Supply Chain Practices of Three European Apparel Companies: Zara, H&M & Benetton - Assignment Example

Supply Chain Practices of Three European Apparel Companies: Zara, H&M & Benetton Part A: Describe (briefly) any of the three operations applying theinput-transformation-output model to structure your response Input. Zara’s customized retailing strategy shortens the development phase to just two weeks until merchandise reaches stores, compared to the industry average of six month (Capell, 2008). Zara is a manufacturing business with high service content, because they take customer requests from the store (i.e., ‘customized’) and expedite these requests as fast as possible through the design process (Winsor, et al, 2004). In the design stage, Zara shuns outsourcing and situates its 300 designers throughout the manufacturing process, a tactic which enables the speed with which products are taken to market (Gallaugher, 2008; Inditex Annual Report 2011). Transformation. Another key strategy is that Zara keeps tight control and flexibility over every link in its supply chain, keeping the bulk of manufacturing in-house rather than outsourcing them. While other companies begin with the designers who plan a year in advance, Zara store managers monitor what is selling daily and track current sales trends. They feed information on what customers need but can’t find to designers who create the designs and have them manufactured instantly. Throughout its process, the ‘fast fashion’ concept enables designs to reach production in two weeks, and has been imitated by Forever 21, Mango, and Topshop (Hansen, 2012). Output. As for distribution, Zara does this exclusively through their own stores because they desire to control the customer’s entire experience. Its Just-in-time system was developed in collaboration with Toyota Motor thus enhancing its control. Smaller batches of clothing are delivered to stores, to project an image of exclusivity to attract customers, and precluding the need to conduct bargain sales to move mass quantities of out-of-season merchandise (Capell, 2008). Part B: Analyse the competitive priorities of the three apparel operations and the approaches taken to managing their supply chain Design Zara’s design phase ‘breaks all the rules’ in retail fashion by drawing ideas from the market and passing these on to its designers to create. Unlike conventional garment retailers, ideas for designs do not originate from the designers in Zara, but from the customers. Customers come into the Zara store, and if they could not find the design they wanted the store management feeds this back to headquarters for designers to work on. This system is what enables the company to realize its competitive advantages, that is, its fast development lead time to market of only two weeks, compared to six months for other companies. While the method assures Zara of a ready market for its designs, the designers however, could only experiment within a strict and narrow margin. Hennes & Mauritz (H&M) plans and designs centrally in Sweden, based on customer demands while achieving a balance among fashion, quality and price. The designers came up with their ideas by observing fashion trends, getting inputs from employees and feedback from customers; in this last aspect, they are similar to Zara. Unlike Zara which releases its designs within two weeks after order, H&M released its designs by seasons, in two main collections and several subcollections. Designing begins by brainstorming which involves all designers, buyers and pattern designers, a process not undertaken in Zara. Styles and designs previously successful and unsuccessful are deliberated on and a look of the year is decided upon. The result is that many designs brainstormed do not reach production. The design method of H&M is organized and shows planning, deliberation, and joint collaboration between buyers and designers, but it is time consuming and inefficient compared to Zara’s two week development to market system. Benetton’s designs depend to a large degree on their designers’ diverse backgrounds and cultures. Designing is organized into three stages: the product’s commercial aspects, research into fabrics, and graphics. As a means of understanding customers, Benetton conducts in-store surveys and to keep in trend, it hires top designers and sends its in-house designers to fashion shows worldwide. In this aspect, Benetton differs substantially from Zara by seeking to predict designs that customers will accept. It differs from H&M in that it does not decide on season designs by consensus but relies on its designers’ skills and background. Design samples are simply shown to the sales force although they are not invited to participate in brainstorming. Production Zara’s production system is tightly controlled by management. Manufacturing of the proprietary designs (60% of products) are centralized in Spain and only T-shirts and similar products are outsourced to China and emerging markets (Inditex Annual Report 2011). Zara stores on fabric which is ready for production. As soon as designs are turned in, project teams decide on the sizes and number of garments to be produced. Production essentially follows the project team model rather than the manufacturing operations model because teams are organized according to the product