Sector Update:Textile and Apparel Industries

Transforming EnterpriseJanuary 28, 2003

Jan Hammond

Harvard Business School

Janice H. Hammond 1.28.2003

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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

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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

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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

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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

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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, …

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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)

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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