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Qualitative Market Research: An International Journal Competitive priorities and supply chain strategy in the fashion industry Bowon Kim

Article information: To cite this document: Bowon Kim, (2013),"Competitive priorities and supply chain strategy in the fashion industry", Qualitative Market Research: An International Journal, Vol. 16 Iss 2 pp. 214 - 242 Permanent link to this document: http://dx.doi.org/10.1108/13522751311317602

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Users who downloaded this article also downloaded: Martin Christopher, Robert Lowson, Helen Peck, (2004),"Creating agile supply chains in the fashion industry", International Journal of Retail & Distribution Management, Vol. 32 Iss 8 pp. 367-376 http:// dx.doi.org/10.1108/09590550410546188 Liz Barnes, Gaynor Lea-Greenwood, (2006),"Fast fashioning the supply chain: shaping the research agenda", Journal of Fashion Marketing and Management: An International Journal, Vol. 10 Iss 3 pp. 259-271 http://dx.doi.org/10.1108/13612020610679259 Stephan Vachon, Alain Halley, Martin Beaulieu, (2009),"Aligning competitive priorities in the supply chain: the role of interactions with suppliers", International Journal of Operations & Production Management, Vol. 29 Iss 4 pp. 322-340 http://dx.doi.org/10.1108/01443570910945800

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Competitive priorities and supply chain strategy in the fashion industry

Bowon Kim KAIST Graduate School of Management, Seoul, Korea

Abstract

Purpose – The purpose of this paper is to explore how high-performing companies in the fashion industry align their supply chain strategy with their competitive priorities.

Design/methodology/approach – In order to answer the research question, case study research on four fashion companies most competitive in the global market. The primary sources of information for the case studies were interview data.

Findings – Based on in-depth interviews with top managers at the companies, propositions are reached: the competitive priorities are closely linked with the firm’s choice of target market, which in turn determines its supply chain strategy, including both sourcing and channel strategy.

Research limitations/implications – This paper shows how in-depth case studies based on interview data about best practices in the fashion industry can contribute to the literature by linking firm’s competitive priorities with its supply chain strategy.

Practical implications – The research outcome enables managers to design their supply chain strategy including sourcing and channel strategy more systematically and effectively so as to be consistent with their competitive priorities.

Originality/value – The research framework is unique in that it combines important concepts and theories in business strategy, outsourcing, and SCM literature. Implications from the in-depth case studies on best practices in the fashion industry can help managers make a decision on supply chain strategy more effectively.

Keywords Supply chain management, Outsourcing, Channel strategy, Coordination, Fashion industry, Case studies, Interviews

Paper type Research paper

Introduction The global fashion industry has rapidly grown and become an important part of the world economy, and the competition in the industry has intensified (Grail Research, 2009). As a result, the industry is characterized by high level of market demand uncertainty and short product life cycles (Şen, 2008). It is now essential for a successful fashion company to design an effective supply chain strategy to become more responsive to the constantly changing market conditions (Christopher et al., 2004; Masson et al., 2007). But, such a strategy must be consistent with the company’s overall corporate strategy as well as its business environment (Djelic and Ainamo, 1999): one of the most important dimensions of corporate strategy is concerned with the

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The author would like to thank the top managers for their extremely valuable cooperation while he visited their companies and interviewed their managers at Louis Vuitton Malletier, Chanel, Zara, and UNIQLO. Part of this research was funded by Korean Standards Association (KSA, www.ksa.or.kr/eng/), and the author appreciates KSA’s support.

Qualitative Market Research: An International Journal Vol. 16 No. 2, 2013 pp. 214-242 q Emerald Group Publishing Limited 1352-2752 DOI 10.1108/13522751311317602

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company’s goals or visions, which in turn influence the company’s target market to a great extent. This paper explores a research question “How companies in the fashion industry align their supply chain strategy with their goals and visions, i.e. competitive priorities” (Christopher et al., 2004).

The fashion industry is a global industry with estimated sales of US$755 billion in 2010. It is also a challenging one. First, there are simply too many players from raw material suppliers to retail channels in the global supply chain, adding complexity. Second, as the customer’s requirements are changing fast, the whole life cycle in the fashion industry shrinks so quickly that achieving an appropriate level of responsiveness is becoming more difficult. As such, effectively coordinating diverse activities and functions in the supply chain has become one of the top priorities faced by fashion companies. In this paper, using the rich interview data with top managers at four global fashion companies, propositions are developed regarding the firms’ competitive priorities and their supply chain strategy.

The paper is structured as follows. In the next section, the relevant literature, is followed by the discussion of the research methodology. Then, propositions are developed by establishing causal links in the detailed interview data. Finally, in the concluding section, there is recapitulation of the research to discuss managerial implications as well as the future research direction and also potential limitations of this research.

Literature Chandler (1962, p. 13) defined strategy as:

[. . .] the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

It inevitably involves making a decision on what businesses, i.e. markets, the corporation should be in Porter (1980). It is essential since generic consumers’ demands are so diverse that a company cannot effectively satisfy all of their requirements simultaneously. In operations management (OM) literature, these requirements are embedded in competitive priorities (Boyer and Lewis, 2002). Ward et al. (1998) put forth and developed measures for four basic competitive priorities, i.e. low cost, quality, delivery time, and flexibility. Similarly, Kathuria (2000) wrote:

Consistent with the literature, the term competitive priorities is used to describe manufacturers’ choice of manufacturing tasks or key competitive capabilities, which are broadly expressed in terms of low cost, flexibility, quality, and delivery.

In fact, each of these four capabilities is a multi-dimensional concept. For instance, Garvin (1988) suggested eight dimensions of quality, i.e. performance, features, reliability, conformance, durability, serviceability, aesthetics, and perceived quality. Regarding flexibility, Gerwin (1993) identified several dimensions such as mix, changeover, modification, volume, routing, material, and flexibility responsiveness that enables the firm to deal with changes in the first six dimensions of flexibility. Zhang et al. (2003) showed a significantly positive link between firm’s manufacturing flexibility and its customer satisfaction.

As part of their corporate strategy, firms try to identify market segments and choose the most appropriate ones to focus on ( Johnson, 1971; Beane and Ennis, 1987):

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Grover and Srinivasan (1987) defined a market segment to be a group of consumers who are homogeneous in terms of the probabilities of choosing the different brands in the product class. Consumers in a market segment have a set of requirements different from that of the consumers in another market segment (Dickson and Ginter, 1987; Krajewski et al., 2007). Therefore, firm’s choice of competitive priorities influences and also is influenced by its choice of target market, i.e. market segmentation, which is in turn strongly determined by corporate strategy (Mintzberg, 1978; Krajewski et al., 2007). In the strategy literature, there is support for correlation between firm’s target market and competitive priorities. Porter (1980) put forth three generic strategies, i.e. overall cost leadership, differentiation, and focus, suggesting the first two are for the general industry-wide market, whereas the last is for a particular market segment only. Each generic strategy is related with particular competitive priorities. For instance, cost leadership can be associated with low cost, differentiation with quality, and focus with flexibility, aesthetics, or perceived quality.

