Operations Management

Prof. Mohammed Aadil

The Benetton Operations Case Study

Retail operations main objectives

Benettons core business is in the manufacturing, production and sale of casual and sportswear, which accounts for 95% of total revenues (Camuffo et al, 2001: 47). The company has a market presence in over 120 countries and has consistently generated revenues exceeding $2 billion throughout this decade (Industry profile, 2007: 15). It has 5,000 retail outlets around the world, the vast majority of which are run by independent managers as part of a franchise arrangement whereby the licensees of those outlets sell products which carry the Benetton brand name (Skjott-Larsen et al 2007: 94).

A key objective of Benetton HQ (based in Treviso, Italy) has always been to retain overall control on every aspect of product sales, thereby ensuring that the Benetton total look is adhered to. The company is renowned for having a distinctive philosophy which is espoused through controversial advertising techniques (Dapiran 1992:8).

Its global network of sales agents each holds responsibility for their own geographic area. They work closely with franchise operators in the sale and distribution of its goods, as well as overseeing all aspects of merchandising (Camuffo et al 2001: 47). A global information system unites every link in the supply chain.

Stiff competition has forced Benetton to radically change its retail strategy (Economist: 9 November 2004). To that end it has introduced over 100 mega-stores and, whilst the majority remain under the franchise system, the company has decided to take direct ownership and control of a few as it seeks to form a closer relationship with its clientele; the logic being that this will facilitate a deeper understanding of customer preferences (Camuffo et al 2001:50). One expert has stated that Benetton a former market leader is lagging behind its competitors, not through any defects in its supply chain, but more because it is less good at seeing the opportunity, inferring that the franchise system is to blame because it creates a barrier between company and customer. Zara, on the other hand, is proving to be far more successful because of it has adopted agile supply chain practices (Cane 2007:1).

Diversifying into new product ranges such as the sportswear market, as well as an added emphasis on its lifestyle branding is a key pillar of the new approach. Its Fabrica, Killer Loop and Playlife brands are all geared towards capturing a large slice of the youth market (FT: 9 May 2003). As the Managing Director explains, we want the market to know that Benetton is about more than just colorful sweaters. Its a lifestyle concept (Hargrave-Silk 2003:1). The Asian markets are vital to Benettons future retail operations objectives, recording a 35% profit rise in Russia and 50% rise in India in 2007 (Womens Wear Daily: 14 November 2007). Although Europe remains Benettons largest market it has recently refocused its attention towards building brand awareness in the emerging markets of Asia, the Middle East and the Far East (Evans 2004:1).

One insider sums up the Benetton retail philosophy, when (s)he states that we do not want to start with high prices to attract people later on with high discounts, but we want our customers to appreciate every time of the year that there is the right ratio between quality and price (Evans 2004:1). Physical distribution operation main objectivesThe company describes itself as vertically de-integrated, meaning that its core functional activities such as design and global strategy are still centralized. Nonetheless it is willing to outsource those activities where it is unable to achieve in-house economies of scale. Its logistics operation has always been directly controlled, in large part owing to the integral part it plays to the companies overall success.

Key to effectiveness is the rapid flow of market intelligence between customer and factory. This is achieved through maximising the benefits of EDI technology which facilitates direct flow of communication between the agent networks representing the 5000 retail outlets. EDI information allows Benetton manufacturers to delay the dyeing process up until a clear understanding is reached on market requirements. This eliminates the buildup of wasteful inventories, thereby reducing costs, slashing cycle times and maximising efficiencies. Once this information is relayed to the centre, Benetton is able to arrange bulk delivery of products from its regional distribution centres which are highly automated and thus able to cope with demand. The company describes their strong track record in distribution as being down to its 360 degree vision; in other words a recognition from the outset as to the strategic importance of logistics through integrating suppliers, manufacturers and retailers in a value chain that thrived on speed, efficiency and flexibility (Dapiran 1992:9-11). Factory & suppliers main objectives Benettons manufacturing processes are characterised by strong upstream vertical integration which entails significant output at its own production centres (22 in Italy and 10 abroad), as well as outsourcing the more labour-intensive tasks such as tailoring and ironing (Camuffo et al 2001:49). The Treviso HQ has overall control over design activities. CAD technology is fully utilised to maximise opportunities for the speedy bringing to market of mass produced garments. This is achieved through the effective usage of 500 sub-contractors who work in the vicinity of the companies HQ and production base. The sub-contractor group, often themselves former Benetton managers, organise the second tier of small factories who undertake the labour-intensive processes (Skjott- Larsen et al 2007: 95-96). A pyramid analogy has been used to describe the hierarchical nature of this relationship, with Benetton at the apex, the sub-contractors forming the second tier and the army of small workshops forming the bottom layer (Harrison 1993: 160)

Benetton directly controls the supply of raw materials thereby achieving cost savings in supplier overheads. It has a very close relationship with the sub-contractor base, thus ensuring that the factories under their control are able to satisfy market trends at short notice. This is a distinct advantage to their competitors who do not enjoy such flexibility and are hampered with fixed-cost overheads (Skjott-Larsen et al 2007:97).

