AD3/May 2014
Advanced diploma in procurement and supply
Improving the competitiveness
of supply chains
CASE STUDY
QP04
INSTRUCTIONS FOR CANDIDATES
The pre-released case study examination is designed to assess your ability to apply the relevant theories,
principles and techniques associated with the unit content to a realistic business situation.
The examination is a three hour open-book examination. The examination questions will test each of the
learning outcomes from the unit content.
You will be expected to demonstrate your knowledge and understanding of relevant theoretical principles,
concepts and techniques; to apply these appropriately to the particular situation described in the case
study and; above all, to make sound decisions. You will not gain marks by writing a general essay on the
topic. Prepared notes may not be included as part of the answer.
Please note that all work should be your own. Copying or plagiarism will not be tolerated and could
result in no marks being awarded. If quotes or short extracts are used they should be attributed or the
source of the information identified.
You should acquaint yourself thoroughly with the case study before the examination. You must take your
copy of the case study into the examination.
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AD3 Case Study May 2014
COMPETITIVENESS IN FASHION SUPPLY CHAINS
Introduction
Fashion, by definition, is transitory in nature – it does not linger for very long. In fact some fashions exist for
very short periods and are rapidly superseded by other fashions. This is certainly true of the clothing and
accessories markets, but can be equally true of other product categories.
Fashion markets are not solely driven by what happens to be the current fashion trend. Seasonal factors
are also significant. In countries where there is a significant Christian population or culture, Christmas has
a major impact on sales demand across a large number of product categories. In fact categories such as
jewellery depend on good Christmas trade for much of their annual profit.
Weather also has a significant impact upon demand. A mild winter can result in lower than forecast sales
of knitwear, heavy coats and other items designed to combat cold weather. Similarly, a cold or wet summer
can result in lower demand for items such as t-shirts and beachwear.
These seasonal, short-term changes in demand and styling, taken within the context of global supply
networks, create volatile, complex and rapidly changing markets that pose substantial challenges to those
seeking to exploit them.
Martin Christopher et al (2004) determined that fashion markets would typically exhibit the following
characteristics:
• “Short life-cycles – the product is often ephemeral, designed to capture the mood of the moment:
consequently, the period in which it will be saleable is likely to be very short and seasonal,
measured in months or even weeks.
• High volatility – demand for these products is rarely stable or linear. It may be influenced by the
vagaries of weather, films, or even by pop stars and footballers.
• Low predictability – because of the volatility of demand it is extremely difficult to forecast with any
accuracy even total demand within a period, let alone week-by-week or item-by-item demand.
• High impulse purchasing – many buying decisions by consumers for these products are made at
the point of purchase. In other words, the shopper when confronted with the product is stimulated
to buy it; hence the critical need for availability.” (Christopher M., Lowson R., Peck H., (2004)
“Creating agile supply chains in the fashion industry”, International Journal of Retail & Distribution
Management, Vol. 32 Iss: 8, pp.367 – 376 (5).
Gordon Selfridge, founder of the famous Selfridges department store in London’s Oxford Street, was
reputed to have said that retailing was all about ‘having the right product in the right place at the right
time’.
Having the right product involves a combination of the right style and colour, quality specification and
price. Value for money is important and goods must also be fit for purpose, which includes compliance
with any relevant legislation or regulations. Although by their nature the most fashionable products are not
expected to have a long product life they must look good and meet quality standards. Fashion retailers at
the more expensive end of the market may not regard price as a primary consideration in their marketing
proposition. Within the mass market, however, it is essential to be price competitive. To achieve lower costs
and compete effectively on price, so-called ‘fast fashion’ retailers source their finished goods globally and in
large volumes from countries with the lowest production costs such as China, India and Bangladesh.