Another important strategic decision is concerned with determining the firm’s boundary (Miles and Snow, 1978; Scott, 1992, p. 230; Hayes et al., 2005). Resource-based view would suggest firm’s valuable, difficult to imitate resources define its boundary (Barney, 1986, 1991; Hart, 1995; Chesbrough and Teece, 1996). If we adopt the resource-based view, we could conclude that a firm defines its boundary by vertically integrating those capabilities that are most valuable and difficult to imitate, while outsourcing others. On the other hand, transaction cost economics would argue that the firm’s boundary is determined by the extent of asset specificity involved in its transactions (Williamson, 1979). For instance, according to the theory, a firm would prefer vertical integration when its transaction with other firms involves extensive asset specificity, so as to minimize opportunistic behaviors from those engaged in the transaction, i.e. in a way to minimize its transaction costs (Shelanski and Klein, 1995). Evolutionary theory offers yet another perspective: it is concerned with the dynamic process by which firm’s behavior patterns and market outcomes are jointly determined over time (Nelson and Winter, 1973, 1982, p. 18). Consistent with the evolutionary theory to treat the firm as a social community of productive knowledge, Kogut and Zander (1993) proposed cooperation within an organization determines the firm’s boundary by identifying a set of capabilities that are easier to transfer within the firm than across organizations and constitute the ownership advantage of the firm (Cohen and Levinthal, 1990). Firm’s decision on its boundary eventually determines what activities the firm will perform in house or outsource outside.

Combining the two distinct concepts, the relationship between a firm’s competitive priorities and its boundary decision can be considered, i.e. sourcing strategy. The resource-based view or the evolutionary theory would predict that if making a high quality product requires a set of very unique skills and knowhow, the firm with such skills and knowhow as its proprietary capabilities or competitive priorities probably does not want to outsource its manufacturing, fearing that during the outsourcing process, its proprietary skills and knowhow might be leaked to other competitors (Tsai, 2002; Dyer and Nobeoka, 2000). It is also likely that as long as the firm’s product quality meets the customer’s expectation, it can enjoy high premium in the market, implying the market for the product is probably a small segment, i.e. a premium market segment, in the entire market.

A supply chain consists of all the activities that must be performed to create value, from procuring raw materials, transforming them into finished products, and delivering

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those products to the customers (Chen and Paulraj, 2004). As the competition in the global business environment becomes more intensified and also the uncertainty magnifies, firms are increasingly facing such competitive pressures as increasing product variety and shortening product life cycle (Lee, 2002). As such, achieving efficiency only is no longer sufficient: in order to be competitive, the firm has to design and manage a supply chain that is agile, adaptive, and aligned, i.e. the triple-A supply chain (Lee and Billington, 1995; Lee, 2004). Since the firm has to deal with multiple functions and/or partner companies in its supply chain (Singh, 1997; Berggren and Bengtsson, 2004; Chen et al., 2006), it is difficult to make the supply chain agile, adaptive, and aligned at the same time. As Lee (2004) suggested, to have such a supply chain, the firm must be able to coordinate among the supply chain participants such as suppliers, vendors, outsourcing partners, distributors, and customers effectively (Porter, 1986; Chen et al., 2001; Zimmer, 2002). There are largely two distinct coordination needs, upstream (sourcing) and downstream (distribution channel). More focused on the upstream, Xu and Beamon (2006) suggested four different types of coordination, market, quick response (QR), supplier-managed inventory (SMI), and strategic alliances. For instance, in the QR coordination, there is a dominating company that exerts more power than other partners in the supply chain when making decisions and sharing the coordination benefits (Van de Van et al., 1976; Myerson, 1982; Moyaux et al., 2007). On the contrary, under the strategic alliance coordination, partner companies participate together in not only simple functions like logistics, but also strategic activities like new product design, and share knowledge and technical skills (Martinez and Jarillo, 1989; Grant, 1996; Shy and Stenbacka, 2003). Using the two dimensions of buyer’s and supplier’s specific investments in their transactions, Bensaou (1999) suggested four different types of buyer-supplier relationships, i.e. market exchange (both investments low), captive buyer (only buyer’s investment high), captive supplier (only supplier’s investment high), and strategic partnership (both investments high). McCann and Galbraith (1981) focused on three dimensions in coordination, formality (informal versus formal arrangements), level of control, and decision localization (centralized versus decentralized), helping us infer that more centralized channel strategy is consistent with more formal arrangements and higher level of control exerted by the focal company in the supply chain. Using theoretical frameworks such as resource dependence, transaction cost, and relational contracting theories, Heide (1994) developed a governance typology for marketing channels, i.e. market governance and nonmarket governance which in turn consists of unilateral/hierarchical and bilateral forms: that is:

[. . .] the differences among market, unilateral, and bilateral governance are explained at a very general level in terms of a predominant reliance on a price mechanism, bureaucratic structures, and socialization processes, respectively.

Focusing on communication strategies in marketing channels, Mohr and Nevin (1990) proposed a contingency theory in which communication strategy moderates the impact of channel conditions (structure, climate, and power) on channel outcomes (coordination, satisfaction, commitment, and performance), emphasizing the importance of the fit or match between communication strategies and channel conditions (Miles et al., 1978). Achrol et al. (1983) investigated the relationship between marketing channel and its environment comprised of customers, suppliers, and general social, economic, political, and technological forces (Miller, 1987). They proposed that

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uncertainties in the input and output sectors of the environment significantly affect key dimensions in marketing channel such as coordination and power balance: uncertainty in the input sector is mainly internal to the channel, e.g. shortage or variability in the supply of raw materials, manufactured products, or parts, while uncertainty in the output sector is largely external to the channel.

Of these theories, the resource-based view and evolutionary theory as the primary perspective are adopted to explore the research question. References on competitive priorities and supply chain strategy are also quite relevant to the discourse in this paper.

