Hugo Boss has become known as an industry trend setter for its high quality men’s and women’s fashion apparel, shoes, and accessories. Product leadership, intimate knowledge of their market and customers, and operational excellence are what distinguish the company from others in the luxury fashion goods industry. From an operational perspective, the variability that exists as a result of designing and manufacturing short run fashion products is high.
This perpetual shifting of demands and preferences makes it difficult to maintain accurate industry forecasts that result in high risk actions as manufacturing products with no guarantee of sale leading to large scale inventory systems. The CEO had to walk a fine line between supplying his customers’ orders promptly, or tying up his production partners with orders that may or may not be placed. Skilled management of the design, planning, and operations of the supply chain impact the success and overall profitability of the operation.
As is clearly stated in chapter one of Chopra, “The goal during the operation phase is to exploit the reduction of uncertainty and optimize performance within the constraints established by the configuration and planning policies. ” •Body wear NOS SKU’s are functional products because they do not change seasonally, including style, color, or fabric, and remain constant year after year for a period of three years. •Some important factors to consider for the business strategy related to NOS items are: oHugo Boss guaranteed delivery within 48-hours for NOS replenishment orders. Forecast demand for NOS items is made six months in advance. oPlanners seek to keep on-hand inventory level of 3. 5 months of forecasted demand. oProduction lead time for NOS items was eight weeks, and current transportation lead time by sea was two and a half weeks. Total lead time from the factory to the warehouse was ten and a half weeks. oThe cost of holding inventory ranged from 9% to 12%. oStockouts in 2004 resulted in lost revenue of 1. 1% oStockouts often occurred during key retail replenishment periods like December.
The supply chain’s primary purpose for this type of product is to supply predictable demand efficiently at the lowest possible cost. Therefore, the recommended supply chain strategies for these products are: 1. Approach to choosing suppliers: Select primarily for cost and quality. The supplier was the same. However, it is important to highlight that it seems that the selection of this supplier is aligned to the strategy. Delta Galil has 13,000 employees and operates in a low cost labor and tax-free area (Cairo).
In addition, this supplier is a leader provider of ladies intimate apparel and men’s underwear and hosiery, giving it the ability to create economies of scale and obtain low cost manufacturing due to its large production. Also, the reputation of the supplier is for good quality. 2. Manufacturing cost: maintain high average utilization rate. •Since the manufacturing process was changed to smaller batches, the lead time was reduced at the supplier’s factory and WIP inventory was reduced. This helped to the manufacturing process to have a leaner production system. There was a deep assessment and negotiation with the supplier Delta Galil to avoid any negative effect in production planning and procurement process that erode economies of scale with the new weekly order process. •In addition, logistic and transportation cost reductions of 9% were achieved due to more frequent shipments and smaller containers. Therefore, the manufacturing and logistic processes were improved. Objective achieved through the SCO initiative: YES 3. Product-design strategy: Maximize performance and minimize cost The SCO initiative was not focused in product design change to improve operation efficiency and performance.
Therefore there may be an opportunity for improvement in this area. WHY? For example, if the product design can be changed in order to delay product differentiation at the end of the process, it will help to the company to react faster to demand uncertainty and reduce waste. Next figure shows the concept to postpone final product configuration that can help to improve operation performance. 4. Inventory Strategy: Generate high turns and minimize inventory throughout the chain. •The WIP at the supplier factory was reduced. •The on-hand inventory at Hugo Boss’ warehouse was reduced to two months of orecasted demand. •Warehouse reported fewer inventory obsolescence and less billable hours for staff due to smaller, more frequent and more predictable deliveries. •Forecast was readjusted on a weekly basis ensuring that current production schedules accurately reflected observed changes in demand. The result was that NOS service level increased to 99. 9%. Objective achieved through the SCO initiative: YES 5. Lead-time focus: Shorten lead times as long as it doesn’t increase cost. •The change in order frequency was accompanied by a four week reduction in total lead time.
Objective achieved through the SCO initiative: YES Some other important facts to be considered as results of the SCO initiative are: There was a reduction of transportation cost of 9% to € 0. 29 per item. With a demand of 4065 units per week, they have a cost reduction of €6,062. 65 per year. Service level improved from 97. 9% to 99. 9 %. In addition it is important to notice that this was possible with increasing the safety stock. Then, we concluded that the safety stock did not increased because the standard deviation of demand during lead time was reduced by shorting the lead times.
This resulted in a 1. 1% increase in net revenue. The reduction of inventory also helps to reduce total holding cost, which can be averaged at 10. 5% of inventory cost. The SCO initiative achieved a reduction of inventory from 3. 5 months of forecasted demand to 2 months. Then, inventory turns increased from 3. 43 to 6 turns per year. One driver for reduction of inventory was the reduction of lead times to 4 weeks, which impacted in the reorder Level (R) that is calculated as the average lead time plus safety stock. Overall, the decision to use NOS items as a pilot was appropriate and successful.
However, this pilot was successful due to the fact that it was implemented with NOS items, and the pilot did not deal with the short –run fashion items. It would be incorrect to assume the same pilot program would be applicable to the other short-run fashion division products that operate on a different design, manufacture, and supply chain. However, there are functional improvements that were realized during the pilot program that could be implemented to the other fashion products, in a limited format. 2. Provide your recommendation. Does it make sense to extend the pilot to other product groups?