rather than process, and product designs are essentially short-lived and therefore time-limited. In one sense, the use of project based processes is advantageous because shorter and more focused production efforts are less costly. However, Zara’s system relies more on swiftly reacting to new information rather than forecasting accurately and basing future plans based on the forecast (Mukherjee, et al., 2008). Also, vertical integration which is Zara’s strength, because it allowed for tighter control, could also be its weakness because of inability to attain economies of scale. Hennes & Mauritz’s production system is distributed across Europe, Asia, Central America and Africa. The geographical proliferation allows H&M to identify and deal with the right suppliers, negotiate the price and impose quality control. The advantage of this system is that H&M did not need to have its own manufacturing plants, but could rely on suppliers close to its markets. It reduces manufacturing overhead, transportation costs, and the need to hire manufacturing personnel. These are advantages H&M has over Zara which manufactures its own apparel in Spain. Unlike Zara which has a single, well controlled and centralized supply chain, H&M operates through two supply chains to create a balance between the need to lower costs for the more generic products, where manufacturing was done in Asia, and the fashion-sensitive garments which were made in Europe. Benetton’s designs are pre-cut into fabrics which are then sent to contractors for stitching. Technically sophisticated tasks are done in-house while labour-intensive jobs are contracted abroad. Much like H&M, Benetton is thus able to take advantage of cost savings particularly in terms of labour. Benetton has more than 200 contractors who are afforded planning support, technical and even financial assistance to procure the necessary machinery and produce the required quality. Clearly, the contractors were important to Benetton and provided the means for it to undertake its ‘Dual Supply Chain’ concept. In so far as it relies on contractors for production, Benetton is similar to H&M although Benetton does some manufacturing while H&M does not. On the other hand, while like Zara Benetton does in-house manufacturing particularly for technically difficult tasks, Zara does manufacturing as a rule while Benetton does it as the exemption, relying more on subcontractors for the bulk of the work. Distribution Zara’s distribution system also operates according to the just-in-time system, sending out only small batches of products and centrally controlling the movement of merchandise. The distribution centre is centrally located among 14 manufacturing plants, making transportation accessible, is fully automated and organized to work efficiently for speed and accuracy. Planes and trucks were preferred for transport rather than ships and trains because, despite being more expensive, they are faster and allowed Zara to maintain a low inventory. The stores themselves were carefully situated in prime locations worldwide, and governed by Zara’s strict quality policies. Most were company owned, however Zara went into alliances and franchises in some markets such as in Asia. Hennes & Mauritz has its transit terminal in Hamburg where finished products are shipped and warehoused, sorted, quality-checked, and prepared for final transport to retail stores. Goods from Asian suppliers were transported by sea to the regional distribution centre or, if the order is particularly large, directly to the stores. H&M averages 21 days from design to shelf, compared to Zara’s two weeks. While H&M takes slightly longer, it is better able to combine those designs released for the collection with trends current in the business. H&M is also better able to take advantage of cost saving measures, such as using shipping by sea and train, and offer prices significantly lower than counterparts in Zara Benetton’s retail distribution is largely done through franchise outlets worldwide, with franchisees entering into contract not with the company but its agents. The agents are in turn supervised by Benetton’s area managers and commercial director. Agents were guided on merchandising, product selection, store location, and other particulars of retailing, leaving the company to concentrate on the designing, production and distribution aspects. This reliance on store franchisees sharply contrasts with Zara’s and H&M’s strategy of full control and aversion to licensing and franchising. Except for the smaller markets, Zara and H&M full managed their own retail stores, except for those smaller markets and isolated locations. For Benetton, franchisees paid no franchise, license or royalty fees, and there were no formal contracts drawn. The only assurance franchisees give are to comply with Benetton’s guidelines and to sell Benetton products exclusively. In this manner, Benetton felt it had achieved sufficient protection against the risks and jeopardies Zara and HRM feared that entering into franchising posed. Below is a table that summarizes the important points by which each company may be compared on the basis of each stage in the supply chain. With regard to design, Zara is seen to have an advantage in speed of delivery from conceptualization to market, and to take advantage of current trends