Research methodology and case companies A researcher must choose research methods that are most appropriate for the research question he is exploring (Scandura and Williams, 2000). In general, there are two broad categories of research methodology, inductive and deductive (McGrath, 1982; Taylor and Bogdan, 1998). In the OM literature, deductive research heavily utilizes normative approaches like mathematics and its extensions such as operations research or statistics, which are not capable of capturing or explaining many of the interesting and important OM phenomena in the real-world context (Swamidass, 1991). Similarly, defining deductive reasoning as the logical syllogism whereby one poses premises and draws conclusions from them, McGrath (1982) emphasized that many interesting phenomena cannot be understood if removed from their social context. Against this backdrop, OM researchers began more seriously employing inductive research methods (Swamidass, 1991). Similarly, as an alternative to a more traditional research method, i.e. the scientific method, Glaser and Strauss (1967) established the grounded theory that legitimized qualitative or inductive research. Since the research questions raised in this paper can be answered in the real-world managerial context more effectively, the inductive research methodology is adopted and therefore, the ensuing discussion is focused on empirical research methods (Mintzberg, 1979).

By extending McGrath’s (1982) proposition, Scandura and Williams (2000) suggested nine research methods for organizational studies, i.e. formal theory/literature reviews, sample survey, laboratory experiment, experimental simulation, field study with primary data, field study with secondary data, field experiment, judgment task, and computer simulation. Similarly, Yin (1989) identified five research strategies, i.e. experiment, survey, archival analysis, history, and case study. He further postulated that exploratory research questions such as how and why call for the use of case studies among others as the preferred research strategies, suggesting six sources of evidence for the case study, i.e. documentation, archival records, interviews, direct observation, participant-observation, and physical artifacts. In particular, the recording of interview data is the most important technique employed by the grounded theory, which shares its theoretical underpinnings with pragmatism and symbolic interactionism: Corbin and Strauss (1990, p. 5) put forth “grounded theory seeks not only to uncover relevant conditions, but also to determine how the actors respond to changing conditions and to the consequences of their actions.” In fact, many researchers in management also used interviews as their primary data sources when conducting case studies (Bonoma, 1985; Eisenhardt, 1989; Perry, 1998; Bennett and Elman, 2006). Partington (2000) suggested retrospective accounts such as documentary records and interviews with managers are widely used in qualitative management research.

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As mentioned above, our research questions are focused on managerial issues in the real-world context, where managers’ roles interactive with the environment are critical to formulating strategy. According to Yin (1989, p. 23), this is investigating a contemporary phenomenon within its real-life context, when the boundaries between phenomenon and context are not clearly evident. In addition, it is acknowledged and taking into account the managers’ interactive roles in the relevant conditions, that this is consistent with canons and procedures of the grounded theory (Corbin and Strauss, 1990). Consequently, in this paper a case study method is adopted using the data of interviews with managers as the primary sources of information when deriving managerial implications and propositions (Burnard, 1991).

It starts with a research question “How do high-performing companies in the fashion industry coordinate their supply chain activities?” To find out a real-world answer to the question, in-depth case studies are conducted on four companies in the fashion industry that are globally competitive and have consistently demonstrated best practices in supply chain management (Goworek, 2010). Although being as objective as possible in selecting the case companies, it was taken into account some realistic constraints such as a possibility to have access to top managers at the companies for interviews. Since there is differentiation between companies depending on their market segments, there is another condition to have equal numbers of case companies in luxury brands and generic apparel brands (Smith, 1956; Riley et al., 2004; Tynan et al., 2010). Finally, there is a choice of the following four companies: according to MillwardBrown Optimor (2011), Louis Vuitton (the first) and Chanel (the fourth). These were among the top five most valuable global brands in the luxury industry with Zara (the third) and UNIQLO (the seventh) among the top ten in the apparel industry.

In early 2010, interviews were conducted and recorded with top managers in charge of operations and supply chain management at the four companies. After completion of the transcripts of the interviews, the managers confirmed its accuracy and suggested corrections when necessary.

Results of case studies based on interview data As alluded to already, the primary outputs of the case studies were in the form of detailed interview data (Beverland, 2004), summarized in the Appendix. In this section, there is presented key excerpts of the interview data that were organized for developing a theoretical framework.

Louis Vuitton (www.louisvuitton.com/) is a prestigious brand in the luxury industry. As one of the most influential players in the market, LV exerts enormous bargaining power in the industry. LV defines quality as a multidimensional concept encompassing durability, details, sophistication, craftsmanship, and tradition (see the interview data LV1 in the Appendix), all of which are the company’s competitive priorities. The company also emphasizes utmost quality of raw materials. As such, its generic strategy is a focused one. In order to protect its proprietary knowledge and brand value, LV has a highly integrated supply chain. LV does over 60 percent of its manufacturing in-house and owns all of the retail stores worldwide (LV2). LV suggests a few strengths of its integrated supply chain (LV3): first, its complete access to the real-time information about key factors like sales, inventory amount, and inventory location; second, its ability to protect its proprietary knowhow to build superb products; third, its ability to control the price completely. Before implementing the integrated supply chain, LV experienced

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significant difficulty in dealing with SCM problems effectively (LV5). LV further endeavors to form a better relationship with its raw material suppliers (LV6). But, even in such partnership, LV will retain the dominating position and exert a leadership role.

Chanel (www.chanel.com/) is another prestigious brand in the luxury industry. It makes products in fashion, accessories, cosmetics including fragrance, and jewelry. An interview with one of the top managers in the company’s fashion design department in Paris was conducted. As such, the fashion segment of Chanel targets the most premium market, i.e. Chanel’s generic strategy is a focus strategy. Chanel defines durability and design excellence as its competitive priorities (CH1, CH4). The company emphasizes extremely high quality of raw materials, which it believes eventually affects the durability of its products. As a result, effective supply chain management is an important element of Chanel’s overall strategy (CH1). Although it has several outsourcing partners in manufacturing, most of the key products are made in-house (CH2). This categorizes Chanel as utilizing in-house manufacturing primarily. In fact, Chanel has a highly integrated supply chain. With its great prowess in creative design (CH5), it exerts enormous bargaining power over its partners in the supply chain: see the quote in CH2:

[. . .] A company like Chanel is powerful enough to lead the fashion trend and the market itself. Thus, working with Chanel itself gives the outsourcing partners prestige and visibility, which compensate for their hard working even for small orders [. . .].

Since the creative design is the utmost focus in Chanel, the company makes a great effort to protect its proprietary design expertise from being leaked to other competitors in the industry. Consequently, Chanel has centralized not only its downstream function like retail stores, but also its design function, which is completely concentrated in Paris (CH2). Like other companies in the fashion industry, Chanel pays attention to its responsiveness to the market demand changes. The company’s primary method to get market feedback is through running fashion shows several times a year. Again, the fashion show is reciprocal in that while the company gets market feedback during the fashion show, Chanel also utilizes it as a way to present its own vision and direction to the market (CH3).

