Pre covid supply chain management Sample

Executive Summary

The aim of the report is to present an evaluation of the supply chain management practices in the pre-covid era. To accomplish the task, this report adopts a comparative case study analysis of two companies in the fashion retail industry. The report will evaluate the supply chain management practices and strategies of the companies in the pre-covid era to identify the challenges for the company during that period and offer recommendations based on that. Based on the analysis, it could be determined that Forever 21’s performance appears to be less successful than H&M’s. This is mostly due to H&M’s quick responses based on accurate market analysis. Management of Forever 21 would have gained a competitive advantage if they had directed more resources and efforts toward understanding the demands of their target customers than expanding their number of physical locations. In any case, it’s worth noticing that H&M’s key financial and supply chain metrics have been dropping over the last few years, which is likely due as well to its expansion of physical stores. Therefore, both companies needed to adopt the right strategies to strike an efficient and sustainable supply chain model while maintaining demand levels in the right places at the right times.

Introduction

The aim of the report is to present an evaluation of the supply chain management practices in the pre-covid era. To accomplish the task, this report adopts a comparative case study analysis of two companies in the fashion retail industry. The report will evaluate the supply chain management practices and strategies of the companies in the pre-covid era to identify the challenges for the company during that period and offer recommendations based on that. To undertake this project, first the key financial ratios will be analysed for the companies in the pre-covid time, i.e. 2016 to 2018. Following that a comparative analysis of the KPIs for the SCM activities of the two companies will be evaluated. Following that an evaluation of the key stakeholders in the supply chain will be presented as well as evaluation of other key value chain entities. Finally the main challenges will be identified and recommendations offered for the companies based on the analysis.

Background of H&M and Forever 21

Erling Persson founded H&M in 1947, its vision is “To lead the change towards a circular and renewable fashion industry while being a fair and equal company” (H&M Group, n.d.). Stein (2019) states that H&M offers consumers an array of products such as clothing, shoes, and accessories. Over 5000 H&M stores are located around the world (O’Connell, 2020). In comparison to other fashion companies, H&M offers extremely low prices to consumers, thus attracting a large group of lower-income shoppers.

Do Won Chang and Jin Sook Chang founded Forever 21 in 1984. As with H&M, Forever 21 specializes in fast fashion retail. Customers can purchase stylish, affordable clothing at the store. Forever 21 filed for bankruptcy on 29 September 2019.

Key Financial Ratios

H&M’s profitability measures decreased over the three financial years (2016-2018, pre-covid era) (net profit margin decreased from 9.69% to 6.01%, and return on assets decreased from 18.91% to 10.77%). Besides the continued store expansion strategy and a slowdown in the market, the reason for this can be explained by the cost of setting up new outlets and the time it takes for sales to break even when they are new.

The Company’s account payable turnover increased from 11.85 to 14.63 times from the rate of 2.7 times per year, which meant it had to pay its suppliers faster than usual. They are paid less frequently as their receivable turnover decreases from 39.39 to 33.24 times. From a purely financial standpoint, this is not a good sign. As we consider H&M’s recent store expansion within the context of the current retail industry, in which consumer preference and sustainability trends have greatly impacted the industry, its performance is notable.

KPIs in Supply Chain

Activities KPIs can be categorized into six different categories, namely facilities, inventory, transportations, information, sourcing and revenue management. H&M works with suppliers rather than owning its own factories. Given that both H&M and Forever 21 are focused on fast fashion, their market segmentation and pricing strategies are likely to be similar.The report will look in depth below at four other activity KPIs in four relevant areas based on how important they are, how they are measured and how they should be interpreted.

Inventory

In an environment where fast fashion is a threat, both H&M and Forever 21 need to keep up with fast-changing trends and demands while avoiding having to stock out or overstock. Day of supply is a simple measure to use, which divides inventory turns by the total number of working days. In addition, if the days of supply are too short, they will not be able to plan their inventory and will not be efficient and cost-effective, and if they are too long, the clothing items will be outdated in terms of styles and will have to be sold at a discount. By assuming 260 working days per year, according to published external reports from H&M, their days of supply have increased from 95.83 (in 2016) to 98.55 (in 2018), which is not desirable and needs to be improved. Other than days of supply, obsolete and excess inventory are also important KPIs to consider. The clothing items that fast fashion companies typically sell are often out of fashion and therefore have to be sold at a steep discount. This is unfavorable for their profit margins. The reason why tracking obsolete or excess inventory is important is so they remain at the lowest possible level.

Transportation

Changing fashion trends dictate frequent replenishment, so transportation costs, both inbound and outbound, are extremely important in fast fashion. To measure outbound cost, it is important to consider the size of the shipment and the number of shipments within a predetermined timeframe while measuring transportation rates per shipment.

