Winning in Apparel Retail: Portfolio View of Supply Chain

Winning in Apparel Retail:
Portfolio View of Supply Chain
Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang

Content

US Apparel Retail & Its Challenges

Portfolio Model for Supply Chain

Case Studies of US Retailers

Putting It All Together

Questions & Answers

Vinay Murthy | Avishek Nandy | Suba Santhanam | Kasey Smith | Audrey Tsang 2

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 2008
Source: Euromonitor 2009

Asymmetric structures are emerging with the balance
of power tipping towards the retailer
• Control over distribution
Textile Manufacturer • Consumer’s focus on
‘complete shopping
experience’ compared to
‘product characteristics’
Textile Manufacturer
POS

Textile Manufacturer

Consumers
Retailer POS

Clothing Manufacturer
POS


Source: Guercini & Runfola, “SOURCING STRATEGIES IN CLOTHING RETAIL FIRMS: PRODUCT COMPLEXITY VERSUS OVERSEAS SUPPLY CHAIN”

The industry is inherently characterized by high
uncertainty, 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 Processes


Content





Questions & Answers


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
Segmentation
When should the retailer
vertically integrate How should clicks-and-
and when should mortar companies
it not? manage SC?
Addressing
Uncertainty
Integration Channel
Strategy Strategy

Strategic Alignment

1. Product Segmentation


Apparel products can be classified into 6 different
categories 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, socks

Source: Doeringer & Crean, 2005. “Can Fast Fashion Save the U.S. Apparel Industry?”


Supply chain strategy should be aligned to various
product 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
network


2. Supply Chain Integration


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


Vertical integration decision would lead to 4 types of
retailer involvement in supply chain
Sales &
Design Sourcing Production Logistics Marketing
Distr.

Brand
Manufacturers Focuses on fast fashion or highly seasonal mass market products;
requires agility

Specialty Retailer
Focuses on better fashion or fashion basics; seasonal product lines
require an agile and lean supply chain

Brand 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 chain


2. Channel Strategy


Most apparel retailers are engaging multi-channel
strategy through offline and online formats

+
Reports say retailers
Clicks-and-Mortar experience higher store
traffic from customers
who visited store
websites


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
warehouses
contain 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

A threshold determines the transition from one
inventory management model to another

A 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 operations
Source: Bendoly et.al., 2006. Service and cost benefits through clicks-and-mortar integration: Implications for the centralization/decentralization
debate

Content





Questions & Answers


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 2008


Zappos: Strengths, Weaknesses & Differentiation

Brick & Mortar Catalog Zappos
Selection Limited by physical Slow information Largest Selection
constraints of store update
Availability Limited by physical Slow information Real-time
constraints of store update information
Targeting Better able to target Better able to target Online search
geographically by mailing address & format attempts to
customer identity please everyone
Reach Limited by geographical Limited by costs of National reach
constraints of store mail
Shopping Option to try on and Can’t try on Can’t try on
Experience experience the good


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 with
Basic Commodities merchandising

•Outlet stores
Find anything you want Excess
•“Powered by Zappos”
Inventory
Whenever you want it Online Customers Solutions
•6PM Acquisition
•Overstock Partnership


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%

Zappos: Takeaways

Online-only
Channel
Tailored
Wide
Vertical
Assortment
Integration

Selection WOW! Service

Can Zappos continue to wow customers
while maintaining low costs?

Zara has positioned itself as a brand selling “medium
quality fashion clothing at affordable prices”

• with • World's 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 years

Key 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

Zara planned its supply chain structure to match unique
product characteristics and customer needs in Fast Fashion

Exclusive focus Speed to Market Constant innovation
on Fast Fashion High product
segment for variety Fashion-sensitive
men and Fast
High Fashion
women. Medium pricing
Target age: Returnability
Infants -45 Moderate Quality High demand
variability


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%
28

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


Ralph Lauren is a $5 billion business with operations
in 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%
Licensing


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.


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 inventory
Conscious about projecting an supervision of the company. and PPE.
innovative interpretation of
American 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 done
internally. 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.


Channel strategy tailored to reinforce brand
experience

• 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.


Content





Questions & Answers


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 successful


Questions?


Winning in Apparel Retail: Portfolio View of Supply Chain

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