Zara (www.zara.com/) is a successful fashion company, targeting a general, industry-wide market, rather than a luxurious segment in the industry. The company aims to offer low prices and sophisticated fashion trends to its customers (ZA1) at the same time. To achieve these two seemingly conflicting goals, Zara implements a strategy consisting of three major elements, i.e. outsourcing, total supply chain management, and store operations (ZA2). Zara makes about 40 percent of its products in-house so as to achieve high level of responsiveness in terms of product mix: Zara’s one of the strongest advantages is to accommodate high “product mix” uncertainty, i.e. Zara can produce more of a particular style or color that turns out to be very popular in the market during the sales season (ZA3). Although Zara utilizes in-house manufacturing more than other competitors in the industry, it also uses outsourcing extensively and thus its outsourcing strategy is a key decision making dimension. In general, the level of technological complexity required in the apparel or fashion industry is not relatively high, i.e. the suppliers’ role is mainly to offer extra manufacturing capacity, rather than highly innovative knowhow or expertise. As such, the primary focus of supply chain management is on how to coordinate manufacturing activities between Zara and its suppliers in response to the market demand uncertainty (ZA2, ZA3). In such a relationship, it seems reasonable for Zara to exert a dominating power vis-à-vis its

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suppliers: Zara creates value by integrating simple supply chain management principles in a very innovative manner (ZA4).

UNIQLO (www.uniqlo.com/) is another fast-growing, successful fashion company. Like Zara, UNIQLO targets a general fashion market, not a high premium luxurious segment. The company’s goal is to help every customer wear high-quality low-price casuals (UN1). UNIQLO pays keen attention to low price and as a result, its supply chain strategy revolves around it (UN2). In order to achieve its goal of low price and high quality at the same time, the company works hard to save labor costs and develop new better materials (UN2). UNIQLO emphasizes such an effort from the early stage of product development and design. Unlike its competitor Zara, UNIQLO has a slightly different market focus: see the quote in UN3:

[. . .] Our direct competitor in the fashion industry, Zara, is focused on young people in their 20s and 30s. But, UNIQLO tries to position itself as a family brand covering from teenagers to customers in their late 30s. Zara tries to compete in the market through design and pattern diversification. On the contrary, UNIQLO seeks to appeal to the customers by offering diverse choices in colors and materials. For example, almost 60 , 70% of UNIQLO designs are basic clothes, with the remaining 30 , 40% being fashion-trendy products [. . .].

Consequently, UNIQLO emphasizes a different kind of responsiveness, i.e. volume responsiveness: it is a very famous story that UNIQLO was able to sell 26 million units of one of its fleece jackets (UN4) in one year. Like other companies in the same market segment, the role of outsourcing partners is to offer extra manufacturing capacity, rather than to suggest innovative ideas or suggestions. Thus, UNIQLO’s primary concern regarding the supply chain coordination is to make sure that the company can get enough manufacturing capacity from its outsourcing partners when necessary (UN5). One of the most difficult challenges faced by UNIQLO is how to garner such cooperation from its suppliers, by helping them trust UNIQLO’s supply chain leadership. For instance, see UN5:

[. . .] UNIQLO’s strategy is exactly the opposite. If we place an order of 10 million, then we will pay for all of the 10 million units no matter what happens, i.e. whether the leftover is 1 million, 5 million, or 9 million. We take the full responsibility for the risk associated with ordering. Once we made the promise and kept it, our strategic partners trust UNIQLO firmly and always are willing to accommodate our orders with the highest priority. Of course, in order to continue this much trust, we always try to make sure that our initial forecasting is extremely accurate. Developing new and innovative materials is closely related with the strategy, since our forecasting can be more accurate if we can generate the demand more actively by marketing innovative materials [. . .].

Using the interview data from top managers at the companies, recapitulation of the case studies were by five criteria, competitive priorities, target markets, sourcing strategy, distribution channel strategy, and overall supply chain strategy (Table I).

Analysis and theory building Our research framework is based on that in Figure 1, which covers the entire dynamics of strategy formulation. The framework is explained in the framework in Figure 1. Firm’s structural conditions such as the firm’s history, legacy, and founders’ characteristics initially determine the firm’s choice of the product and its target market which are inevitably related with the firm’s competitive priorities and motivations

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(Kim, 1998; Krajewski et al.; 2007). Based on such competitive priorities and target markets, the firm has to select its supply chain strategy for both sourcing and distribution channel. Depending on how effectively the firm manages its supply chain strategy, its overall performance is realized (Bryce and Useem, 1998; McIvor, 2000; Momme and Hvolby, 2002). The firm’s performance outcome will either reinforce or revise its structural conditions, and the dynamic cycle continues (Kim and Lee, 2001). In this paper, however, it is not intended to look into the entire causal relationship described above. Rather, focus is on a particular part, i.e. the relationship between the firm’s competitive priorities and its choice of supply chain strategy.

A fashion supply chain A supply chain in the fashion industry can be shown as in Figure 2: in the supply chain, the focal firm is the fashion company, which deals with numerous supplying functions or companies in the upstream and also quite a few retailing alternatives or partners in the downstream. Accordingly, the fashion company has to make decisions on sourcing and channel strategy (Swoboda et al., 2009).

A sourcing decision involves how much of the process needed to make its products the firm should internalize. In-house sourcing implies that the firm makes its products or supplies internally, i.e. inside its own plants or facilities. If the firm adopts an outsourcing strategy, it utilizes external suppliers and/or partner companies for making

Case company Interview data

(a) Louis Vuitton Competitive priorities Durability, details, sophistication, craftsmanship, tradition LV1, LV4 Target market Focused on high end, high premium luxury market LV1 Sourcing strategy In-house and tightly controlled supply chain LV2 Channel strategy Intensively centralized channel; tight price control LV2, LV3 SC strategy Concentrated; centrally and internally coordinated LV3, LV5, LV6 (b) Chanel Competitive priorities Durability and service, design excellence, brand image CH1, CH4 Target market Focused on high end, high premium luxury market CH3 Sourcing strategy In-house and tightly controlled supply chain CH2 Channel strategy Intensively centralized channel; complete control CH2 SC strategy Concentrated; centrally and internally coordinated CH5 (c) Zara Competitive priorities High fashion trends, low prices

Product mix flexibility as market responsiveness ZA1

Target market General, industry-wide market ZA1 Sourcing strategy Outsourcing with significant in-house manufacturing ZA3 Channel strategy Distribution channel mostly decentralized ZA2 SC strategy Mostly dispersed ZA2, ZA4 (d) UNIQLO Competitive priorities High quality low price casuals

