Compare and Contrast Approaches Taken by H&M, Zara and Benetton in Their Supply Chain Management

Edinburgh Napier University

Compare and contrast the approaches taken by H&M, Benetton and Zara to managing their supply chain Logistics and Supply Chain Management SOE 10104 Lecturer: Claire Lindsay

Author: Adelina Negru Student number: 40131528 Date: 13.03.2014

Executive summary

Table of contents: Introduction.............................................4 Fast-fashion and supply chain concepts..........5 Overview of the companies..........................8 How Benetton, H&M and Zara manage their supply chain.............................................9 Conclusion.............................................12 References..............................................13

Introduction Nowadays, fast-fashion industry represents one of the most competitive and challenging business sectors. Volatile demand along with other customer-related factors have driven companies such as Zara, H&M and Benetton towards constant improvement of their supply chain in order to make them more efficient and responsive. This task has become more difficult to fulfil, since the fashion-consciousness of consumers is maintained by media sources, which deliver information on latest catwalk trends. Therefore, continual renewal, updating of ranges and up-to-date design have become focal points in their strategy, as to meet and exceed customers’ expectations. As a result, companies, which operate in the second market segment, emphasise agility, process integration and use of information technology to achieve speed-to-market goal. Notwithstanding, each company has adopted its own specific approach in management of the supply chain according to its market niche and product characteristics. For a better understanding of the motives, which make companies to adopt certain strategies, the first section of this paper will explore the basic concepts related to supply chain and fastfashion market. In addition, it will explain the importance of supply chain in meeting market requirements and overcome challenges. What comes subsequently is a brief overview of Zara, H&M and Benetton performance over the last years, with particular focus on operations. Then, this paper will discuss the approaches these companies have adopted to manage effectively their supply chain. In the end, the conclusion section will summarise the main points of the report concerning the importance of finding the right approach for supply chain management.

Fast-fashion and supply chain concepts

According to Christopher (1992), the supply chain represents the “network of organisations that are involved in through upstream and downstream linkages, in the different processes and activities that produce values in the form of products and services in the hands of ultimate consumer”(p.12). Therefore, companies seek to create and maintain sustainable relationships with the suppliers and downstream customers in order to add value to their products and reduce the overall cost (Bruce et al., 2004; Christopher, 1992). Moreover, management structures have to assess the nature of the demand for the products, which they supply; otherwise, they risk choosing a wrong approach in managing the supply chain. It is argued that competition has shifted from company versus company model to supply chain versus supply chain (Bruce et al., 2004; Christopher, 1992). Nowadays, many marketplaces are volatile and do not have a specific demand pattern. Consequently, the focus in designing the company’s strategy must rely on building up a responsive, fast and flexible supply chain, which is possible only if pursuing an agile approach (Fisher, 1997; Christopher and Towill, 2002). However, the industries, which operate in the functional market that includes products with a predictable demand, are more likely to pursue leanness, since it is more feasible than being agile. Nevertheless, agility and leanness should not be interpreted as opposing philosophies. Their performance is strictly related to the situation in which they are applied, as shown in Table1.

Table 1: The distinguishing attributes of lean and agile Distinguishing attributes

Lean supply

Typical products Marketplace demand Product variety Product life cycle Customer drivers Profit margins Dominant costs Stockout penalties Purchasing policy Information enrichment Forecasting mechanism

Commodities Predictable Low Long Cost Low Physical costs Long-term contractual Buy goods High desirable Algorithmic

Agile supply Fashion goods Volatile High Short Availability High Marketability costs Immediate and volatile Assign capacity Obligatory Consultative Source: Mason-Jones et al. (2000)