If so, which ones and why? What challenges would she face in attempting to do so? Are these challenges insurmountable? As shown in the table below, the other product groups are fashion products, which require a different supply chain strategy. It is important to understand that Fashion products are innovative shirt-run fashion products, where demand is unpredictable. In addition, there is a market uncertainty that increases the risk of shortages or excess supplies. Therefore, Hugo Boss has to improve the supply chain responsiveness for this type of products.
The primary focus of a responsive supply chain is to respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory. The key supply chain requirements for innovative products are: 1: Manufacturing cost: deploy excess buffer capacity. 2: Inventory Strategy: deploy significant buffer stock of supplies or finish goods. 3: Lead-time focus: invest aggressively in ways to reduce lead times. 4: Approach to choosing suppliers: Select primarily for speed, flexibility, and quality. 5: Product-design strategy: use modular design in order to postpone product differentiation for as long as possible.
We recommend that the pilot be extended to limited aspects of the other product groups, specifically the body wear and hosiery line within the Boss-Orange and Hugo brands. It is noted that while entire line is currently categorized as fashion lines, hosiery and bodywear could be re-categorized as NOS products. As shown in the graphs below, the left side shows the Boss-orange brand in the middle and the Hugo brand in the upper region of the strategic fit zone, which means that both brands have a greater uncertainty in demand and requires a supply chain that is responsive to frequent changes in the fashion market.
By shifting the two product lines left and down within the strategic fit zone, as shown on the right side graph, the lines will have a much more defined demand and efficient supply chain requirements. Not only will demand and supply chain planning be less volatile, by having all hosiery and bodywear lines in all three brands, Black, Orange and Hugo, under the NOS program, will create several advantages, including: •Economies of scale to reduce overall costs •More leverage with suppliers by offering to bringing all product lines under one supplier •Transportation and warehouse costs will be reduced
The reason we recommend limiting the extension of the pilot program changes to the bodywear and hosiery categories is due to the fact that these product lines have limited variability and therefore design and manufacturing processes can be modified to parallel the successes and efficiencies of the pilot program. There are several challenges that will result from the expansion of the program into the Boss-Orange and Hugo divisions. The challenges and pitfalls include: 1)Duplicating the single source production process for the additional product lines.
During the pilot program, all the manufacturing was centralized within the company’s primary contract manufacturer, Delta Galil. It is not clear that this same vendor will be able to accommodate the additional product lines. Further, the negotiation with Delta Galil took more than a year to resolve before the pilot program was put into place, shifting manufacturing to the company’s other vendors may take time to establish and may not result in the same quality and successful supply chain integration.
Further, the location of the pilot program manufacturer (Delta Galiel) within a tax free zone in Cairo kept manufacturing costs down but continuing with this vendor on a more extensive product line will increase shipping costs to markets outside of Europe and the Middle East, such as North America and Asia which currently accounts for 28% of the overall company sales. 2)Assuring that the Hugo Boss brand maintains its reputation for high quality and responsiveness in its inventory restocking.
If too many of Hugo’s products get commoditized and the brand doesn’t maintain is “fashion sense” it will tarnish the overall cache of Hugo Boss likely resulting in loss of sales and customer loyalty. 3)Balancing of production cycles will be a challenge as Hugo extends the supply chain enhancements. While some products within Boss-Orange and Hugo product lines will switch to the new supply chain system, there will remain short run fashion items that will not follow the same process and supply chain.
This duplication of supply chain systems will likely increase costs and create even greater variability. Steps to improve the responsiveness of the supply chain for fashion products: 1. Identify if some of the current fashion products can become functional products. If the company has a fashion product line characterized by frequent introductions of new offerings, great variety and low profit margins, the company will need to apply an efficient supply chain approach similar to the one used in the SCO pilot for NOS items. 2.
For the remaining products, Hugo Boss has to create a responsive supply chain. The reason behind this recommendation is that stockouts of high profit margin products can impact significantly in lost sales when the demand is uncertain. In order to minimize the impact of lost sales, the company needs to have a flexible and responsive supply chain. The following four bullets are important to align the fashion products to a responsive supply chain: a. Make sure management understands and accept that uncertainty is inherent to fashion products.
If this objective is not achieved, it is possible that some executives may push to have an efficient supply chain for fashion products that will create problems and profit loses. b. Reduce uncertainty: Encourage activities to find sources of data that can serve as leading indicators to predict better the demand. i. Work closer with key customers during the product development phase: The prototype phase that happen in March of the previous year to launch is an important milestone that can be used to obtain customer feedback.
Also, by having involved the key customers during sampling and collection phase Hugo Boss would have better indicators for demand. c. Avoid uncertainty by cutting lead times and increasing the supply chain’s flexibility. i. Lead times. The pilot SCO demonstrated strong results in lead-times reduction by placing orders in a weekly basis instead monthly basis. Even though production schedules and capacities have been negotiated with contract manufacturers in advance, the weekly orders may help to realign priorities and make adjustments based on current demands. i. Start production with products with less uncertainty: Another opportunity is to start production with products that have had better acceptance from customers during the prototype phase and then have less uncertainty. This action will free up production capacity to react to faster to supply-demand mismatches for the rest of the products. iii. Closer suppliers: Most of the customers for Hugo Boss are in Europe where they pay premium for fashion products.
We recommend assessing the idea to set up a supplier in Europe that can reduce lead times by doing the final configuration of the product in Europe based on existing demand. d. Hedge against the remaining uncertainty i. Increase capacity/lower utilization: it is important to keep idle capacity for those products that have high profit margin. This action will help the company to react if demand exceed supply and avoid lost sales. ii. Inventory: In some cases, it will be better to have larger inventory for those products with high profit margin to respond to unpredictable demand.