systems that allow for speed, economies of scale, and efficiencies, allowing airlines to purchase direct and indirect goods and services with minimal overhead costs, processing up to 90 percent of their purchasing volume, from order placement right through billing and payment, via the Internet. New Business Models and Solutions The airline industry seems to be in a perpetual crisis, especially after 9/11, which has pushed several academics to think of redefining the business model as in Figure 2. The new model features both increased horizontal integration from globalisation and greater vertical integration through added services at all levels of the supply chain, thanks to new SCM and BPR systems that allow higher resource productivity in an environment of rising performance standards. Similar pressures from globalisation and technology innovations would impact the high street fashion industry, resulting in new business models to emerge from the crisis. Fortunately, in both cases, technology and globalisation are both sources of operations management problems and the keys to finding the appropriate solutions. Reference List Barlow, G. (2006). Changing fashions: A look at the UK fashion industry. London: Fashion Shop. Belobaba, P.P. (2002). The airline industry since 9/11: Overview of recovery and challenges ahead. Working Paper for the MIT Global Airline Industry Program, Washington, DC. 26 March. Davenport, T.H. and Short, J.E. (1990). The new industrial engineering: Information technology and business process redesign. Sloan Management Review, 31 (4), p. 11-27. Deming, W. E. (1986). Out of the crisis: Quality, productivity, and competitive position. Cambridge: Cambridge University Press. Doganis, R. (2002). Flying off course: The economics of international airlines. London: Routledge. Doshi, G. (2006). Fashion industry: Ready to face the future. Ezine Articles. Retrieved November 27, 2006, from: . EFQM (European Foundation for Quality Management) (1999). The EFQM excellence model. Brussels: EFQM. Gereffi, G. (2002) Outsourcing and Changing Patterns of International Competition in the Apparel Commodity Chain. Paper presented at the conference on: Responding to Globalisation: Societies, Groups, and Individuals, April 4-7, 2002. Boulder, Colorado. Hammer, M. (1990) Re-engineering work: Don't automate. Obliterate. Harvard Business Review, July-August, p. 104-112. Hammer, M. and Champy, J. (1993). Re-engineering the corporation. London: Nicholas Brearley. Hazeltine, F.W. (1994). Believe it or not: Business process re-engineering is not for everybody. APICS - The Performance Advantage, May, p. 24-29. Hofer, C. W. and Schendel, D. (1978). Strategy formulation: Analytical concepts. St. Paul: West Publishing. Juran, J. M. (1964). Managerial breakthrough: A new concept of the manager's job. London: McGraw-Hill. Kearney, A.T. (2003). The emerging airline industry: A joint study by A.T. Kearney and the Society of British Aerospace Companies. Chicago: A.T. Kearney. Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. (2003). Designing and managing the supply chain: Concepts, strategies, and case studies. New York: McGraw-Hill. Stulz, R. (1990). Managerial discretion and optimal financial policies. Journal of Financial Economics, 26, p. 3-27. List of Figures Figure 1. Apparel Industry Supply Chain. Figure 2. The Emerging Airline Industry Business Model. Figure 1. Apparel Industry Supply Chain (Source: Gereffi, 2002, Figure 1, p. 39) Figure 2. The Emerging Airline Industry Business Model Asia. Europe Americas Geographical Scope Service Types MRO Regulatory Agencies Airports and Others Customer Distributor Operator Low-cost regional Regional network International network Holiday charter Business jet Cargo Global Manufacturing Value Chain Lessor/Owner Prime Manufacturers Suppliers [Source: A.T. Kearney, 2003, Figure 2, p. 3] Read More