In the case of mid-end fashion segment, companies have to face short life cycles, high volatility, low predictability and high-impulse purchasing (Bruce et al., 2004; Christopher et al., 2004). Therefore, when matching the given attributes of lean and agile strategies, which

are summarised in Table 1, with the market characteristics mentioned above, it is more likely for a company, which operates in apparel industry to adopt an agile approach. Agility and leanness underpin such concepts as Quick Response (QR) and Offshore Sourcing, which represent common patterns adopted by companies operating in fast-fashion market towards their supply chain. Lowson (as cited in Christopher and Towill, 2002) argues that decisions adopted in QR movement rely on information regarding demand, thus attempting to maximise diversity and minimise lead-times, expenditure, cost and inventory. Information transfer and profitable exchange of activity make possible the integration of enterprises in a mutual network (Wikner et al., 1991). The essential breakthrough made in QR was identifying and employing the fact that “supply chain is a system of bi-directional flows” (Christopher and Towill, 2002, p.2). This means that goods flow from producer to the customer and valuable information about demand and other aspects is transmitted back to the manufacturers. All these characteristics move QR closer to agile supply principles, whereas Offshore Sourcing emphasises leanness. This trend is efficiency-driven since companies want to minimise the cost while achieving economies of scale, but it may significantly affect its flexibility and responsiveness. Since the nominated models along with JTI concept and demand chains (Barnes and LeaGreenwood, 2010) work only in specific context, a hybrid strategy would be more appropriate for the apparel industry. Therefore, some companies have separated baseline and surge demands (Christopher and Towill, 2002, p.2.), thus an agile approach will be used downstream and leanness upstream from the decoupling point in the supply chain (MasonJones et al., 2000). Bruce et al. (2004) argue that “leagility” enables upstream chain to be cost effective and provides the downstream chain with high service levels in a dynamic marketplace. Lowson (2001) has analysed the financial performance of three European clothing retailers who pursued different sourcing strategies. Table 2 shows that leanness results in highest gross margins, whereas agility offers the greatest return on investment. Based on the same data, a combined strategy will offer intermediate values, which for a company relying on agile pipelines means bigger gross margins and slightly lower investment profitability. Data from Table 2 provides strong incentives for companies to pursue a mixed strategy, which assigns higher percentage of lean for basic items and conversely, lower offshore rate for products with unpredictable forecasts (Christopher and Towill, 2002).

Table 2: How the Responsive Pipeline Delivers Enhanced Bottom-line Performance

Sourching Strategy

Gross Margin (to sales revenue)

Resultant Sourcing Performance Metric Gross Service Self Through Inventory Margin Level (proportion Turns (per Return on (chance of season) Investment customer merchandise finds first sold at full choice price) SKU)

Retailer A –Lean Pipeline 0.61 2.20 Offshore, low cost strategy Retailer B – Hybrid Lean/Agile Pipelines Combined Strategy 0.47 4.43 using foreign and domestic sources in the same season Retailer C – Agile Pipeline Domestic, 0.43 5.75 responsive and flexible strategy Source: Based on Lowson, R. (2001)

71%

71.80%

1.70

81%

80.78%

5.30

96%

91.4%

7.20

For the companies, which operate in apparel industry, a hybrid strategy is the most feasible one; nevertheless, each company has its own concept of “leagility”, which is designed according to organisation’s objectives and situation. Therefore, this paper will further discuss the characteristics of management approaches in case of Zara, H&M and Benetton. In order to do so, it is important to define the framework, which will facilitate the understanding of supply chain as a part of the business strategy. Therefore, the discussion will focus on how companies manage and integrate their supply chain processes. According to the Global Supply Chain Forum (Lambert, 2006), there are eight main processes, which can be synthesised into four parts: product organisation and design, purchase and production, product distribution and ultimately, sales and feedback (Zhang, 2008). Each of them will be further discussed, but first it is important to see the company background and then assess the impact of company’s mission upon management approach in supply chain.

