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Introduction
Fast Fashion as a category has made significant inroads into fashion retail in the past two decades, with companies like Zara, Hennes & Mauritz AB (H&M) and Uniqlo establishing their presence as leaders in this segment. Due to the nature of the fashion business, the supply chain is highly fragmented and is divided across multiple geographical regions across the world. Traditional fashion labels have a lag time of close to 9 months between the time their creations are shown on the ramp at a fashion show and the garments actually being available for purchase in stores (Su and Gargeya, 2011). Fast Fashion abbreviates this time to a few weeks, using technology and smart supply chain practices to do so. Within 3-4 weeks of the new season’s products coming on display in fashion shows, Zara and H&M present wearable versions of these in their stores, thereby catching trends early and establishing a reputation as trend leaders (Choi, 2013).
How does a company like H&M make this possible? Garments are a very complex merchandise category, as the combination of colors, cuts, fabrics, stitching styles, etc. undergoes rapid changes (Novak and Eppinger, 2001). To deliver garments in such a short time cycle requires significant supply chain efficiency and management skills. At the same time, H&M positions itself as a low cost retailer; hence it requires facilities that ensure end-to-end execution in the shortest possible time at the lowest possible cost. To achieve low cost, the company has to source its products from sourcing destinations in Asia, which can increase the delivery time due to transportation logistics.
In this study, we take a look at how the brand has structured its supply chain management practices to achieve low cost in shortest time. We evaluate the advantages of the system and possible areas where improvements might be made or a new method adopted.
H&M Supply Chain Management Structure
H&M is based in Sweden and its fashion retail chain is spread across a large portion of Europe. It positions itself as a low-cost fast fashion retailer which turns around designs and collections in 2-3 weeks. In order to achieve this, H&M has extremely efficient supply chain processes. Some of the key highlights of its supply chain are:
Fast Turnaround of designs
H&M does not cater to high fashion designs. Its target is fast fashion of the street variety which will be bought and replaced frequently. To capture recent styles and trends, H&M takes photographs of trending garments from fashion shows, and electronically circulates these to its designers. The designers then create street versions of these garments in 1-2 days. This rapid turnaround in designs enables H&M to get the designs ready in a very short period of time.
Sourcing Strategy
H&M stocks largely on recent trends in the market based on feedback from the fashion shows etc. For styles which are new and have recently been shown, H&M sources the garments from a network of vendors located across Europe and Asia. In order to get the best value, it eliminates middlemen and extra layers, instead dealing with the vendors directly. For this, it has set up a network of production coordination centers across the countries where it operates, which coordinate directly with the vendors. While many of these vendors are located in countries across Asia and Europe, the time to delivery is reduced by use of technology for placing orders and tracking production progress. For rapid turnaround, the company uses vendors from Europe, while products which have longer turnaround time and replacement orders are sourced from Asia. Typically, a new design may be first produced by a vendor in Europe so that it gets to market very quickly, but subsequently produced in China to get the advantage of a lower cost of production.
Categorization of Vendors
H&M prefers to aggregate large volumes with vendors so as to reduce the cost per garment. Vendors typically deal in only one type of garment – shirts, tops, skirts, etc. so that the production process does not get disturbed by changing over from one type of garment to the next. Instead, large volume orders are given so that the turnaround time is reduced. H&M does not stock fabrics but encourages its vendors to do so, thus reducing its own cost and increasing the speed of delivery (Sardar and Lee, 2013).
Centralization of Distribution
For distribution, H&M works on a central hub & spoke model. All vendors ship their products to a central warehousing facility in Germany. From here, the distribution is coordinated to the various regional distribution centers present in each country. The centers in turn aggregate the orders from the various stores in its network to provide bulk requirements to the central warehouse. This reduces the transportation time and cost by reducing the inventory carried across the chain, instead aggregating the inventory in a single place from where it can be dispatched to wherever it is required.
Cost Reduction in Retail
H&M does not own its retail stores. Instead, the company rents floor space in order to reduce the cost of operations for the stores. It also takes on larger store space as compared to competitors like Zara, since it stocks a larger variety in more volumes. In order to ensure that the inventory is maintained at acceptable levels, the store carries out regular promotions and discounts on merchandise that exceeds the optimal stocking period. This helps clear inventory and increases the rate at which new merchandise is stocked. This is helpful in improving the overall store margins as people buy more frequently since there is new merchandise available every few weeks.
All of the above are significant value additions for the H&M supply chain as they enable the company to turn around merchandise in a relatively fast time, and do not increase their costs through high inventory or high cost investments. While part of the production is handled close to the distribution hub, repeat orders and orders with a longer turnaround time are sourced from Asia to get a lower cost of purchase (Guercini and Runfola, 2004).
In addition, H&M also sells a significant portion of its merchandise online, thereby reducing the cost of setting up stores, stocking and investing in employees, etc.
Analysis of H&M Supply chain Management Strategy
H&M has implemented a strong supply chain strategy to ensure that it can sell fast fashion in high volumes at low cost. Towards this end, it has invested in technology, systems and processes to optimize the turnaround time from design to final distribution. Here we analyze the key strengths and weaknesses of the supply chain with regards to the fashion industry.
