1. The Key Factors in Sourcing Decisions
1. M&S Background
• Marks and Spencer is the UK’s leading retailer, trading in 350 owned
stores in the UK, a further 10 in Hong Kong and we have franchise
partners in 36 countries, in 150 locations.
• The Group employs more than 60,000 people. In the year ended March
2002, group sales from continuing operations were €12.1b, up 4.5%.
Operating profits were €1.0b. Our market capitalisation is currently in the
region of €12.5b
• Looking at Group operating profit and UK sales in more detail, 81% of our
operating profit came from retailing within the UK. With the UK sales split
as follows; almost 50% from clothing, 45% from food and the balance from
Home. Financial services delivered 14% of our profit, the key drivers in this
business being our store card and personal loans.
• Our business model is a 100% own brand, achieved through our
command of the supply chain.
• Our scale advantage drives strong buying power, and combined with
relatively high returns per foot and low operating costs, enables us to
ensure delivery of desirable product of consistently high quality, at great
prices.
• However, between 1998 and 2001 we saw falls in operating profit. Our
clothing business under performed and the position was exacerbated in
2001 by a fall in the profitability of financial services, resulting from our
decision to take generic credit cards in our stores from April 2000.
Throughout this period footfall held up and our food business remained
robust.
• Our clothing products were no longer appealing sufficiently to our
customers. We no longer offered the best product at the best value on the
high street. This was largely due to our decision to maintain manufacturing
in the UK, when our competitors were achieving significantly better values
overseas, allowing them to negate our scale advantage.
• So, the first step was to initiate a programme of relocation and
consolidation of our supply base. This started in late ’99 and has increased
our overseas manufacturing from 25% in 1999 to 90% by the end of this
year.
• In doing so, we took around €500m of cost out of our supply chain.
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2. • We source products from around 600 garment factories and 500 raw
material suppliers in over seventy countries around the world. In the late
90’s the competitive market in clothing forced us to work with our suppliers
to establish overseas manufacturing facilities. By the end of 2003 90% of
our clothing will be manufactured overseas but the importance of supplier
relationships remains. Our top 15 clothing suppliers account for 92% of our
business, many of which are UK companies but sourcing from overseas.
• We have a stringent ethical trading policy as our customers have the right
to expect that Marks and Spencer products will provide them with truly
aspirational levels of quality and value without exploiting the people who
work for the suppliers that manufacture it. That’s why a summary of our
ethical standards forms the contract between our suppliers and us.
Our technologists regularly visit suppliers and we want extra assurance
about our standards on child labour, safety, pay, terms of employment and
working hours. We use ethical audits to ensure the factories we produce in
meet our required standards. Many of these audits are conducted as part
of our participation in the Ethical Trading Initiative, which brings together
groups representing government, business, trade unions and human rights
groups.
2. What are our sourcing requirements?
- Before we answer this, we have to know what our customers require
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3. - Product that appeals to our customers, is the key to any successful
retailing business – In terms of, Design, Fit, Value and Quality
- Merchandise available when our customers want to make their
purchase in the size and colour they want
- Once we understand what our customers want we then have to add any
additional requirements we may have of our own to achieve these
requirements;
- Firstly our ability to respond to our customer needs through speed
to market, breaks into two areas;
 Ensuring products reach the market place within a specified
time scale and can be replenished as quickly as possible
 Ensuring processes are in place to enable us to react to sales
and product trends earlier and in line with our competitors
- And I have left cost until last, but as a retailer we have to ensure we
source our merchandise at the best possible value taking account
of our quality standards and ethical trading policy.
Price is always a difficult one, as there has to be a balance struck
between a matrix of lead-time v service v value. This will be
dependent on the particular product segmentation of a garment or
range.
- So to summarise what our buyers in London expect from our suppliers is,
quality product, shorter lead times, adherence to agreed delivery dates,
ability to deliver smaller more reactive production runs and good prices.
It is this criteria that begins to mould our sourcing decision making process
3. Our sourcing criteria consists of;
- Quality product: Quality in our business is paramount. Before
placing any contracts we have to be sure that a potential new
vendor can make to the quality standards our customers demand.
Our business only has one quality standard, which is not negotiable
– If a new vendor is unable to make to these exacting standards
then we will not take any relationship forward.
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4. - Ethical trading policy: As a company we take our social
responsibilities very seriously and until a vendor meets all our
ethical requirements, no contracts will be placed.
- Stock management: The management of stock and holding
differentiated levels of stock today is an important factor in deciding
how a particular range maybe sourced. Also we must ensure we
deliver our availability targets.
