Winning in Apparel Retail: Portfolio View of Supply Chain

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Winning in Apparel Retail: Portfolio View of Supply Chain

  1. 1. Winning in Apparel Retail: Portfolio View of Supply ChainVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang
  2. 2. Content US Apparel Retail & Its Challenges Portfolio Model for Supply Chain Case Studies of US Retailers Putting It All Together Questions & AnswersVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 2
  3. 3. US Apparel is ~$300B industry, which is growing at 3% CAGR primarily driven by volume US Apparel Retail Sales in USD billion CAGR (2003-08) 273 Value Vol. Price 265 270 255 2.7% 4.9% -2.2% 243 236 84 82 Men’s outerwear 3.1% 4.4% -1.3% 82 79 75 71 110 113 109 Women’s outerwear 1.7% 5.8% -3.9% 108 100 104 36 38 39 Childrenswear 4.0% 5.2% -1.1% 32 32 34 33 32 35 37 39 40 Clothing accessories 3.9% 9.8% -5.3% 2003 2004 2005 2006 2007 2008Source: Euromonitor 2009 Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 3
  4. 4. Asymmetric structures are emerging with the balanceof power tipping towards the retailer • Control over distribution Textile Manufacturer • Consumer’s focus on ‘complete shopping experience’ compared to ‘product characteristics’ Textile Manufacturer POSTextile Manufacturer Consumers Retailer POSClothing Manufacturer POS Clothing Manufacturer Clothing ManufacturerSource: Guercini & Runfola, “SOURCING STRATEGIES IN CLOTHING RETAIL FIRMS: PRODUCT COMPLEXITY VERSUS OVERSEAS SUPPLY CHAIN”Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 4
  5. 5. The industry is inherently characterized by highuncertainty, and need for speed and flexibility High Uncertainty + Need for Speed to market Short Product Lifecycle Tremendous Variety • Fashion products which comprise roughly • From fashion basics to haute couture, 35% of retail market, has life cycle of ~10 wks consumers have unlimited choice • Seasonal products, which comprise 45% of • Highly fragmented market – top 20 retailers market, has lifecycle of 20 weeks on average contribute only 20% of retail sales • Extreme seasonality – assortment changes • PBS system used for mass production, which every 8-12 weeks focuses on extreme specialization • Demand is almost non-existent outside of a • A pair of pants can take 40 days for 40 product’s specific seasonal area operations, with only 24 min of direct labor Seasonality in Demand Complex Supply ProcessesVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 5
  6. 6. Content US Apparel Retail & Its Challenges Portfolio Model for Supply Chain Case Studies of US Retailers Putting It All Together Questions & AnswersVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 6
  7. 7. Development of a portfolio model is imperative in addressing the uncertainty in apparel retail How to tailor supply chain management for different product segments? Product SegmentationWhen should the retailervertically integrate How should clicks-and-and when should mortar companiesit not? manage SC? Addressing Uncertainty Integration Channel Strategy Strategy Strategic Alignment Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 7
  8. 8. 1. Product SegmentationVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 8
  9. 9. Apparel products can be classified into 6 differentcategories based on the fashion pyramid The Fashion Pyramid Haute Custom made haute couture Couture• More fashion content• More product differentiation Designer High quality, expensive fashion• Greater demand uncertainty• Higher quality fabric Fast Fashion Higher-priced, ready to wear fashion• Higher price• Shorter product cycle Moderately priced dresses and suits Better Fashion• Shorter production runs Dress shirts, casual slacks, and knit Fashion Basics sportswear Basic Commodities Knits, underwear, socksSource: Doeringer & Crean, 2005. “Can Fast Fashion Save the U.S. Apparel Industry?”Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 9
  10. 10. Supply chain strategy should be aligned to variousproduct characteristics • Functional products with predictable demand, long lifecycle, low Demand margin, few variants, match with a physically efficient SC Characteristics • Innovative products with unpredictable demand, short lifecycle, high margin, many variants, require market- responsive strategy • For complex products, decoupling point should be more Structural upstream to increase accuracy in responding to customer needs Complexity • 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 Available • For instance, if the number of variants is high companies need to Variants shift push-pull boundary further upstream, pool uncertainty or vertically integrate to increase control • Higher the customer experience the stronger the need for high Customer service level, identification between retail store and brand personality and consequently for increasing control over the retail Experience networkVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 10
  11. 11. 2. Supply Chain IntegrationVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 11