Consider the following statistic: in 1990 90% of Benetton garments were produced in Italy. Now it is only 30% and within a few years it is expected to fall to only 10% (Economist: 8 February 2007). Such is the dramatic impact of globalisation. Benetton has responded by remaining true to its philosophy of tight central control by replicating its Treviso production model on a global basis. For instance Benetton Hungary has production oversight of 7 countries within the region (Camuffo et al 2001: 49). This is in keeping with the underlying company philosophy of creating global brands which transcend national boundaries. How well do these three interconnecting sets of operations fit together? For decades Benetton has consistently demonstrated that getting the right mix of the 3 supply chain functions is critical if market success is to be achieved. Its franchise network has proved to be adept at communicating critical market trend information via its EDI system to HQ who alerts the manufacturing side to the real-time needs of the market. Use of sophisticated CAD/ CAM technology has enabled Benetton to gain the upper hand on its competitors by being quick and flexible at this point in the production process (Dapiran 1992:9-10. Benetton has successfully exploited I.T. advantages from an early stage. Its global integrated network has enabled agents to forward customer order details to the 500 sub-contractors based in the Veneto heartland where the company manufacturing capability has historically been located. Within days they are able to receive multiple orders from various country agents and rapidly set in motion the manufacturing work by fully exploiting the vast network of sub-contracted labour. The system is also connected to Benetton manufacturing plants worldwide (Johnston 1994: 2-3).

Benetton is famous for using postponement tactics at the actual sequencing point of the production process, whereby dying of the garments is not completed until the agent network have provided market intelligence on what particular products are in demand in which locations. Tang points out the advantages of postponement when declaring that it has proven to be a cost-effective mass customisation tool to handle regular fluctuations under normal circumstances (Tang 1996: 38).

Camuffo has demonstrated that in recent years Benetton has successfully risen to a more challenging market environment by opting for a strategy that involved increasing its overall ownership and control of supply chain assets and only outsourcing those areas where the company was not in a position to achieve economies of scale. He points to the paradox of tighter centralized control over the whole supply chain, yet at the same time being able to achieve sufficient flexibility to rise to market challenges (Camuffo et al 2001: 52). There can be no doubt that Benetton prefers quite rigid control over processes, despite the tendency to opt for sub-contracting relationships with suppliers.

Let's turn to technology decisions of the Benetton.

We will view three major tasks that are faced by company concerning technology, which are to acquire the technologies that the company needs for its operations and its offerings, to fully exploit these expensively acquired technologies in the company's own offerings or by other means and to manage these two processes effectively in a complex organization.Firstly we'll take up acquire technology of Benetton. On our opinion Benetton keeps a making technology' approach. Indeed, Benetton makes' its own technology by developing it in its own research, namely working up design of its garments, basic methods of manufacturing, some special technologies, such as dyeing in grey', selling principles and so on.There is a more detailed explanation with some examples. As we've mentioned before, Benetton has a big staff of designers not only for creating the collections but also for researching new materials. So, all the researching work is been doing by Benetton itself. Other interesting example is Benetton' working out of dyeing in grey' their famous policy of manufacturing garments, where possible, in greggio, or in grey, and then dyeing them only when demand for particular colours is evident. This is a slightly more expensive process than knitting directly from colored yarn, but their supply-side economies allow them to absorb the cost of this extra flexibility, which in turn allows them to achieve relatively fast deliveries to the stores.As about exploit technology, Benetton doesn't hold to only external or only internal exploitation. As we've mentioned above, its designers research new materials, but all the materials are delivered from suppliers, so Benetton offer a turnkey' package for its suppliers. Also about delivering though Benetton operates through a number of agents, all they have the same selling principles, worked out by the core company. But also we can speak about internal exploitation in the manufacturing step, because Benetton does manufacture much of its production itself using its own developed production technologies.Speaking about manage technology, in every level from material manufacture to selling step all the participants of Benetton production hold to common principles of working. For example, Benetton's designers suggest a new materials for suppliers, Benetton's specialists control not only the step of assembling garments, which is mostly take place at its own factories but also at its suppliers factories. At the same time it's very important control its delivery system. Benetton stores have always been designed with relatively limited storage space, and so store owners require that deliveries of garments are fast and dependable. Benetton found decision through their famous policy dyeing in grey'.To specify this analysis of Benetton's technological development, we have to determinate the types and the levels of Benetton's technology. We have to distinct the product technology and the process technology and distinct the basic level of technology and the distinctive level of technology.The Benetton Company has product technology that applies design of offerings that solve the customer's problem of needing a wide range of products such as casual clothes, sport clothes, clothes for children. They can offer diversified products, basic clothes produced fast and cheap, this is necessary to operate in their particular network, but this is not the kind of technology which permit them to be competitive. By this way, we think that their product technology is basic.Concerning their process technology, they can practice low prices, its production costs for woollen items are significantly below some of its competitors. Moreover they can deliver their products in different places in Italy 15 factories, and 7 factories all around the world. Their process technology ensures the delivery of product in short delays such as their idea of "dyeing in grey". By this way, we think their process technology is distinctive.It remains to be seen whether or not Benetton can sustain its competitive edge, particularly in the emerging markets of Asia, where much of its energy is now focused. The early signs are good, however it has been shown that competitors who are able to display more agile working practices can edge out established brands in a very short space of time. Zara is a case in point.Questions

1. Explain with reference to the case the role of postponement tactics as a Mass customization tool?Wisdom Kids Academy

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