Volume flexibility as market responsiveness UN1, UN2

Target market General, industry-wide market UN2, UN3 Sourcing strategy Extensive outsourcing with little in-house manufacturing UN4, UN5 Channel strategy Distribution channel mostly decentralized UN3, UN4 SC strategy Mostly dispersed UN5

Table I. Summary of case studies

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products or procuring parts and materials. For a channel strategy in the downstream, the adoption is the categorization of centralized versus decentralized (McCann and Galbraith, 1981). Under the centralized channel strategy, the focal firm centralizes or tightly controls most of key decision making factors involving price, product mix,

Figure 1. Fundamental research

framework

Firm’s structural conditions (history, legacy, founders)

Firm’s choice of products and

markets

Product’s characteristics,

attributes (motivations,

competitive priorities)

Sourcing Strategy

(upstream)

Channel Strategy

(downstream)

Firm’s performance

Reinforce or

Revise

Figure 2. Fashion supply chain

Supplying Fashion Company Retailing

In-house versus

Outsourcing

Centralized versus

Decentralized

Supply Chain Strategy

Sourcing Strategy Channel Strategy

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and inventory. An extreme example of centralized channel strategy is to own all of the retail stores. Under the decentralized channel strategy, the firm manages its distribution function more flexibly in order to respond to the local market changes more promptly.

Using the two strategies, sourcing and channel, a typology of supply chain strategy is developed (Figure 3). The concentrated supply chain strategy is defined as the one consisting of in-house sourcing and centralized channel strategy, whereas the dispersed supply chain strategy of outsourcing and decentralized channel strategy.

Analysis of case studies in the fashion industry The conceptual model is applied to the case studies. Using Table I, it is clear that there are two groups according to the firm’s “sourcing” strategy versus its channel strategy (Figure 4). Our case studies show that the two companies in the luxury fashion industry, Louis Vuitton and Chanel, can be placed in the upper-left corner (concentrated supply chain strategy), since both of them have in-house sourcing and centralized channel

Figure 3. Supply chain strategy in the fashion industry

Centralized

In-house Outsourcing

Primary Focus of Upstream Strategy (Sourcing)

Primary Focus of Downstream Strategy

(Channel)

Concentrated Supply Chain

Strategy

Dispersed Supply Chain

Strategy Decentralized

Figure 4. Case companies’ sourcing versus channel strategy

Zara

UNIQLO

Centralized

In-house Outsourcing Primary Focus of Upstream Strategy

(Sourcing)

Primary Focus of Downstream Strategy

(Channel)

Chanel

LV

Concentrated SC Strategy

Dispersed SC Strategy

Decentralized

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strategy (Amatulli and Guido, 2011). On the contrary, the other two cases, i.e. Zara and UNIQLO, are located in the lower-right corner (dispersed supply chain strategy): these companies adopt an outsourcing strategy and a decentralized channel strategy.

When a firm targets a specific market segment like a high-end, premium market, its primary competitive priorities are comparable with excellence in quality, perceived quality, and the like. On the other hand, when a firm tries to reach a wide range of market, not confined to a small, specific market segment, it focuses on market responsiveness, low cost, functionality or performance. That is, there is rather clear relationship between firm’s competitive priorities and its target markets. Now the case companies are categorized by the two dimensions, competitive priorities versus supply chain strategy. As in Figure 5, LV and Chanel are placed on the upper-right corner with excellence-driven competitive priorities and concentrated supply chain strategy, while Zara and UNIQLO on the lower-left corner with responsiveness-driven competitive priorities and dispersed supply chain strategy.

Now we would like to derive propositions from the case study analysis. From Table I and Figure 4, the first two propositions are put forth:

P1. When a high-performing fashion company chooses its competitive priorities consistent with serving a premium market, it is likely to utilize a concentrated or tightly controlled supply chain strategy in order to protect its proprietary knowledge and/or brand. A concentrated supply chain is primarily comprised of in-house sourcing strategy and centralized distribution channel strategy.

P2. When a high-performing fashion company chooses its competitive priorities consistent with serving a mass market, it is likely to utilize a dispersed or coordinated supply chain strategy in order to be more responsive to changing market demands. A dispersed supply chain is primarily comprised of outsourcing strategy and decentralized distribution channel strategy.

A firm chooses a focus strategy when it makes a product or service that is unique and can enable the firm to enjoy high premium in the specific market segment. As such, a high-performing fashion company focuses on a specific, specialized market segment when it has valuable proprietary knowledge or experience consistent with its

Figure 5. Case companies’ quality

goals versus supply chain sourcing strategy

Dispersed (coordinated)

Primary Supply Chain Strategy

Primary Competitive Priorities

& Target Market

Concentrated (tightly controlled)

UNIQLO Zara

Chanel

LVE xc

el le

nc e

P re

m iu

m R

es po

ns iv

en es

s M

as s

M ar

ke t

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associated competitive priorities. Suppose that the firm has a proprietary knowledge that enables it to enjoy stronger competitive advantage in the focused market. In order for the firm to retain such competitive advantage continuously, it has to protect its proprietary knowledge from being leaked to other companies in the market. Probably the best way to protect the firm’s proprietary knowledge is to internalize all of the value chain activities involved with making the product or providing the services. Therefore, it is postulated that the more important the firm’s proprietary knowledge, the more likely to utilize in-house sourcing along with centralized channel strategy.

Krajewski et al. (2007) emphasized the fit between corporate strategy and operations strategy. One of the most important elements of corporate strategy is to decide the firm’s target market by taking into account its core competences, which are essentially connected with its competitive priorities. On the other hand, one of the most important operations decisions is concerned with its supply chain strategy (Poppo and Zenger, 1998; Insinga and Werle, 2000). As in Figure 5, therefore, the last proposition is put forth:

P3. There is significant correlation between the firm’s choice of its competitive priorities and its target market.

Discussion and managerial implications Our research question was “How do high-performing companies in the fashion industry align their supply chain strategy with their competitive priorities?” In order to investigate it from a real-world perspective, interviews were conducted as in-depth case studies on four fashion companies, which have consistently shown high performance in the global market. Analyzing rich interview data with top managers at the companies, it is found that there indeed is a significant relationship or a strong pattern of relationship between high-performing firm’s competitive priorities and its supply chain strategy (Krajewski et al., 2007). More specifically, our research outcomes indicate that when a high-performing firm chooses a focus strategy in order to protect its proprietary knowledge and/or brand, it is more likely to utilize in-house sourcing and centrally controlled retail operations (Porter, 1980). On the contrary, when a high-performing company decides to target an industry-wide market rather than narrowly focused one possibly because there is no “explicit or compelling” need to protect proprietary knowhow or brand, it is likely to adopt an outsourcing strategy along with a more decentralized channel strategy.