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The most cost effective way of transporting finished goods from countries many thousands of miles away
is by sea freight. However, this can take weeks and adds significantly to the order lead time for finished
goods. Sea freight from China to Europe can take from four to six weeks. Air freight, which is much faster
and can take days rather than weeks, is more costly and thus impedes price competitiveness. The challenge
for the fast fashion retailers is to leverage the economies inherent in global sourcing of clothing and at the
same time deal effectively with the longer timescales and distances involved, and their impact on flexibility
of supply. This makes supply chain management complex as it involves controlling and managing large
networks of distant suppliers, more effort in developing the product design function, and producing greater
numbers of collections and individual designs (7).
Andres Mazaira et al in their 2003 case analysis of Inditex-Zara (18) suggested that the following trends
would be the determining factors for the future development of the global fast fashion sector:
•
•
•
•
•
•
•
•
De-localisation of textile and clothing manufacture in Europe and North America.
A strong increase in competitive pressure.
Company growth strategy and forward-looking integration for clothing manufacturers.
Development of distribution chains.
Increased market participation for “killers”.
Growing internationalisation.
A strong commitment to flexibility.
Low fidelity levels. ‘One-brand wardrobes’ no longer exist, and companies seek to increase their
share in customer wardrobes” (19).
Many of these predicted factors have now become reality.
Many international fast fashion retailers such as Gap and Topshop source their products globally from
independent producers. Often retailers claim to have long-standing relationships with their manufacturers
and some express concern for the social and ethical governance of their supply chain.
Retailers are concerned not just that product specification is met, but how the specification is met. Textile
workers are traditionally among the lowest paid and most exploited in the world. Compliance with ethical
and environmental codes can be as important as conformance to order specification. Managing these risks
is a significant challenge for retailers.
Basic and more predictable clothing such as T-shirts, for which it is easier to forecast demand further in
advance and more accurately, is where retailers can best achieve economies of scale sourcing from low cost
countries, particularly in Asia. One retailer in the UK sold 6 million T-shirts in 2006 (17). However, the profit
margins on these types of products are lower than on the more innovative and more fashionable products
where order volumes are lower and the lifecycle shorter. Fast fashion retailers, using supply networks of
independently owned manufacturers, therefore try to predict and even influence demand for the more
fashionable products. “Emerging fashion trends in each of these market groups would be very closely
monitored as well as more general inspiration from movies, television, popular holiday destinations, music
industry offerings and so on” (18).
Different approaches to the management of global supply networks in the fast fashion marketplace are
exhibited by three of the largest global fast fashion retailers: Benetton, H&M (Hennes & Mauritz) and Zara
(Inditex Group).
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Benetton
Benetton is an Italian company and one of the first truly global fast fashion retailers, with more than
6,000 shops in 120 countries (Benetton Group 2013). While the whole of the European Union has become
a net importer of clothing, Italy still has a positive balance of exports, although this dropped considerably
between 1997 and 2007, falling from 50% to 17% with imports into Italy from China more than doubling in
the same period (19).
Benetton was founded in 1965 in Ponzano Veneto near Treviso, Italy and grew rapidly based on a business
model that included quasi-franchised1 outlets (a minority of stores were wholly owned), a wholly owned
manufacturing and dyeing facility, and a network of relationships with small to medium sized local
manufacturers. These manufacturers included home workers that specialised in knitting, cutting and sewing.
The suppliers operated in a tiered supply network with tier one suppliers coordinating tier two suppliers
and tier two coordinating lower tiers, often consisting of the home workers. Benetton had also developed
a new method for dyeing knitted cotton goods. This meant that it was possible to alter the colour
balance of orders very quickly once first indications of demand, via sales reports, came in. In the past the
franchise owners would order around two thirds of the forecasted demand for the season up front, with
the remainder of the orders placed once early reaction had been received. Thousands of designs were
produced annually from teams of more than 300 designers working on short-term contracts. This model
was very successful and led to rapid international growth in numbers of outlets as well as unit sales, fuelled
in particular by creative, and often controversial, advertising. Global distribution was, and still is, handled
from a state-of-the-art distribution hub based at Castrette in Italy.