Overview of the companies Benetton Group Luciano Benneton founded Benetton Group in 1965. Now it accounts for 6500 stores spread around 120 countries, which in 2011 have produced net revenues of € 2.032 billion. The business model relies on flexible operational approach in both wholesale and retail distribution channels.Company’s vision builds up on innovation and integration. Fashion is regarded as “a global village where young people of every race live”. On their website, they claim to be driven by progress exclusively in operating value-adding activities. These values are shared by the Group’s brands: United Colours of Benetton, Sisley and Playlife (Benetton Group, 2013). H&M The history of H&M brand begins in 1947 with one store opened in Sweden. Now, the store network accounts for 3100 stores in 53 countries. It comprises six brands: H&M, COS, Monki, Weekday, Cheap Monday and & Other Stories, which have generated a net sales revenue of € 14, 53 million (H&M Full-Year Report, 2013). The business concept of H&M is to offer “fashion and quality at the best price”. As for the values, this fashion giant relies on teamwork, as fundamental driver for performance with strong believe in members’ empowerment (H&M, 2013). Zara Zara is the oldest and most successful brand from Inditex group. Since 1975, Zara has expanded the number of stores to 1808 in 86 countries and has constantly surprised with its up-to-date fashion design. This fashion brand relies heavily on customers’ feedback in order to “give shape to the ideas, trends and tastes developing in the world” (Inditex Group, 2013). In 2012, Zara has experienced an 18% growth in sales, up to € 10, 541 million (Inditex Annual Report, 2012) and is striving for further expansion in emerging markets.

How Benetton, H&M and Zara manage their supply chain It is a known fact that manufacturer “push” is no longer a source of competitive advantage in the apparel industry. Nowadays, fast-fashion giants rely on consumer “pull” (Doyle et al., 2006; Sull and Turconi, 2008), therefore they tend to reduce the number of processes in the supply chain in order to “satisfy consumer demand at its peak” (Barnes and Lea-Greenwood, 2006, p.259). Continual renewal and updating of ranges have become key features in secondmarket supply chain management; hence, it builds up on the in-season buying and lead-time reduction to integrate “newness” (Barnes and Lea-Greenwood, 2010) in their competitive strategy. Hence, an agile approach with lean elements has become the key-point in the management of supply chain. Nonetheless, it is necessary to investigate to what extent agility and/or leanness are implemented in the supply chain processes. Product organisation and design Since the target consumer group for all three companies is youth (Benetton Group, 2013; H&M, 2013; Inditex Group, 2013), they try to follow the latest fashion trends in order to deliver high-end looking items at an affordable price (Carugati et al., 2008). Therefore, the initial supply chain process seeks for equilibrium between price, quality and fashion, which underpin the business concepts of Zara, H&M and Benetton (Benetton Group, 2013; H&M, 2013; Carugati et al., 2008). Product development stage in H&M involves 160 in-house designers and 100 pattern makers who work in Stockholm to develop collections, which will meet, or preferably exceed customers’ expectations. The design process in Zara is rather interpretative, than innovative, therefore the company focuses on integrating the newest information regarding fashion trends in order to sketch new kinds of products. At the core of this complex process is the customer, which, involuntary becomes an important part of the product creation and organisation. Shop managers constantly send feedback to headquarters regarding inventory levels, customers’ opinion and shop assistants ideas, which emerge from meticulous observation of the items that consumers prefer to buy, or wear themselves (Zhang, 2008; Carugati et al., 2008). This process is efficient because of intensive use of information systems. The real-time transfer of data via PDA enhances visibility and helps head offices to elaborate a proper design and production plan according to demand trend (Zhang, 2008). Although, Benetton and H&M also seek to diversify their product range and make it more

