sector update: textile and apparel industries transforming enterprise january 28, 2003 jan hammond...
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Sector Update:Textile and Apparel Industries
Transforming EnterpriseJanuary 28, 2003
Jan Hammond
Harvard Business School
Janice H. Hammond 1.28.2003
2
Industry Overview: Bases of Competition
•Price/Cost•Overcapacity, retail consolidation.•Prices dropping: e.g. 1994 – 2002, CPI up ~23%
• Women’s/Girls Apparel price index down ~13%
•Quality•Look, feel, durability...
•Fashion•Short product life cycles, unpredictable demand
•Variety•Closets are full: consumers need a reason to buy
Janice H. Hammond 1.28.2003
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Short Product
Life Cycles
Forecasting
Uncertainty
Need for NewSupply Channel Management
Models & Practices
Inventory
Risk
Lean Retailing• Weekly+ replenishment • Small order quantities• Short lead times
Technological Enablers:• Barcodes and Scanners
• Product level identification• Shipping container identification
• EDI & Internet• Automated Distribution Centers
Competitive Impetus for Lean Retailing with Technology as an Enabler
Product Proliferation
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Channel Structure: Traditional Retailer-Supplier Dynamics
Apparel Plant 1
Apparel Plant 2
Apparel Plant n
Retailer’s Warehouse
Retail Store 1
Retail Store 2
Retail Store m
Manufacturer’s
Warehouse
Low Frequency Retail Order
Large Bulk Shipments
Apparel Plant n
Weekly Orders
Apparel Plant 1
Apparel Plant 2
Retailer’sDistribution
Center
Retail Store 1
Retail Store 2
Retail Store m
Manufacturer’s Distribution
Center
Channel Structure: Lean Retailer-Supplier Dynamics
Small Replenishment
Shipments
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Apparel Sales by Distribution Channel
0%
5%
10%
15%
20%
25%
30%
Mass Merchants Specialty Stores Department Stores National Chains Other
Per
cent
of D
omes
tic A
ppar
el S
ales
19972001
Source: Standard and Poors, 2002
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Distinctive Aspects of Industry: Factors Affecting E-Commerce Adoption• Difficult to specify key aspects of product
– Fit– Color– Touch and feel
• Reviews by customers, industry experts, independent performance evaluations not as helpful
• Emotional aspects to purchase• Brands help (somewhat)• Some product categories easier:
– Basic products: • More familiar touch, feel, and fit;• Less expensive• Less important emotionally
– Product with clear sizing standards
Janice H. Hammond 1.28.2003
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Business to Consumer
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Evidence of Industry Challenges (B2C)•Returns high
–Casual sportswear: 12% - 18%–Fitted fashions: 20%-28%–“High” fashion: up to 35%–vs. average on-line return rate among all product types ~10%
–Returns expensive to process•Arrive one at a time, not necessarily in good condition
•Need to be classified, undergo quality control with a determination made:
•Repackage and back to inventory?
•Back to vendor?
•Liquidate?
•Requires higher level of judgment in distribution center
•Customer credit (scan or input order number)
•Update inventory/sales systems
•Example: Spiegel volume: 6M units/year: 24,000/day
Janice H. Hammond 1.28.2003
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Technological “Solutions”• Zoom Technology• Color Representation Technology• Swatch Technology• Technology to address fit challenges:
– “Personalized” on-line “models”• Input your measurements and other characteristics: “try
clothing on” the model– Take body measurements
• “Fit calculators” translate measurements to sizes– Body scanning
• Fidelity issues• And … do you want to see your own body online?
– Marketers want images more “aspirational”– Alight.com for “plus sizes”: you give measurements: no image,
just says “loose”, “tight” or “best” fit
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Mass Customization• Dell Model: Book orders prior to manufacturing
– But, can’t hold all components like Dell. – Fabrication required as well as assembly; Color matching critical.