Benetton and Zara both have supply chain models based upon a degree of vertical integration that allows
them to exercise more control since some of the manufacturing takes place in their own factories. This
differs from other international fashion retailers such as Gap, Topshop, H&M and Mango where the supply
chain strategy is not to own manufacturing but to deal with independent suppliers (7).
Although Benetton is widely known as an Italian manufacturer, things have changed. Benetton has
relocated much of its production abroad and retains less than 20% of its manufacturing in Italy (6). The
Benetton Group has clearly defined its consumer experience in terms of operational objectives as:
•
•
•
•
•
QUALITY
RIGHT PRICE
PROXIMITY
TIME TO MARKET
TIMELY DELIVERY (2).
To achieve these objectives Benetton has set out to develop a supply chain strategy that delivers flexibility,
efficiency and effectiveness in responding to the production requirements of the company.
Benetton has based its supply network on two models: the Industrialised Model and the Commercial
Model, each accounting for 50% of total production requirements. This approach is sometimes referred to
as a dual supply chain.
Benetton refers to the stores that are not wholly owned as ‘wholesale’ and these account for around 75% of the group
business. The wholly owned stores which account for a further 25% of group business are referred to by the Benetton Group
as Directly Managed Stores. The wholesale stores have area or regional agents who organise the orders from the individual
wholesalers direct to Benetton. The store owners are, in fact, retailers in their own right but do not pay royalties to Benetton.
However, they can only stock Benetton branded products and the retail pricing is controlled by Benetton. So the system operates
more like a kind of franchise operation although it is strictly speaking not a franchise in the legal sense of the word.
1
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The Industrialised Model has higher levels of direct control and vertical integration with the Benetton
Group. Production takes place in Italy, Eastern Europe, Tunisia and India. There is also significant investment
in expanding production centres in Croatia and Tunisia where facilities control the complete production
cycle from raw materials to finished goods. Non-vertically integrated operations in these countries handle
more intensive manufacturing and finishing, which is outsourced but directly controlled by Benetton’s own
production sites in Italy and other countries. Direct in-house control by Benetton is exercised over those
operations that it considers ‘strategic’ in nature, such as where large scale automation is required, e.g.
weaving and quality control. Significant investment has been made in automation and enhanced quality
control systems. The Olympias Group, which is wholly owned by Benetton, provides textiles, yarns, clothing
manufacturing, labels and laundry processes such as dyeing (garment, yarn and fabric) and finishing (stone
washing jeans would be one example of this).
The Commercial Model that accounts for the remaining 50% of production is outsourced to manufacturers
in China, India, South-East Asia and Turkey. With this model, Benetton is seeking to maximise the benefits
and lower costs of global sourcing, while maintaining rigorous control of quality and compliance, using its
own locally based personnel.
This double supply chain is intended to ensure efficiency and speed for Benetton’s supply operations and
it uses two approaches to planning: a sequential approach aimed at minimising costs and maximising
efficiency; and an integrated approach aimed at minimising response times to changes in demand. This
system conducts key activities such as R&D, product design, production activities and sales in parallel
(see Exhibit 1).
In terms of logistics and distribution the Benetton Group has total direct control of both its Industrialised
Model of direct production and the Commercial Model of outsourced production. The operations of
Benetton’s distribution centre at Castrette2 are integrated with two other distribution hubs, in Asia and
Latin America, which share the development of automation, modelling and organisation of the systems
that have long been a feature of the Castrette operations. The IT system, which coordinates and optimises
worldwide deliveries, is fully centralised and Benetton continues to invest in structures and processes
(See Exhibit 2).
A multinational team of more than 300 designers research feedback from stores to determine trends
and consumer requirements. This is supplemented with information on customer requirements from
local regional sales agents. The planning processes aim to “simplify the structure of the collections and
the production processes (based on feedback received from the sales network), optimising the various
operational phases to provide a constantly improved service to the point of sale” (2). The objective is to
ensure rapid reaction to seasonal trends and changes in consumer demand so that the products delivered
to stores are constantly updated.