- Lead times: We are continually striving to reduce our lead times, as
we make better buying decisions the closer to the point of sale that
we buy product.
- Responsiveness: Being able to respond to sales in season and the
ability to stop slow selling product and chase the fast in season is a
crucial factor in determining the overall level of profitability at the
end of a season of our categories.
- Lower mark downs: Controlling our mark downs leads on from
being able to respond to sales minimising cost of reductions of slow
selling merchandise.
- Reducing Costs: Our business, is continually looking at its overall
costs so we can invest in product, be it upgrading raw materials or
in selling price or investing in our stores to create an aspirational
shopping environment.
In the current economic environment, where retail sales are likely to
be difficult we will be looking to drive greater efficiency through our
supply chain which means reducing costs.
These criteria build into an overall picture of what kind of sourcing model we
propose for a product area.
If we split the world into 4 regions we believe each has certain advantages and this
is why we work towards having a balanced strategy taking this into account;
- Eastern Europe, Middle East and Northern Africa, because of their
close proximity to our business brings quick response, an ability to
react in season, have innovative European fabric mills close to
needlepoint and drive later buys of new fashion merchandise
- Indian Sub Continent, gives cost advantage, high work content
garments and has a good fabric industry to compliment the garment
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5. production making the region vertical
- Asia has many of the advantages associated with the Indian Sub
Continent but covers both formal and casual industries more widely
- The Americas is to the USA what Eastern Europe, Middle East and
Northern Africa is to the EU.
4. So coming back to the original question – What are our key factors in making our
sourcing decisions
In our view we do believe China and the other countries which are restricted by
quota will benefit from the end of quota costs, and Chinas level of apparel exports, in
particular will increase as a result of 2005.
But if I take Marks and Spencer, we will still want a balanced sourcing strategy
between countries working towards the criteria I have already highlighted and this
will allow us to benefit from the strengths of each region. Our clothing division is split
into a number of groups, ladieswear, menswear, lingerie and childrenswear, all of
which have different requirements and different sourcing strategies;
- Ladieswear want to be reactive to sales trends and will concentrate
production in Eastern Europe and Northern Africa, which also means
they will be able to use innovative European fabrics.
- Menswear which is a less volatile market to Ladieswear will source
more merchandise from further a field
- Lingerie which has more of a mixed product portfolio between fashion
and core merchandise will use a balance between the different regions
In summary as a business we are positioning our sourcing strategy to take account
of quota elimination in 2005. Though as I have highlighted through this presentation
cost is one of a number of factors when deciding our sourcing strategy.
Our sourcing requirements need to be balanced between regions, which offer us the
ability to respond to our customer requirements quickly, establishing garment
production near quality raw material sources and balancing this where appropriate
with cost.
As a business we have secured good garment manufacturing routes, but our
knowledge of raw material sources in Asia and the Indian Sub Continent still has
some way to go.
5

6. production making the region vertical
- Asia has many of the advantages associated with the Indian Sub
Continent but covers both formal and casual industries more widely
- The Americas is to the USA what Eastern Europe, Middle East and
Northern Africa is to the EU.
4. So coming back to the original question – What are our key factors in making our
sourcing decisions
In our view we do believe China and the other countries which are restricted by
quota will benefit from the end of quota costs, and Chinas level of apparel exports, in
particular will increase as a result of 2005.
But if I take Marks and Spencer, we will still want a balanced sourcing strategy
between countries working towards the criteria I have already highlighted and this
will allow us to benefit from the strengths of each region. Our clothing division is split
into a number of groups, ladieswear, menswear, lingerie and childrenswear, all of
which have different requirements and different sourcing strategies;
- Ladieswear want to be reactive to sales trends and will concentrate
production in Eastern Europe and Northern Africa, which also means
they will be able to use innovative European fabrics.
- Menswear which is a less volatile market to Ladieswear will source
more merchandise from further a field
- Lingerie which has more of a mixed product portfolio between fashion
and core merchandise will use a balance between the different regions
In summary as a business we are positioning our sourcing strategy to take account
of quota elimination in 2005. Though as I have highlighted through this presentation
cost is one of a number of factors when deciding our sourcing strategy.
Our sourcing requirements need to be balanced between regions, which offer us the
ability to respond to our customer requirements quickly, establishing garment
production near quality raw material sources and balancing this where appropriate
with cost.
As a business we have secured good garment manufacturing routes, but our
knowledge of raw material sources in Asia and the Indian Sub Continent still has
some way to go.
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