These results are nontrivial and have some significant implications for management practices. Although it is not very difficult to understand each of the strategic concepts like firm’s competitive priorities, target markets, sourcing or channel strategy, and supply chain coordination separately, managers often find it hard to take into account all of them simultaneously when designing their firm’s business and supply chain strategy. Our research outcomes along with the frameworks developed in this paper can help managers deal with these key strategic variables more systematically and effectively. It could be even more important for the managers in the market characterized by high uncertainty and variability such as the global fashion industry (Christopher et al., 2004).

On the theoretical side, the findings are also consistent with the literature: apply the resource-based view, evolutionary theory and grounded theory to explain the research outcomes (Barney, 1991; Nelson and Winter, 1982; Corbin and Strauss, 1990). The first two propositions postulate that whether the firm chooses a tightly controlled supply chain depends on whether it has proprietary knowledge to protect: for instance, if a firm has

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highly valuable skills and knowhow as its proprietary capabilities or competitive priorities, it would not outsource its manufacturing, fearing that during the process, its proprietary skills and knowhow might be leaked outside (Kogut and Zander, 1993). That is, to empirically show the role played by firm’s knowledge as the most critical resource in shaping its supply chain strategy. Using theories and frameworks in business strategy and OM literature, it can be also explained as the link between firm’s competitive priorities and its choice of target market (Krajewski et al., 2007). Finally, the research framework is constructed encompassing both upstream and downstream functions, i.e. sourcing and channel functions, based on the literature in supply chain management. One of the most important contributions this research makes to the literature is to empirically confirm the links among firm’s competitive priorities, target market, and its supply chain strategy, using interview data with the real managers at the companies. As such, it is reasonable and necessary to elaborate on the research methodology.

Our primary research methodology was case studies for theoretical replication. In particular, the primary sources of information for the case study were interview data with the managers. Partington (2000) suggested that as retrospective and reflexive accounts of managers and other organizational actors, interviews are an important source of knowledge that is the basis for building causal theories. In effect, interviews with real managers are used as the dynamic data to empirically test and confirm some of the propositions put forth by the literature. It can be underscored as a separate contribution made to the literature methodologically. Consistent with the fundamental motivation of case study, however, it is not to pursue complete “generalization” of the research outcomes (Yin, 1989). Rather, it endeavors to show a necessary condition for a high-performing firm to employ a particular coordination mechanism under certain circumstances, other things being equal. That is, it is not intended for statistical replication or analytic generalization. As such, one of the limitations of this research is the possible lack of generalization outside the specific context comparable with the cases studied directly. Nevertheless, by focusing on best practice companies in the global market, it is believed that the research results shed light on understanding the delicate correlation between firm’s competitive priorities and supply chain strategy, at least as evidenced by high-performing companies in the fashion industry. In addition, the propositions derived from our case studies can be tested against a larger set of data in the future to form a more generalizable theory.

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Appendix. Interview data Louis Vuitton [LV1] What does quality imply to LV? To us, good quality means durability, details, sophistication, craftsmanship, tradition, and also getting the best materials. We should use the best materials to manufacture products, which are sophisticated at the most detailed level.

[LV2] What are the overall characteristics of LV’s supply chain? Our supply chain is vertically integrated in the downstream, i.e. from manufacturing to distribution. We do about 60 percent of our manufacturing in-house, and own the entire 446 stores worldwide. Although we outsource about 40 percent of our manufacturing to subcontractors, LV is usually the only customer to them and as such, LV controls almost 100 percent of its manufacturing.

[LV3] What are the major strengths of LV’s integrated supply chain? First, with the integrated supply chain, we know ourselves completely. Everyday we have complete access to all kinds of information such as market demand, inventory amount and its location, which help us forecast most accurately.

Second, it allows us to protect our proprietary knowhow. Let me give you an example. A few years ago, we tried to launch a new product, a fashion shoe line. We wanted to make sure we can make shoes with absolutely high quality and searched for perfect talents for that purpose. Finally we were able to identify the most ideal craftsmanship available in a small village in Italy. Two options were available to us. One was to find a local manufacturer we could work with as our outsourcing partner and the other to build our own shoe manufacturing plan in the Italian town. We opted to pursue the second alternative and built our own plant in the Italian town, continuing our integrated supply chain strategy. By keeping our supply chain integrated in this way, we can protect our proprietary knowledge and knowhow, and focus on mastering our expertise.

Finally, our integrated supply chain makes it possible for us to have a complete control of price. In the luxury goods industry like the one where LV is, it is very important to manage the price optimally. For instance, if we cannot control our retail stores, some of the stores might be tempted to lower the prices when they have unnecessary inventory in their warehouse. But, offering a discount is fatal in this kind of industry. It will undermine your brand completely. We have to protect our brand. Brand image is everything in the luxury industry. Unless LV controls all of its retail stores, we cannot guarantee a complete price control throughout the world. With the integrated supply chain, we control all of our retail stores all around the world, whether it is in Japan, Hong Kong, the USA, or Germany, and thus make sure that there will be no discount or no erosion of our prestigious brand image. Another benefit of integrated price control is to enable us to present absolutely consistent brand image throughout the world. Although there might be some small differences due to fluctuating currency exchange rates, LV tries to make sure that every LV product is priced consistently across the world. For example, you will not buy a LV bag at a significantly cheaper price in Hong Kong than in Japan. More importantly, wherever you buy a LV product in Japan, the price will be the same across all of the retail stores in Japan. Consistent pricing and no-discount policy are the two most important tools to prevent any brand value erosion from occurring.

[LV4] What are the more specific and perhaps immediate goals or objectives of LV’s supply chain strategy? First, one of the most important KPI (key performance indices) is the product’s availability rate, i.e. to maximize the availability rate. We want to make sure that when a customer enters one of our stores, she will find the right product always. This is very important in our industry. When the customer cannot find what she wants in the store, sometimes she may go to other luxury brands or may decide not to buy the product at all, at least for a while.

Second, our goal is to minimize the inventory. It is not just about reducing the inventory cost. More importantly, we have to avoid our products’ becoming obsolescent. Displaying obsolescent products in the store can tarnish our brand value, sending out wrong signals to our customers. Moreover, keeping unnecessary inventory implies your inability to forecast the demand, which we do not want to accept.