The Castrette platform optimises deliveries and the quality of the service to the sales network, thanks to its geographical
position (close to the domestic market and the countries of Europe) and the use of innovative technologies. This structure
has a fully automated electromagnetic sorting system, which can manage the individual orders of the 6,400 Benetton stores
worldwide, ensuring the total integration of the production cycle. (order management, packaging and deliveries). The folded
and hung garments are automatically sorted, packaged and sent through a 1km-long tunnel to the Automated Distribution
Centre, which covers a 30,000 m² area, has an overall capacity of 800,000 boxes and is capable of handling 120,000 incoming and
outgoing packages daily. The centre requires a workforce of only 28 people, compared to a couple of hundred people that would
be necessary in a traditionally operated plant” (2).
2
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H&M
H&M (Hennes & Mauritz) is one of the largest global fast fashion retailers. The first Hennes store opened in
Vasteras, Sweden in 1947. Today it has a network of more than 3,000 H&M stores in more than 53 countries
worldwide. The company continues to thrive and expand. Expansion today is focused on the USA and China
as well as European markets such as Russia, Germany, the UK, Italy, Poland and France. Unlike Benetton,
most of this worldwide network of retail outlets is wholly owned, with franchising playing only a small role
where necessary to enter a particular market. Franchising is not seen as a core part of the development
strategy long term.
H&M has an intense corporate focus on sustainable practice throughout its operations and particularly
with regard to supply chain operations. Quality and rapid reaction to trends also feature highly in corporate
communications regarding supply side objectives. The company also strives to achieve the best possible
price by:
• Keeping all of the design function in-house using a team of more than 160 multinational designers
and 100 pattern makers based at the company headquarters in Stockholm.
• Disintermediating the supply chain – removing intermediaries and coordinating manufacturing
using its own production offices and personnel in each supply market.
• Achieving economies of scale by placing large volume orders.
• Using global resourcing to ensure the best possible price – ‘buying the right products from the
right markets’.
• Efficiency in the vertically controlled logistics and distribution operations.
• Maintaining a focus on costs throughout the whole organisation.
H&M has concept teams comprising buyers, designers and pattern makers, which are responsible for
ensuring that H&M stores keep up to date with customers and the latest trends. Highly fashionable
merchandise is produced and stocked in smaller quantities in large cities. A larger volume of more basic
merchandise is distributed more widely (11).
To achieve the lowest possible price H&M sources from around 800 independent suppliers across Europe
and Asia. Although these suppliers source the raw materials they require, H&M has extended its quality
and compliance audits downstream to incorporate the mills and finishing plants that supply products
and services to its suppliers. H&M’s audits also include a strong focus on environmental responsibility,
sustainability and chemical management.
Although H&M does not own any manufacturing it does have its own production offices and personnel in
the markets where its merchandise is manufactured. These production offices are responsible for managing
the timing and practical aspects of progressing orders placed, carrying out quality testing, ensuring
chemical requirements are met, and conducting audits.
Lead times for orders placed can vary within the supply system from a few weeks for high fashion trend
items to six months for more basic high volume products.
“The decision of which supplier is the right one, is not only a matter of cost-efficiency but also depends
on other factors such as transport times, import quotas and quality aspects. To minimise risk, buying
is carried out on an ongoing basis throughout the year.
“In recent years, H&M has reduced the average lead time by 15-20% through developments in the
buying process. Flexibility and short lead times diminish the risk of buying the wrong items and allow
stores to restock quickly with the best-selling products” (9).
Most of the goods purchased are transported by rail and sea (90%) with shops receiving goods from distribution
centres in their ‘geographic vicinity’. H&M controls the inventory but outsources the transport to third parties.
A large percentage of goods sold are routed to local distribution centres via a transit terminal in Germany.
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AD3 Case Study May 2014
Inditex – Zara
The fast fashion chain Zara is another of the world’s largest fashion clothing retailers. It is part of the Inditex
Group, a group of more than 100 companies operating in textile design, manufacturing and distribution,
with headquarters in La Coruña in northern Spain. The Inditex Group has more than 6,000 retail outlets in
more than 400 cities across five continents and continues to grow rapidly (15).
