Operations Management

OPR 300 – Operations Management
Case Study
Supplying Fast Fashion
Contrast the approaches taken by H&M, Benetton and Zara in managing their supply chains.
Consider the following focus points:
1. How do they differ in terms of their approach to design stage of the supply chain?
2. How do they differ in terms of the manufacturing stage of the supply chain?
3. How do they differ in terms of the distribution stage of the supply chain?
4. How do they differ in terms of the retail stage of the supply chain?
5. For each brand, Identify and explain a SCM strategy or trend utilized in its supply chain.
6. In your opinion, which of the three companies have the best SCM and why?
Working individually, analyze the “supplying Fast Fashion” case study and present your analysis
in a report. Your work will be assessed according to the linked rubrics on blackboard. You are
encouraged to use online sources to support your analysis/recommendation. Make sure to
properly reference those sources in your report. The report should address all the questions
raised in the case study. Please use appropriate headings and subheadings where necessary. The
report should consist of the following sections:
Title page
Executive Summary
Introduction
Discussion
Recommendations
References
Please conform to the following:
• The report should be limited to 3-4 pages (700-1000 words) excluding title page and
references
• Use Times New Roman 12-pts font and 1.5-line spacing
• Use the APA referencing style
• Number each page consequently
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Supplying Fast Fashion
Garment retailing has changed. No longer is there a standard look that all retailers adhere to for
a whole season. Fashion is fast, complex and furious. Different trends overlap and fashion ideas
that are not even on a store’s radar screen can become “must haves” within six months. Many
retail businesses with their own brands, such as H&M and Zara, sell up-to-the-minute
fashionability at low prices, in stores that are clearly focused on one particular market. In the
world of fast fashion, catwalk designs speed their way into high-street stores at prices anyone
can afford. The quality of the garment means that it may only last one season, but fast-fashion
customers don’t want yesterday’s trends. As Newsweek puts it, “being a quicker picker-upper” is
what made fashion retailers H&M and Zara successful. They thrive by practicing the new science
of “fast fashion”, compressing product development cycles as much as six times. But the retail
operations that customers see are only the end part of the supply chains that feeds them. And
these have also changed.
At its simplest level, the fast-fashion supply chain has four stages. First, the garments are
designed, after which they are manufactured. They are then distributed to the retail outlets,
where they are displayed and sold in retail operations designed to reflect the businesses’ brand
values. In this short case we examine two fast-fashion operations, Hennes and Mauritz (known
as H&M) and Zara, together with United Colors of Benetton (UCB), a similar chain, but with a
different market positioning.
Benetton
Almost fifty years ago, Luciano Benetton took the world of fashion by storm by selling the bright,
casual sweaters (designed by his sister) across Europe (and later the rest of the world), promoted
by controversial advertising. By 2005, the Benetton Group was present in 120 countries
throughout the world. Selling casual garments, mainly under its United Colors of Benetton (UCB)
and its more fashion-orientated Sisley brands, it produces 110 million garments a year, over 90
per cent of them in Europe. Its retail network of over 5,000 stores produces revenue of around
$2 billion. Benetton products are seen as less “high fashion” but of a higher standard of quality
and durability, with higher prices, than H&M and Zara.
H&M
Established in Sweden in 1947, they now sell clothes and cosmetics in over 1000 stores in 20
countries around the world. The business concept is “fashion and quality at the best price”. With
more than 40,000 employees, and revenues of around SEK 60 billion, its biggest market is
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Germany, followed by Sweden and the UK. H&M are seen by many as the originator of the fastfashion concept. Certainly they have years of experience at driving down the price of up-to-theminute fashions. “We ensure the best price”, they say, “by having few middlemen, buying large
volumes, having extensive experience of the clothing industry, having a great knowledge of which
goods should be bought from which markets, having efficient distribution systems, and being
cost-conscious at every stage.
Zara
The first store opened almost by accident in 1975 when Amancio Ortega Gaona, a women’s
pyjama manufacturer, was left with a large cancelled order. The shop he opened was intended
only as an outlet for cancelled orders. Now, Inditex, the holding group that includes the Zara
brand, has over 1,300 stores in 39 countries with sales of over 3 billion. The Zara brand accounts
for over 75 per cent of the group’s total retail sales, and is still based in northwest Spain. By 2003
it had become the world’s fastest growing volume garment retailer. The Inditex group also has
several other branded chains including Pull and Bear, and Massimo Dutti. In total it employs
almost 40,000 people in a business that is known for a high degree of vertical integration
compared with most fast fashion companies. The company believes that it is their integration
along the supply chain that allows them to respond to customer demand quickly and flexibly
while keeping stock to a minimum.
Design
All three businesses emphasize the importance of design in this market. Although not haute
couture, capturing design trends is vital to success. Even the boundary between high and fast
fashion is starting to blur. In 2004, H&M recruited high fashion designer Karl Lagerfeld, previously
noted for his work with more exclusive brands. For H&M his designs were priced for value rather
than exclusivity, “Why do I work for H&M? Because I believe in inexpensive clothes, not “cheap”
clothes,” said Lagerfeld. Yet most of H&M’s products come from over a hundred designers in
Stockholm who work with a team of 50 pattern designers, around 100 buyers and a number of
budget controllers. The department’s task is to find the optimum balance between the three
components comprising H&M’s business concept – fashion, price and quality. Buying volumes and
delivery dates are then decided.
Zara’s design functions are organized in a different way to most similar companies.