responsive to the changing demand, they cannot achieve Zara’s performance in terms of responsiveness. This is the main reason why Zara has a higher global average of 17 visits per customer in a year (Carugati et al., 2008). For Benetton, the in-house design process has expanded to a global range, thus reducing the ratio of customised garments from 20% to 510% in attempt to minimise costs (Slack et al., 2006). This aspect reflects the fact that Benetton, unlike Zara and H&M, has adopted lean elements in upstream level (Bruce et al., 2004). Purchase and production Zara, H&M and Benetton have adopted different approaches towards management in purchase and production processes; hence, they have designed their supplier network according to the performance objectives, which they rely on. For example, H&M has completely outsourced its production in Europe and Asia, mainly directed by efficiency seeking motives, thus cost reduction. It has a network of 800 independent suppliers, who are close long-term partners (H&M, 2013). This strategy meets entirely the idea of lean enterprise developed by Womack and Jones (as cited in Bruce et al., 2004) which comprises the idea of operational synchronisation of legally and functionally separated companies. Nevertheless, the dyeing and cutting can be made at a later stage, which represent an agile element. Notwithstanding, the offshore sourcing impacts negatively the lead-times, since it takes from six weeks up to three months (Slack et al., 2006), depending on the type of product (H&M, 2013), conversely to Zara, which is considered to be the fastest in the industry, because the lead-time is up to two weeks (Slack et al., 2006; Carugati et al., 2008). This is an indicator of pursuing an agile approach towards manufacturing. Therefore, 50% of products are manufactured internally, whereas, the rest are outsourced to Europe and Asia. Moreover, eighteen factories for internal manufacturing, out of twenty wholly owned subsidiaries are located at the core of its market, in Arteixo, Spain (Zhang, 2008). Unlike H&M, Benetton and Zara have both integrated production and retail to meet the constantly changing demand. It is surprising that Zara and Benetton had a similar vision towards the supply chain, but the companies had not achieved the same performances. The reason is because Zara has efficiently implemented the categorisation of products towards manufacturing, therefore the trendiest items, which are time-sensitive are located in proximity to headquarters, whereas the price-sensitive ones are outsourced to less costly labour markets. In addition, Zara has built a reliable network of subcontractors, which are specialised in labour intensive activities (Sull

and Turconi, 2008), thus benefiting from company’s financial, technological and logistic support. Product distribution In terms of product distribution, Zara and Benetton emphasise a similar strategy (Slack et al., 2006) since they operate in both retail and production sector, whereas H&M is exclusively a retailer, that is the main reason why it relies on efficient flows and cost-consciousness in the distribution process. Logistics centres are of particular importance since they are the core of the strategy. They control the flow of products between suppliers and stores, avoiding overstocks. Moreover, H&M builds up on green transports. In 2012, the transports from suppliers to distribution centres via rail, or sea, have accounted for 90% (H&M, 2013). Conversely, Zara uses preponderantly air transport for delivery of items to emergent markets in order to achieve speed-to-market goal. As for the European market, it uses truck shipment, which is less costly than other means of transport. Zara and Benetton both invested heavily in automatisation of warehouses, but what differentiates them is the number of deliveries per month. Zara has deliveries twice a week, while Benetton does not approach such a responsive strategy. Although, they both inspect, iron, fold, bag and tag garments in manufacturing complexes, before sending them to distribution centres (Zhang, 2008; Carugati, 2008). Sales and feedback The feedback question was addressed in the design section; therefore, this part will focus on retailing strategies pursued by the fashion giants. Zara aims to create an environment of scarcity and opportunity in its stores by changing the product range twice a week (Carugati, 2008), whereas other stores do not pursue similar tactics. Notwithstanding, all three companies locate stores in visible areas and choose big venues. Benetton started to sell products in warehouse-type of buildings as part of its changing strategy since 2000 (Slack et al., 2006), whereas Zara and H&M have always followed this pattern. A common characteristic of all three companies is that they heavily invest in the appeal of the stores in order to deliver a unique customer service.

Conclusion Many scholars argue that over the last decades competition has shifted from company versus company model to supply chain versus supply chain. Therefore, it is mainly important for companies to choose a management approach towards supply chain appropriate to the market characteristics in which the company operates. Short life cycles, high volatility, low predictability and high-impulse purchasing are only few of the challenges, which companies need to overcome in order to be successful in the fast-fashion market. This enhances the need to design a proper management style for supply chain, which often is a combination of leanness and agility. The analysis of management approaches elaborated by Zara, Benetton and H&M prove the fact that a hybrid strategy is the most feasible for this highly competitive sector. Failure to be responsive to the changing demand may cause serious problems that cannot be solved in short-term. Achieving speed-to-fashion goal has become an imperative in the apparel industry; therefore, companies have to be very consistent when assessing the strategy which they want to pursue. As seen from the discussion of management approaches towards supply chain, the effectiveness of information systems is mainly important for achieving speed-tomarket goal. Information technology makes it easier for companies to coordinate activities since it reduces costs and enhances accuracy, therefore it offers the opportunity to adopt “control by information” , rather than “control by doing” (Gattorna and Walters, 1996)

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