Its fashion retail stores include Zara (1,770 shops), Zara Kids (166 shops), Pull & Bear (825 shops), Massimo
Dutti (634 shops), Bershka (910 shops), Stradivarius (816 shops), Oysho (533 shops), Zara Home (363
shops) and Uterqüe (87 shops). Most of the retail outlets are wholly owned by Inditex and, similar to H&M,
franchising is only used where local regulations impede direct foreign ownership.
One of the unusual features of Zara is the lack of a formal marketing department and the low spend on
advertising (10). Observers such as journalists and academics have therefore looked to other factors such as
logistics and supply chain management for the secret to the fashion retailer’s continued success.
The team of designers at Zara produce around 24,000 designs each year, out of which around one third
will find their way into stores. This is significantly more designs than other fashion chains and represents
a key feature of Zara’s approach to fast fashion. It ensures that the store collections or ‘product ranges’
are constantly refreshed with new merchandise. Each of the 6,000+ Inditex stores receives at least two
deliveries of new merchandise every week. Regular customers shopping in Zara understand that if they see
something they like they will need to buy it immediately because it is unlikely that there will be any repeat
deliveries (production) of exactly the same garment.
“In this way, says Masoud Golsorkhi, the editor of Tank, a London magazine about culture and
fashion, Inditex has completely changed consumer behaviour.
“When you went to Gucci or Chanel in October, you knew the chances were good that clothes would
still be there in February,” he says. “With Zara, you know that if you don’t buy it, right then and there,
within 11 days the entire stock will change. You buy it now or never. And because the prices are so
low, you buy it now” (10).
Communication directly from the shop floor to the production and design department in La Coruña is
vital in ensuring the designers and production planners are kept up to date with customer reaction to new
products, with what styles are selling and what trends are emerging. Staff in the shops contact the Zara
production office to let it know what customers are asking for and if clothes with particular style features
are experiencing high demand. Store staff have handheld computers to view the next order allocation and
can change quantities based upon local customer preferences. Retailers essentially have two objectives.
The first is to maximise return on investment in each store, by maximising sales. The second is to maximise
the profitability and return on inventory for each product line. Different locations may have somewhat
different demographic mixes and this will impact upon demand. Zara attempts to ensure that stores stock
the optimum mix of products that appeal to particular customer requirements in each location and to
maximise return on inventory in each product line by ensuring effective and accurate distribution to meet
local demand characteristics.
The whole of Zara’s strategy is based upon shortening lead times and reaction times to a few weeks – a
quick response (QR) approach that is the retail sector equivalent of manufacturing’s JIT (Just in Time). In
fact some of the factories near to Zara’s head office in La Coruña are connected to the distribution centre
by an aerial monorail so that the transfer of completed garments for finishing (ironing, quality control
inspection etc) is quicker and more efficient. The cutting of fabric takes place in Inditex-owned factories
using the latest CAD (computer aided design) machinery and this is then sent out to a large network of
small-to-medium sized sewing workshops and subcontractors.
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Only one third of actual forecast requirement is produced ahead of the season, with the remaining two
thirds produced during the season based on in-season style trends. Production is, in fact, based upon JIT
principles. A substantial amount of the fabric used in Zara’s own factories is left undyed to be coloured as
late as possible in the garment production cycle so that a more accurate reaction to specific local demand
can be achieved (3).
Half of the production for Zara comes from factories mostly owned by Inditex close to La Coruña in Spain
with some also in Portugal and Morocco. The remaining 50% is produced by independent manufacturers
with 30% coming from factories in Eastern European countries such as Turkey, Romania and Bulgaria,
and the remainder from Vietnam, China, Brazil and Bangladesh among others (Hansen S.) where Zara
can achieve 15- 20% lower production costs (3). These distant independent markets tend to be used for
more basic merchandise that has a longer product life and where demand is not as volatile as the more
fashionable merchandise.