Strengths
Rapid turnaround time for designs using technology and internet to transfer designs from the ramp to designers and from designers to the vendors, which reduces the time required to bring a design to the market.
Categorization of vendors as per types of garments ensures minimum lag time between the order being received and production being executed.
For faster turnarounds, local vendors are preferred as the transportation logistics are significantly reduced as compared to vendors in Asia. This is used when new styles have to be brought to market quickly.
For lower costs, vendors in Asia are used, as they produce at lower unit cost, but the delivery time is longer due to geographical distances.
Large orders are placed and vendors are encouraged to stock up on fabric to reduce the time required for production.
Inventory turnaround is increased by offering discounts and promotions for inventory that does not move after specific shelf time. This ensures that the stores are always stocked with fresh merchandise and shoppers encouraged to come back with greater frequency.
Weaknesses
Since H&M depends on high volumes with low margins, if a particular design does not sell, losses are significant in the form of discounts and promotions required to sell off the existing inventory.
For fast moving designs with a short reorder cycle, H&M uses vendors in Europe as the turnaround time required is less. However, it pays more as the cost of production is likely to be higher with European vendors than Asian vendors. Therefore, the margin on fast-moving items as an aggregate is lower than those products with a long lead time. As a result, if a new product fails, the losses are higher.
While H&M carries little inventory, it expects its suppliers to do so. This can affect the profitability of the supplier unless there is a regular flow of orders.
Since distribution of the merchandise is from a central location, the reorder time for some locations may be higher than if they get the supplies directly from the vendor. In addition, there needs to be a process to shift inventory within a region in case certain merchandise is in demand in one store but is lying unsold in another.
Challenges in the Current Environment
Today, as the number of online shoppers increases, the relevance and profitability of brick and mortar shopping destinations like H&M is under threat. With more people shopping online, the company needs to maintain a central inventory to cater to online customer requirements rather than distributing it across multiple stores.
It is also likely that customers can compare prices across retail locations and online stores through the internet and various applications. In such a scenario, H&M needs a cohesive pricing structure that will allow it to provide equitable pricing across both models. If the price in store is higher than that online, people will only shop online and the stores will face reduced foot traffic and therefore lower sales. If the online price is higher, people will get a feeling of being cheated and stop buying from H&M.
Managing geographically diverse vendors across multiple locations is a challenging task. Any breakdown in communication can be fatal for the company.
H&M depends heavily on its team of designers to turn around fashion designs fast. If it is not able to do so, the entire business model fails. Hence designers and technology are a critical part of the success strategy of H&M, since the internet is used to transfer orders, designs, etc. between the design team and vendors. Any breakdown in communication can adversely affect the business.
Opportunities for H&M
As H&M expands into online retail as well as new geographies, it will have to evolve a new more decentralized method of distribution to reduce the time lag between order and delivery. One way would be for all vendors to ship directly to the store locations or customers based on orders or demand. This will reduce the order to fulfillment time drastically as repackaging and shipping in the central warehouse reduces. This can be achieved if the present IT infrastructure is used to communicate to the vendors what items are needed at which store and by when.
H&M also needs to implement a reverse logistics system so that the regional distribution centers collect the unsold inventory and redistribute it to other stores based on local demand, as well as aggregate it and can offer it online at a discount if required. This is a tactic increasingly used to reduce standing inventory and generate better returns (Kelley, 2013). This will reduce the image of H&M as a discount brand store for fast fashion and improve the revenue per store and per footfall.
Conclusion
H&M along with competitors Uniqlo and Zara have redefined the supply chain for fashion retail. By implementing its unique model successfully, H&M has improved profitability and its image as a fast fashion brand. By working on the low margin high volume market, the brand has captured significant market share through its abbreviated turnaround time in getting new styles to market. At the same time, the system has a few flaws that need to be corrected as the company grows beyond the European market. By implementing a decentralized distribution system and reverse logistics, it can improve the profitability of its stores and reduce the time to market for its merchandise in many locations, leading to better sales, lower discounting and therefore higher profit margins.
References
Choi, T.M. (2013) “Fast fashion systems: theories and applications,” CRC Press.
Guercini, S. and Runfola, A. (2004) “Sourcing strategies in clothing retail firms: product complexity versus overseas supply chain,” Journal of Customer Behaviour, vol. 3, no. 3, pp. 305-334.
Kelley, R. A. (2013) “Inventory redistribution optimization in the fast fashion industry,” Doctoral dissertation, Massachusetts Institute of Technology.
Novak, S. and Eppinger, S.D. (2001) “Sourcing by design: product complexity and the supply chain,” Management Science, vol. 47, no. 1, pp. 189-204.
Sardar, S. and Lee, Y.H. (2013) “Analysis of outsourcing strategies for cost and capacity flexibility in textile supply chain management,” in proceedings of the 17th International Conference on Industrial Engineering Theory, Applications and Practice, Pusan National University, Busan, South Korea.
Su, J. and Gargeya, V.B. (2011) “An empirical examination of global supply chain management practices in US textile and apparel industry,” Journal of System and Management Sciences, vol. 1, no. 1, pp. 11-20.