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Finally, our supply chain strategy is designed to protect environment. It was not driven by calculating costs, but by proactively selecting our strategy, i.e. it was the result of our strategic intent. Although we do not try to gain immediate profit from our environmental initiatives, we expect our customers and the market in general to value our environmental effort in the future and that might help increasing our sales. But, again we have a very long-term perspective in this matter. Three most important initiatives we have started so far are using sea flight more extensively, reducing industrial packaging, and building and utilizing a truly green warehouse. We are currently shipping almost 60 percent of our products via sea and compared with 2004, we have reduced about 40-50 percent of CO2 emissions through sea transporting and green warehousing.

Our commitment to protecting environment has not been always favorably accepted inside LV. When we suggested sea flight instead of air shipment, some people pointed out that it would take about four to six weeks to ship products to foreign markets like Japan and Hong Kong, and thus we will not be able to meet the customers’ demand on a timely manner. The point was very valid. But, we were able to overcome such an issue with our capability to forecast the demand very accurately. For instance, suppose that the demand for a product for the next five months is forecast to be 100. Based on the forecast information, you ship 20 units via air and the remaining 80 via sea, rather than shipping all of the 100 units via air. Then, you can satisfy the immediate demand for the first month and the demand for the next four months can be satisfied by the products shipped via sea. By using the sea flight along with the air transportation, we can reduce the CO2 emissions by almost 75 percent. That is a significant improvement! When we actually implemented this strategy, there turned out to be another benefit we neither expected nor intended, i.e. cost saving. The cost of sea flight was just a fraction of the air flight!

As a result, our strategic choice to emphasize the environment was a success. However, it could not be made possible without our centralized supply chain. That is, it was possible because we had complete knowledge about our inventory for every SKU (stock-keeping unit) everyday at every store. So we see there is really close relationship between the goals we have and the supply chain design we have developed over time.

[LV5] Was there any particular moment or motivation that made LV develop its supply chain strategy in a unique way? Yes, it is very important to understand the context, from which all of our supply chain initiatives sprang. Even just 20 years ago, LV was a manufacturer of leather goods in a stable environment with few uncertainties. The whole thing was dramatically changed in early 1990s, when LV decided to enter new markets such as ready-to-wear fashion products, shoes, and other fashion and accessory items. In fact, LV even set up a goal that 45 percent of its entire product lines should be new products every year. Naturally, the company’s business model had to be changed completely. In order to achieve its aggressive sales goals, LV had to find out lots of new customers in many different countries. In fact, LV added almost 62 new countries to its customer list. Another phenomenon beyond the control of LV was that the global market became more and more converged. For instance, financial breakdowns in the USA were felt not only within the USA, but also throughout the world simultaneously. As such, the worldwide market uncertainty is fluctuating more severely. All of these external as well as internal difficulties are combined to make it ever more difficult to forecast the market demand accurately and reliably. LV was in a very delicate situation. On the one hand, it had to deal with the vastly expanded target market, and, on the other hand, the uncertainty became much more complex to make sound planning almost impossible.

In the face of this dire situation, LV decided to make big three decisions. The first one was to centralize our supply chain. Before this change, each store was allowed to place its own orders once a month. Since each store operated independently, it had motivation to inflate its order, believing that the larger inventory it had, the more likely its sales would increase. Probably the store managers themselves were not very confident about their own ability to predict the demand even for a month. Before centralizing our supply chain, we usually experienced 30 percent shortage of our products at the store level. Such a massive inefficiency could have

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been multiplied if we had not taken any drastic measures. In this context, we centralized the ordering decision and asked each store simply to sell the products without worrying about inventory, forecasting, and financial performance. Soon we realized that the forecasting at the aggregate level was relatively easy. Each week after we forecast the aggregate demands for all of our regional markets, our SCM teams negotiate with plants regarding which of the products and how many units of them to manufacture. We use either sea or air flight to ship the products to our regional warehouses, from which deliveries to individual stores are made mostly via trucks, trains, or sometimes air flights.

Another big shift was made towards very reactive and flexible supply chain. As mentioned already, in the past each store placed an order every month, and thus the delivery to the store was scheduled monthly. As the market uncertainty intensified, however, monthly replenishment was not at all enough. We had to increase the delivery frequency by reducing the lead-time considerably. As a result, we were able to reduce the inventory size significantly. There was one psychological barrier to implementing this high-frequency auto replenishment strategy. Store managers falsely believed they needed a large inventory to achieve a high level of product availability for the customers. We had to show that in reality, their belief was groundless. Using some simulation techniques, we proved that a large inventory is usually associated with wrong inventory and makes it difficult for the store to find the right product for the customer, often leading to serious obsolescence as well. Once it was well understood that it should be detrimental to have excessive inventory, we were able to redesign our supply chain to be reactive and flexible. Based on more stable aggregate demand forecast, we make the products and ship them from our central warehouse in France to regional warehouses in other countries. The replenishment at the store level is done very often from a regional warehouse to individual stores using trucks or sometimes airplanes. Now each store receives a small-sized delivery about six times every week. This simple system increased our product availability enormously. In theory, for instance, a LV store in Tokyo sold all of its products including those in stock this afternoon, and then we can replenish the store with a complete set of LV products it needs to open for business tomorrow morning. After implementing the reactive and flexible supply chain, our performance has improved substantially, e.g. the shortage rate is reduced from almost 30 to 5 percent, the overall inventory level from six to three months of sales, and the obsolescence rate is less than 3 percent.

The final decision was about protecting the environment. As already discussed, it was a strategic decision, not resulting purely from a cost-and-benefit analysis. We were committed to embracing social responsibility. Two of the most immediate and visible initiatives we took were using sea flight more often and minimizing the industrial packaging materials. By doing so, we significantly reduced the CO2 emissions and thus our products’ carbon footprints. Another more fundamental project was to build our central warehouse in Cergy area, which is truly a green warehouse and ISO certified. We used mostly natural materials to build the warehouse and a geothermal heating system is currently used. Although the energy savings and the significant reduction of CO2 emissions are very critical benefits, we also believe that the warehouse is providing a very safe and healthy working environment for our employees and therefore helps us enhance the employee productivity.

[LV6] What are the most serious challenges faced by LV right now? First of all, the greatest potential risk is based on our belief that nothing will stay stable or predictable, and consequently everything will be difficult to forecast. Ironically this is exactly the same belief we had in early 1990s when we had to make major changes in our strategy. As the market becomes more globalized, we expect, such an uncertainty will extremely intensify. It implies it will be much harder for us to guarantee our product availability at our stores.