Zara has around 50 stores in the United States and there are limited plans for further expansion there. Zara
has expanded very successfully in China where there are approximately 150 stores. Questions have been
raised regarding the ability of Inditex to continue to supply China in the way it has done to date with such
a large scale expansion. Doubts have been voiced as to whether the existing supply chain strategy and
business model can be replicated in other distant markets (10).
Nelson Fraiman, a professor at Columbia Business School who has studied the Inditex model, told the New
York Times Magazine:
“Their factories in La Coruña have a finite capacity to respond quickly. You open more and more
stores, and you don’t have flexibility of the last-minute response. Once they have a big thrust in China,
then what happens is that they will have to take the whole model” – the processing of customer
reactions, the quick-turnaround design teams, the logistics platform – “and replicate it in China.” But
the bigger Inditex gets, he says, the more it will lose control over quality and efficiency (10).
Conclusion
Fast fashion retailers are most concerned about their gross margin return on inventory (GMROI). They need
to achieve a particular return on their investment in stock and as this stock is fashion clothing, the return
(profit) needs to be achieved quickly. The key performance ratio GMROI is calculated in the following way:
Gross Margin (on sales less VAT)
Average Inventory Value at Retail Selling
× 100
The lower the stock holding or inventory compared to the gross margin, the higher the GMROI becomes.
This is a powerful measure considering that the main purpose of existence for a retailer is to purchase
goods at one price and sell them at a higher price. So this measure informs the market on how successfully
a retailer is achieving this aim – how well it is managed. Institutional investors and banks focus on this
metric when making investment and financing decisions.
The lower the average stockholding is compared to gross margin, the higher the GMROI will be. Shops can
work on lower inventories if they have an efficient and regular delivery system. However, if sales drop,
because the wrong styles or colours or size assortments are stocked, then inventory will increase. Sales
promotions which reduce gross margin will need to be applied (to encourage customers to buy more of the
slower moving lines) and this will mean a reduction in gross margin and, therefore, in GMROI.
Having the right merchandise in stock, in exactly the right quantities, in such a fast moving and volatile
global market means synchronising production, supply, distribution and deliveries to consumer demand to
provide a flexible, responsive and efficient supply chain.
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AD3 Case Study May 2014
Success in the fast fashion market will, therefore, be achieved by those companies that can create and
effectively manage such supply systems. Competition will, therefore, not be between retailers alone but
rather between their global supply networks. This was clearly articulated in Masson et al’s (2007) published
research into the complexities and challenges of managing such supply networks to achieve agility.
“... the high-product variety required to succeed in this market almost always requires a significantly
large and changeable supply base, so the industry is also a particularly good example of network
competition (Christopher and Towill, 2000). Retailers that can successfully manage the complex supply
network to achieve supply chain speed and flexibility will maximise profits when they do meet market
needs, while at the same time minimising the penalties associated with missing the market” (18).
With demand increasing for a smaller volume of innovative products that are introduced more frequently
throughout the year there is a growing requirement for suppliers with more sophisticated production,
design and operational skills. This is challenging retailers in this sector since it involves a further widening of
this already complex supply structure.
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AD3 Case Study May 2014
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EXHIBITS
EXHIBIT 1 – Benetton Industrial Structure Double Supply Chain
EFFICIENCY
SPEED
Sequential Supply Chain
Integrated Planning System
Design
Operations
R&D
Vs
Consistency
Operations
R&D
Design
Sales
Sales
Benetton Group Value Chain, Downloaded on 07.11.13 from http://www.benettongroup.com/valuechain/index.html
EXHIBIT 2 – Benetton Organisational Model – Operations
European and
Mediterranean
plants
Asian plants
Central American
plants
Independent
suppliers
European
logistics hub
Asian
logistics hub
Central America
logistics hub
Italy
Shenzehn
Mexico City
Global store
network
Benetton Group Value Chain, Downloaded on 07.11.13 from http://www.benettongroup.com/valuechain/index.html
END OF CASE STUDY
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