with its ‘customized retail’ approach. Benetton’s traditional process is slower with only two collections a year, but it sought to make up for this by instituting a dual supply chain method to speed up the delivery. H&M sought to tread the middle-ground by relying on both brainstorming to predict future designs and feeding back market reactions and reducing delivery time to 21 days to take advantage of current trends (Heizer, et al., 2011). Concerning production, Zara chose the more costly in-house manufacturing method, which allows it to strictly control quality but limits the firm’s ability to explore cost efficiencies in other countries (Miltenburg, 2005k p. 175). H&M fully contracts its manufacturing to suppliers, and thus relinquishes some of the control but takes advantage of cost benefits. Benetton takes the middle road by retaining manufacturing tasks considered technically sophisticated, but less delicate, more labor intensive tasks are contracted out. Finally, in distribution Zara and H&M limit themselves to company-managed stores to control the quality of the retail experience, while Benetton leaves the retailing to franchisees without fees but with the commitment to adhere strictly to the company’s guidelines. There is a trade-off in control for the ability to expand faster and farther (Tompkins, et al., 2005). Part C: As a summary/conclusion, describe a number of factors that may create a ‘bullwhip effect’ in the supply chain for any of the three and how this can be managed There are several factors which present in the three supply chains discussed which have the potential to create a bullwhip effect. The bullwhip effect is the artificial distortion of consumer demand figures in the process of transmitting such information back to the suppliers from the retailer (Ling, 2007, p. 191). Technically, it is ‘the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing)’ (Cachon, Randall & Schmidt, 2007). Under conditions of perfect certainty, if all orders were certainly to be met by demand then there would be no variability and therefore no bullwhip effect. The diagram that follows shows the graphic illustration of the bullwhip effect as it applied to seasonal sales of Campbell Soup (Freelancer Consulting, 2011). Due to increase in retailer sales, information was passed back through the distributors to the manufacturer for increased orders in order to meet an uncertain but impending further increase in demand. Through each stage, order fluctuations assume error margins that compound earlier error margins, thus adding up to the eventual manufacturers. The amplification in the orders creates a wider variability, an oscillation that is likened to a bullwhip (small amplitude waves at the source of information, wider swings at the destination). In the case of the three retail brands, the potential for bullwhip effect exists because in each organization, information is fed back from the customers to the manufacturer in one way or another. Bullwhip is therefore imminent; the question that remains is how variation may be minimized or reduced. Several methods have been identified towards this end, such as centralizing the demand information, reducing variability in the customer demand process, reduction of lead time from order to delivery, and creation of strategic partnerships (Simchi-Levi, et al., 2004). Each of the companies has employed one or two of these methods to improve the match between manufacturing and demand. Although Zara has no strategic partnerships because it insists on concentrating control within the company, it has however centralized its demand information network by relying on direct feedback from its own store managers. Variability in the customer’s demand process has been reduced by its ability to obtain specific customer preferences through ‘Customized Retailing,’ and directly conveying these to the designers. Finally, lead time from order to delivery is reduced by its famed 2-week product development process. For H&M, the survey of customers introduces greater variability than obtaining the exact specifics as Zara store managers do, and lead time is longer because of the brainstorming and consensus process that goes into each collection. But H&M did shorten the lead time to 21 days by introducing ‘Rapid Reaction’ between collection releases. In the case of Benetton, bullwhip was evident under the old system when designs were released only in two collections. However, the company’s use of franchisees creates strategic partnerships which help fine-tune the ordering process, and the firm’s use of the ‘Dual Supply-Chain’ model improved lead times that enabled the firm to have five collections a year. Bibliography Cachon, G P; Randall, T; & Schmidt, G M 2007 ‘In Search of the Bullwhip Effect.’ Manufacturing & Service Operations Management, 9 (4), 457-479 Capell, K 2008 ‘Zara Thrives by Breaking All the Rules’ Bloomberg Businessweek Magazine. Retrieved 23 December 2012 from http://www.businessweek.com/stories/2008-10-08/zara-thrives-by-breaking-all-the-rules Gallaugher, J 2008 ‘Zara Case: Fast Fashion from Savvy Systems.’ Retrieved 23 December 2012 at http://www.gallaugher.com/Zara%20Case.pdf Hansen, S 2012 ‘How Zara Grew Into the World’s Largest Fashion Retailer.’ The New York Times Magazine. 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