  12. 12. Vertical integration decision depends on asset specificity, scale and demand uncertainty If products are too specific to the firm and requires lot of customization, there is more value in vertical integration Asset High demand uncertainty Specificity with high asset specificity requires greater control of the supply chain Demand Firm Scale Uncertainty Larger the scale,lesser is the benefit of increasing surplus from outsourcing Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 12
  13. 13. Vertical integration decision would lead to 4 types ofretailer involvement in supply chain Sales & Design Sourcing Production Logistics Marketing Distr. Brand Manufacturers Focuses on fast fashion or highly seasonal mass market products; requires agilitySpecialty Retailer Focuses on better fashion or fashion basics; seasonal product lines require an agile and lean supply chainBrand Marketers Focuses on branding; product lifecycles are typically longer; requires higher quality than agility Mass Merchandizers Focuses on mass market products; requires a lean supply chainVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 13
  14. 14. 2. Channel StrategyVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 14
  15. 15. Most apparel retailers are engaging multi-channelstrategy through offline and online formats + Reports say retailers Clicks-and-Mortar experience higher store traffic from customers who visited store websitesVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 15
  16. 16. Multi-channel firms are faced with option of centralized and de-centralized inventory management De-centralized model Centralized model Supplier/ Manufacturer Supplier/ Manufacturer Centralized online inventory Store warehousescontain online Warehouse Warehouse inventory as Warehouse well (for stores) (for online) Store Store Store Store Store Store Store Store #1 #2 #3 #4 #1 #2 #3 #4 Online + Store Customers Store Store Customers warehouses contain only store inventory Online Customers Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 16
  17. 17. A threshold determines the transition from oneinventory management model to anotherA total cost of operation (TCO) view is required to determine the operating models Low Online Demand High Online Demand De-centralized Centralized Online Inventory Online Inventory Management Management Factors determining transition: 1 Online demand as % of total demand 2 Service level & Backorder constraints 3 Transportation, handling and fixed cost of operationsSource: Bendoly et.al., 2006. Service and cost benefits through clicks-and-mortar integration: Implications for the centralization/decentralizationdebateVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 17
  18. 18. Content US Apparel Retail & Its Challenges Portfolio Model for Supply Chain Case Studies of US Retailers Putting It All Together Questions & AnswersVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 18
  19. 19. Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 19
  20. 20. Zappos: The Premier Online Destination for Shoes 1000 Gross Annual Sales 840 (in Millions) 597 370 184 8.6 32 70 0 1.6 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 20
  21. 21. Zappos: Strengths, Weaknesses & Differentiation Brick & Mortar Catalog ZapposSelection Limited by physical Slow information Largest Selection constraints of store updateAvailability Limited by physical Slow information Real-time constraints of store update informationTargeting Better able to target Better able to target Online search geographically by mailing address & format attempts to customer identity please everyoneReach Limited by geographical Limited by costs of National reach constraints of store mailShopping Option to try on and Can’t try on Can’t try onExperience experience the good Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 21
  22. 22. Zappos: Excellence in Selection Customer Need Infrastructure Integration Tools x Brands Suppliers Inventory •Custom solution •Real-time pricing Designer x Styles Management •Fulfillment infrastructure x Colors System •Dropped the “Drop Ship” Fast Fashion x Sizes Better Fashion •Real-time inventory, = Millions Central Vendor pricing, discount data Fashion Basics Warehouse of SKUs Extranet •Vendors help withBasic Commodities merchandising •Outlet stores Find anything you want Excess •“Powered by Zappos” Inventory Whenever you want it Online Customers Solutions •6PM Acquisition •Overstock Partnership Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 22
  23. 23. Zappos: Excellence in Service Powered by Service™ Lowering the Cost of Transportation • Free overnight shipping • Free returns • Extensive product info • 24 Hour customer solutions call center Percentage of 5 days or more, 1% Customers Within 4 Reachable by days, 21% High Ground Within 1 Responsiveness Shipping Within 3 day, 11% days, 18% High Transportation Costs Within 2 days, 49%Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 23