• Custom Fit– In store measurement/ordering:
• Levi’s jeans: measure• Brooks Brothers’ shirts: measure• Brooks Brothers’ suits: body scan
– On-line measurement/ordering:• Lands’ End
– Take own measurements– Jeans, chinos: now 40% of all purchases are custom fit– Price premium ~50%– Moving into men’s shirts, trousers
• Custom Design• Fabric, components, style options
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B2C Issues for Different Participants• Bricks and Mortar Retailers
– Different data requirements– Order fulfillment challenges
• Manufacturers– Channel conflict– Order fulfillment challenges
• Catalog Companies– Easiest transfer, but new skills required
• Pure Plays– Order fulfillment challenges– Need brands to instill consumer confidence
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Case Study - Levi Strauss
11/23/98: On-line Launch• #1 e-mailed consumer request for direct on-line sales of
Docker products- Levi launches on-line sales of Levi and Docker brands
• Industry debate: Levi should first use the web to improve spotty fulfillment record with retailers instead of using web to sell direct
01/99: On-line Exclusivity• Levi retains exclusive rights to selling Dockers and Levi on
line• sales of Levi and Docker brands declared off limits on all retailer web sites: anger in channel
Janice H. Hammond 1.28.2003
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B2C - Levi Strauss
11/99: Off Line• Levi announces halt to e-commerce efforts and web sales
post holiday season• Instead, Levi will use site as a merchandising vehicle, with
final sale directed to retail partner sites• All online efforts now moved to JC Penney and Macy’s
• Debate: why Levi changed online strategy:• Overwhelming opinion claimed due to channel conflict• Others claimed Levi was caught in a fulfillment challenge as they
failed to develop an infrastructure to support the site
• Levi announces a renewed focus on working hand-in-hand with retailers to meet consumer needs
• 01/03: Continue to sell on Penney and Macy’s site.
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Partnerships
• Fewer in each category choosing to “go it alone”: Combine bricks and mortar presence and online capabilities:– Levi’s and Macys/JC Penney partnerships– Sears bought Lands’ End– Amazon site: Sears/Lands’ End, Eddie
Bauer, Target, Gap, Liz Claiborne, …
Janice H. Hammond 1.28.2003
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On-Line vs. Catalog
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Catalog On-Line Total
Per
cent
of T
otal
Dom
estic
App
arel
Sal
es
1999
2000
Source: Standard & Poors, 2002
On-line apparel sales growing (much at expense of catalog sales)
Janice H. Hammond 1.28.2003
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Expect continued growth, but understand challenges
Amazon entry is a big deal: First 6 weeks of Amazon apparel
store site (holiday season): $1.29 billion sales, # 2 only to computers, at $1.32 billion
Partnerships critical: combine brand name w/ bricks and mortar w/ on-line fulfillment capabilities
More women using the internet
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Business to Business
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Forces Driving Implementation
• Demand unpredictability is high: the need for improved channel information is considerable.
• The high fragmentation of plants and global dispersion of plants make the need for transparency high: there are many local players who benefit from lack of good market information.
• “Pain” in the industry is high; there is great room for improvement.
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Expected Performance Benefits
1. Decreased cost of communication in the channel. – Extension of lean retailing practices
• From EDI to web based: easier to scale, maintain, improve
– Estimate for Sears for purchase orders alone:• Purchase order cost expected to drop from $100/order (cost w/
previous EDI system) to $10/order (using Web-based retail exchange)
• Annual savings for 100 million purchasing orders ~ $9 billion/year
2. Improved visibility in the supply chain
3. Improved forecasting capability
4. Reduced channel inventories
5. Improved design
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Forces Hindering Implementation– Difficulties of specification persist: Products, plant
capabilities and components are difficult to characterize.
– Apparel plants are small, with relatively low levels of sophistication. Implementation will be challenging.
– The complexity of interaction among channel partners is relatively high.
• Communicating about product design, product quality, plant capabilities, involves significant subjectivity. This type of communication will be harder to put on line.
– Intermediaries provide domain expertise and local knowledge that will be hard to automate.
– Deep knowledge is required to be effective
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B2B Auctions, Exchanges, etc.
Tig
htly
coo
rdin
ated
sup
ply
chai
ns
Breadth of Relationships
Dep
th o
f R
elat
ions
hips
Where the hype has been
Where many of the benefits lie
Understanding the Value Proposition for Textile-Apparel-Retail B2Bs
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