Information

In Forecasting in fast fashion requires striking a balance between consistent items and changing or seasonal products. That’s why variance from plan is a good metric for judging how well forecasting is executed. By estimating the unfulfilled demand as well as observing long-held stocks, deviation from plan is calculated as the sum of squared errors in actual demand from forecasted demand. The higher the variance the poorer the forecasting quality. Inventories and the days of supply can be used as measures of variance from plan, since these figures would demonstrate that current forecast system provides high accuracy for planning if they are maintained consistently. According to our calculation, H&M’s figures should be considered very stable, with only minor fluctuations. According to Peterson (2014), H&M usually releases new designs in only 2 weeks, which is reasonable and sufficient in terms of responding to the fast fashion market.

Sourcing

A brand that introduces new items frequently needs to ensure that their suppliers can deliver within short time limits, which is why supply lead time should be closely monitored. Forever 21 or H&M can be more responsive to changing consumer demands when their lead times are shorter. It is important to take into consideration not only delivery speed, but supply quality as well. It is possible to measure the quality of clothing supply by examining how many items delivered are standard. There is no way to test all the items delivered, but a random inspection of at least a portion of them can provide an estimate. Days payable outstanding may be a simpler way to judge sourcing or suppliers. Companies with a lower number can hold onto cash for a longer period of time before having to settle payments. H&M is now (2018) shipping products in 17.77 days instead of 21.93 days (in 2016). As a result, either the suppliers deliver quicker supplies, requiring faster payment, which is beneficial to H&M’s operations and ability to respond to the market. There is also the possibility that the fashion industry has grown larger and the demand for suppliers has increased, so suppliers can only cater to faster and more secure buyers, which is not conducive to competition in the general fashion industry.

Stakeholder Analysis

Manufacturers

There are around 900 independent factories H&M outsources to. The majority of them are based in Asia (TUN, 2019) while the rest are found in Europe. In addition to reducing prices and lead times, they can also lower the risk of unreliability by maintaining strong relationships with them. 30 oversight offices are located near the manufacturing sites in order to oversee the production centers. As a result of geographical proximity, communication is easier and a close working relationship is ensured with the suppliers. The quality of the design can be assured and changes to the design can easily be implemented. Also, H&M does not store their own fabrics, it is done for them by their partners. The fabric does not need to be shipped if anything needs to be ordered at the production site. Lu (2014) estimates a reduction in lead time of 15-20% utilizing this method.

About 30% of the goods for Forever 21 are made in factories in California. The company has been unable to reach economies of scale despite being able to produce and sustain large volumes. The failure to reach economies of scale is a sign that they have focused on the wrong areas. This is largely due to the differences in the types of goods and amounts produced in different countries, due to the difference in weather conditions (Bloomberg, 2019).

Facility and Transportation Management

In the fast fashion industry, trends and collections are changing so quickly that comprehensive and reliable transportation management is a must. Seasonal products and limited time collections especially require this. Dresses and swimwear won’t sell once summer is over.

SCM performance

A clothing factory today employs one person out of every six on earth and produces 80 billion garments annually (Thomas, 2019). Considering those numbers, it is not surprising fast fashion is so widely known. According to Thomas (2019), the garment industry makes 80 billion garments a year and employs every sixth person on Earth. Fast fashion is well-known due to a statistic of that magnitude.

We As part of its operational review, it will dive deeper into its system. With the rapid response production capability and enhanced product design capabilities found in fast fashion, “hot” products can be designed that capture current consumer trends and minimize production lead times as a means to match supply with demand (Cachon, 2011). Due to their target audience, fast fashion businesses H&M and Forever 21 have similar SCM operations. The designs are based on fast turnaround times and could be mass produced at an affordable cost. Young customers with limited means and a desire to wear the latest designs wear these strategies wildly in many cases.

In 80% of H&M’s retail inventory is manufactured in advance, with 20% introduced in response to market trends. With over 750 suppliers worldwide, 60% of its garments are produced in Asia, with the remainder produced mainly in Europe. The company uses top fashion trend forecasting companies around the world, including Worth Global Styles Network (WGSN), an entity which boasts of its status as an authority in fashion.

H&M also works with over 700 partners in over 20 countries because it does not have its own factories. As a result, both the buying and production of its products are managed through a network of external suppliers (Fig. 1). In addition, it strategically locates 30 production oversight offices throughout the world in order to act as a mediator for the local partners and to facilitate communications about the latest fashion trends and internal company business.

Challenges and issues

These companies were in the same industry and used similar SCM models, which meant they faced similar challenges in terms of industrial challenges. Despite similar challenges, H&M differs in its foresight and reaction to challenges that give it an edge over Forever 21.

In Forever 21’s executives could not have predicted what is now known as the retail apocalypse that began in 2017 and continues to threaten virtually every retailer (Cesareo, 2019). Six years ago, there were seven outlets in seven countries. Now it has 47 outlets in 47 countries. Many other retailers attempted to save themselves from extinction through rapid expansion during the last few years, but Amazon has been doing the opposite. As a result, H&M has adjusted its distribution model so as to serve the online demand better by expanding its online store offerings, and it plans to continue to expand online. The retailer also expanded its in-store pick-up/returns of online orders as well as mobile services by increasing the use of image-recognition technology to match customers with similar items at H&M.