  24. 24. Zappos: Takeaways Online-only Channel Tailored Wide Vertical Assortment Integration Selection WOW! Service Can Zappos continue to wow customers while maintaining low costs?Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 24
  25. 25. Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 25
  26. 26. Zara has positioned itself as a brand selling “medium quality fashion clothing at affordable prices”• with • Worlds 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 yearsKey strength – Maintaining a highly responsive supply chain at low operating costs Responsiveness Sensing and • Four weeks to complete a product cycle responding • Two new collections to its 4,430 shops worldwide every week to market trends • 20,000 new designs a year immediately Maintain lower • Higher Gross Margin (46%) compared to industry average(41.6%) cost structure • Compensate higher manufacturing costs (15-20% higher) by having leading to 1. Lower advertising costs affordable prices 2. Lower markdowns Efficiency
  27. 27. Zara planned its supply chain structure to match uniqueproduct characteristics and customer needs in Fast FashionExclusive focus Speed to Market Constant innovationon Fast Fashion High productsegment for variety Fashion-sensitivemen and Fast High Fashionwomen. Medium pricingTarget age: ReturnabilityInfants -45 Moderate Quality High demand variabilityVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 27
  28. 28. About 85% of Zara’s in-house production happens after the season starts, resulting in high forecast accuracy • 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 1st Quarter 2nd Quarter 3rd quarter 4th quarter 5th quarter Manufacturing markdowns Sales Fast Fashion Visit to Industry Design Introduction Manufacturing Distribution and Sales exhibitions to collection Season Design and raw material sourcing 65% 35% Zara External manufacturing 55% 45% Internal manufacturing 15% 85% 28Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang
  29. 29. As rivals invested heavily in Internet retailing, Zara focused its efforts on increasing its physical presence • 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• Provide all store SKUs online Online channel strategy • Centralized distribution system in Spain• Prices identical to store prices • Jump in product return rates and left over• Delivery options Low customer satisfaction inventory - Free store pick-up in 3-5 days Low profitability • Dependent on increase in demand to - Home shipping in 48 hours justify transportation costs• Free return option within 30 days • Challenges of online sales forecast Supply chain challenges Solution  Change in online product assortment and tailored supply chain strategy for the online channel Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 29
  30. 30. Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 30
  31. 31. Ralph Lauren is a $5 billion business with operationsin 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 Revenue by Business Operating Income by Business 4% 11% Wholesale 27% Retail 45% 51% 62% LicensingVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 31
  32. 32. With a combination of basic and innovative products, RL uses a tailored supply chain Haute Couture Designer High Value Fast Fashion Varying Demand Better Fashion Medium to High Fashion Basics Variety Basic Commodities• 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
  33. 33. Sourcing and Production fully outsourced with Asia, Europe and South America constituting 95% of production Sales & Design Sourcing Production Logistics Marketing Distr. In-house, strictly Fully outsourced with no facilities Fully outsourced In-house strictly Combination of under Mr. Ralph owned or operated by Ralph to 3-PLs own stores, Lauren Lauren. retailers and licensed partners. Not sustainable for products specific to RL with low-scale and uncertain demand Suppliers work under close Licensed partners own inventoryConscious about projecting an supervision of the company. and PPE.innovative interpretation ofAmerican style with strong Company staff at manufacturing Company assistance for shop-in-international appeal. facilities ensure product and shops, marketing, branding and quality control. packaging.Branding and advertising is doneinternally. Increased exposure to escalating Licenses in China and South Korea cotton prices in China and global reclaimed to assume complete air fuel prices. control of supply chain.Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang
  34. 34. Channel strategy tailored to reinforce brandexperience • 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.Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 34
  35. 35. Content US Apparel Retail & Its Challenges Portfolio Model for Supply Chain Case Studies of US Retailers Putting It All Together Questions & AnswersVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 35
  36. 36. 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 successfulVinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 36
  37. 37. Questions?Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 37

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