Conventionally, the design input comes from three separate functions: the designers themselves,
market specialists, and buyers who place orders on to suppliers. At Zara, the design stage is split
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into three product areas: women’s, men’s and children’s garments. In each area, designers,
market specialists and buyers are co-located in design halls that also contain small workshops for
trying out prototype designs. The market specialists in all three design halls are in regular contact
with Zara retail stores, discussing customer reaction to new designs. In this way, the retail stores
are not the end of the whole supply chain but the beginning of the design stage of the chain.
Zara’s approximately 300 designers, whose average age is 26, produce approximately 40,000
items per year, of which about 10,000 go into production.
Benetton also has around 300 designers, who not only design for all their brands, but who are
also engaged in researching new materials and clothing concepts. Since 2000, the company has
moved to standardize their range globally. At one time, more than 20 per cent of its ranges were
customized to the specific needs of each country. Now only 5-10 per cent of garments are
customized. This reduced the number of individual designs offered globally by over 30 per cent,
strengthening the global brand image and reducing production costs.
Both H&M and Zara have moved away from the traditional industry practice of offering two
‘collections” a year, for spring/summer and autumn/winter. Their “seasonless cycle” involves the
continual introduction of new products on a rolling basis throughout the year. This allows
designers to learn from customers’ reactions to their new products and incorporate them quickly
into more new products. The most extreme version of this idea is practiced by Zara. A garment
will be designed; a batch manufactured and ‘pulsed’ through the supply chain. Often the design
is never repeated; it may be modified and another batch produced, but there are no ‘continuing’
designs as such. Even Benetton have increased the proportion of what they call ‘flash’ collections:
small collections that are put into its stores during the season.
Manufacturing
At one time Benetton focused its production on its Italian plants. Then it significantly increased
its production outside Italy to take advantage of lower labor costs. Non-Italian operations include
factories in North Africa, Eastern Europe and Asia. Yet each location operates in a very similar
manner. A central, Benetton-owned operation performs some manufacturing operations
(especially those requiring expensive technology) and coordinates the more labor- intensive
production activities that are performed by a network of smaller contractors (often owned and
managed by ex-Benetton employees). These contractors may in turn sub-contract some of their
activities. The company’s central facility in Italy allocates production to each of the non-Italian
networks, deciding what and how much each is to produce. There is some specialization – for
example, jackets are made in Eastern Europe while T- shirts are made in Spain. Benetton also has
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a controlling share in its main supplier of raw materials, to ensure fast supply to its factories.
Benetton is also known for the practice of dying garments after assembly rather than using dyed
thread or fabric. This postpones decisions about colors until late in the supply process so that
there is a greater chance of producing what is needed by the market.
H&M does not have any factories of its own, but instead works with around 750 suppliers. Around
half of production takes place in Europe and the rest mainly in Asia. It has 21 production offices
around the world that between them are responsible for coordinating the suppliers who produce
over half a billion items a year for H&M. The relationship between production offices and
suppliers is vital, because it allows fabrics to be bought early. The actual dyeing and cutting of
the garments can then be decided at a later stage in the production. The later an order can be
placed on suppliers, the lower the risk is of buying the wrong thing. Average supply lead times
vary from three weeks up to six months, depending on the nature of the goods. However, “The
most important thing,” they say, “is to find the optimal time to order each item. Short lead times
are not always best. Some high-volume fashion basics, it is to our advantage to place orders far
in advance. Trendier garments require considerably shorter lead times.” Zara’s lead times are
said to be the fastest in the industry, with a ‘catwalk to rack’ time as little as 15 days. According
to one analyst, this is because they “owned most of the manufacturing capability used to make
their products, which they use as a means of exciting and stimulating customer demand.” About
half of Zara’s products are produced in its network of 20 Spanish factories, which, like at
Benetton, tend to concentrate on the more capital-intensive operations such as cutting and
dyeing. Sub-contractors are used for most labor-intensive operations like sewing. Zara buys
around 40 per cent of its fabric from its own wholly-owned subsidiary, most of which is in undyed
form for dyeing after assembly. Most Zara factories and sub-contractors work on a single-shift
system to retain some volume flexibility.
Distribution
Both Benetton and Zara have invested in highly automated warehouses, close to their main
production centers, that store, pack and assemble individual orders for their retail networks.
These automated warehouses represent a major investment for both companies. In 2001, Zara
caused some press comment by announcing that it would open a second automated warehouse
even though, by its own calculations, it was only using about half its existing warehouse capacity.
More recently, Benetton caused some controversy by announcing that it was exploring the use
of RFID tags to track its garments.
At H&M, while the stock management is primarily handled internally, physical distribution is
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subcontracted. A large part of the flow of goods is routed from production site to the retail
country via H&M’s transit terminal in Hamburg. Upon arrival, the goods are inspected and
allocated to the stores or to the centralized store stock room. The centralized store stock room,
referred to within H&M as “Call-Off warehouse”, replenishes stores on item level according to
what is selling.
Retail
All H&M stores (which have an average size of 1,300 square meters) are owned and solely run by
H&M. The aim is to “create a comfortable and inspiring atmosphere in the store that makes it
simple for customers to find what they want and to feel at home”. This is similar to Zara stores,
although they tend to be smaller (average size 800 square meters).
Perhaps the most remarkable characteristic of Zara stores is that garments rarely stay in the store
for longer than 2 weeks. Because product designs are often not repeated and are produced in
relatively small batches, the range of garments displayed in the store can change radically every
two or three weeks. This encourages customers both to avoid delaying a purchase and to revisit
the store frequently.
Since 2000, Benetton has been reshaping its retail operations. At one time the vast majority of
Benetton retail outlets were small shops run by third parties. Now these small stores have been
joined by several Benetton-owned and operated larger stores (1,500 to 3,000 square meters).
These megastores can display the whole range of Benetton products and reinforce the Benetton
shopping experience.