On On a separate note, Forever 21 made a number of mistakes as a result of its leadership’s failure to anticipate and anticipate changing consumer attitudes about the fast fashion industry. Managers were not responding well enough to the pressing problem of climate change, which is a worldwide concern. In fact, the fashion industry contributes more to global carbon emissions and wastewater than domestic and international travel combined. Due to their short life spans and cheap fabrics, their clothes contribute significantly to landfill waste. Rather, H&M implements ways for old clothing to be recycled for store discounts or credit, which means that clothes can be given new life and are not destined for a landfill. The sustainability page of H&M states that “57% of all materials we use to make our products are recycled or sustainably-sourced materials”.

Recommendations

Supply chain agility, adaptability, and alignment are the three components of the Triple A model. “Only those companies that build agile, adaptable, and aligned supply chains get ahead of the competition” (Harvard Business Review, 2004). Instead of striving for efficiency, companies must have a culture that can adapt to changing networks and strategies.

Agility

Agile means being able to cope with the uncertainties created by rapid changes in demand and supply in the market. Overstock, excess inventory that leads to price markdowns, and ramping up and down production all contribute to frequent stock-outs or oversight of errors during the production process.

Manufacturing, distribution, and other components of a company’s supply chain must be flexible for companies to become agile. By exchanging real-time information over the Internet and fostering strong collaborative relationships with suppliers and partners, it is possible for the chain to react faster. Together with Zara and Mango, H&M and its competitors have already implemented agile supply chains into their supply chains. The chain may unnecessarily be hamstrung by H&M’s low-priced, non-bulky inventory of items such as buttons, hooks, zippers, etc. A customer feedback system was also installed at every store with the aim of tracking trends directly from customers.

The management of Forever 21 has not been able to respond to market changes as quickly and effectively as H&M. Due to the similar target markets and pricing strategies employed by both companies, Forever 21 can learn from H&M’s investment in IT to automate processes both within and between its production and distribution centers.

Secondly, H&M’s integration of innovative technology into processes to improve responsiveness also demonstrates that, unlike Forever 21, it has kept its supply chain relevant to the global market and has maintained its edge in the marketplace. The ability to adjust to changes in the market, such as economic recessions, technological advances, economic, social, and demographic trends, is the crucial capability that companies must develop if they wish to remain competitive.

By integrating waste reduction and circular economy principles into its supply chain, H&M also had an advantage over Forever 21 by recognizing and responding to the increasing concern about climate change and demand for sustainable logistics. For example, it recycles old clothes for discounts in exchange, which is an ideal example of reverse logistics, a practice that is becoming increasingly widespread across all manufacturing industries.

Adaptability

It involves modifying certain strategies based on the types of new products they are introducing, the markets they are trying to penetrate, and how rapidly technology is evolving and how product lifespans are shrinking. To provide flexibility in their product designs and supplier networks, companies should invest in infrastructure that helps them monitor economies around the world.

The high reliance of both companies on independent suppliers for production and procurement, resulting in their lack of in-house manufacturing, calls for strong and well-aligned relationships between the company’s management and its suppliers. Due to misalignment of interests, inventory problems may arise, leading to increased unnecessary expenditures. Furthermore, there is the possibility that one defective link could have a significant impact on the whole chain.

Alignment

The key to achieving alignment is accurate and consistent internal communication. Supply chain stakeholders should be able to exchange information with companies more clearly and transparently. In particular, taking into account H&M’s model of introducing new collections within short intervals, it is crucial for the company to align its strategies and decisions with the capabilities of its suppliers, so that it can reduce lead times and make sure that the quality of its products meets industry standards.

In order to improve overall supply chain performance, performance measures should be identified and agreed upon. The company must share part of the ownership risk of the inventory with suppliers, especially those that must borrow money to finance their inventory. In addition to its highly integrated communication and information system as well as the strategic locations of its manufacturing sites and design production centers, H&M maintains close relationships with its suppliers in Europe due to geographical proximity and with those in Asia due to the company’s integrated communication and information system.

Conclusion

Forever 21’s performance appears to be less successful than H&M’s. This is mostly due to H&M’s quick responses based on accurate market analysis. Management of Forever 21 would have gained a competitive advantage if they had directed more resources and efforts toward understanding the demands of their target customers than expanding their number of physical locations. In any case, it’s worth noticing that H&M’s key financial and supply chain metrics have been dropping over the last few years, which is likely due as well to its expansion of physical stores. Therefore, both companies needed to adopt the right strategies to strike an efficient and sustainable supply chain model while maintaining demand levels in the right places at the right times.

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