Another challenge is concerned with raw materials. So far LV has been successful in forward integrating the supply chain, i.e. we have been in full control over manufacturing and distribution. However, in this luxury industry, it is essential to use the highest quality raw materials like genuine leather and fabrics. Although we have not faced any serious problems in

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dealing with our raw material suppliers, we are very keen to future possibility that the raw materials will be in short supply. We do not intend to achieve a complete backward integration of our supply chain, but have to make sure that the coordination with our raw material suppliers should be at the level between our own departments inside LV. In order to do so, we always emphasize close partnership with our raw material suppliers. That is, our relationship with our suppliers is not based on economics only, but on mutual trust and respectable collaboration. It inevitably involves working together to develop new products and improve operations efficiencies. In addition, we would like to provide visibility to our suppliers by sharing key information and data with them. With more information and data on the actual sales and demand patterns of LV products, the suppliers understand LV’s business better and become more willing to share their own information and data, often related with innovative new ideas about advanced raw materials. This is a virtuous cycle, where both LV and the suppliers are getting more and more from the collaborative relationship.

The third issue is concerned with the conflict between customer’s perspective and factory’s perspective. On the one hand, the customer’s perspective emphasizes flexibility. But, on the other hand, the factory’s perspective values efficiency. After going through many trail-and-error experiences, we realized that it is essential to strike a balance between flexibility and efficiency, rather than to choose one at the cost of the other. For instance, we believe we can reduce the conflict through implementing lean production system. For more fundamental solution, however, we have focused on training and education. We ran forecasting games like the beer game with our warehouse workers. The key lesson was to understand how important it is to have a coordinated supply chain. Another more comprehensive training program was designed to enhance communication skills for effective supply chain coordination. This program put together managers and employees from all functions including marketing and country mangers, and highlighted the essential role played by effective communications in improving the supply chain performance. It was a very successful training program.

In fact, we believe we should go beyond simply enhancing supply chain efficiency only. We endeavor integrating all of our critical functions within LV from new concept development to actual delivery of our products to the customer. So far, marketing function has played a major role. It works closely with design function, which is solely dedicated to creative activities. After close communicating with the design, the marketing decided the launch date for new products. Then, the marketing communicate with the supply chain function to arrange the production and distribution. Of course, when it decides the launch date, the marketing pays close attention to the feedback from the SCM department. Likewise the design function accepts feedback regarding the customer voices from the marketing when it creates new concepts for new products. Also the SCM department gets inputs from regional SC managers as well as individual stores across the world. It has a SCM team in each regional market and works with all the other functions including the finance department. But such coordination can be improved more, not necessarily jeopardizing our creativity. The key is to find people who can communicate effectively. We believe there are three fundamental building blocks underlying the success of LV, i.e. effective communication, superb teamwork, and excellent information systems for forecasting and replenishment.

Chanel [CH1] What does quality imply to Chanel? First of all, quality should mean durability. We need to make products that the customer can use for long. As such, we pay keen attention to raw materials like fabrics and other synthetic ones. But, materials have evolved over time. For instance, in the past we did not use polyester, but we do use it now since it is now good material.

Quality is also about excellence in design. We view design as a risky endeavor. But, design at Chanel is not driven by market demand or customers. The creative team is leading the design. Of course, sometimes marketing function provides information about market trend, but the creative team plays the quintessential role in designing.

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Quality also implies service. This is related with durability. Chanel products are made of very delicate materials. Although an utmost attention is paid to ensure durability, sometimes it becomes necessary to fix the product. Except for cases requiring very simple repairs, all products needing services are shipped to our headquarters in Paris, where complete repairs are treated. We try to make sure that the services for our products are done perfectly, wherever the products are sold.

[CH2] What are the overall characteristics of Chanel’s supply chain? Chanel has five in-house factories in France and several contract manufacturers in Italy for bags, glasses, and other accessories. There are about 20 outsourcing partners for manufacturing. We usually do not give large volume to each outsourcing partner. Moreover, our request for high quality is quite demanding. Despite these, our suppliers are eager to work with Chanel. It probably reflects the unique characteristics of the luxury industry. In this industry, concepts are more important than volumes. A company like Chanel is powerful enough to lead the fashion trend and the market itself. Thus, working with Chanel itself gives the outsourcing partners prestige and visibility, which compensate for their hard working even for small orders. Regarding our distribution channel, we have our own Chanel stores, dispersed all around the world. A store manager is in charge of operating each retail store. Thus, our supply chain is highly integrated from manufacturing to distribution.

Like the integrated downstream supply chain, our design function is completely centralized in Paris. The creative team is in charge of design works in Chanel. As pointed out already, our creative team pays the keenest attention to the artistic attributes of Chanel products, not excessively driven by current market trends. In fact (but, as all of you already know), Chanel’s creativity is coming from one genius, Karl Lagerfeld. He is still active, but nobody knows what will happen to Chanel’s design after Karl.

Despite its ultimate focus on artistic elements, the design function is not completely insulated from other supply chain functions. On the contrary, it is an integral element of our supply chain strategy. The creative team constantly gives guidance as well as advice to manufacturing plants and retail stores. For manufacturing, it provides guidance and advice regarding best fabrics to use, suppliers who can supply the appropriate materials, and delicate production processes. For retail stores, it offers guidance and advice regarding the choice of products, display methods, and interior designs of the store. In this sense, the design or creative team drives the entire supply chain at a fundamental level.

[CH3] With the utmost focus on creativity and artistic elements in design along with the concentrated supply chain how do you deal with the issue of market responsiveness? Although we say our design is driven by artistic talents, not by contemporary market trends, we do communicate with the market constantly as a way to enhance our responsiveness. Chanel usually runs fashion shows six times each year, four big fashion shows for general public and two buyer shows for large commercial buyers. For about ten days during each fashion show, we get orders from the buyers. Based on such orders, we start pre-ordering fabrics. Having six fashion shows each year enables us to have quick cycles to be more responsive to the market demands. Of course, through the fashion show, we present to the customers our vision as well as direction towards artistic perfection for our products, and then we try to meet the customer’s demand more responsively.

[CH4] Without properly taking into account the market requirements when developing new concepts for new products, it seems like Chanel is using a “make-to-stock” system. But, it sounds a little bit strange that a company in the luxury industry uses a make-to-stock system. How do you evaluate this statement? Well, we do use a make-to-order strategy. But, it is only for the really rich customers. We estimate there are probably less than 300 customers across the world, who can be categorized in this group. They are kings, queens, princes, princesses, and billionaires. We make clothes for these customers through a true make-to-order system. From the very beginning of the clothes making process, we consult the customer about everything like fabrics, styles, designs, colors, and even accessories. Of course, our design team always tries to provide

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creative ideas and sometimes more ideal directions to these customers as well. Another market segment we serve is the “ready-to-wear” market. Here we use the “make-to-stock” system. That is, we make our products and sell them to the customers who want to buy them. In this market, through the creative team, Chanel exerts enormous leadership in defining the market trend itself. In a sense, we often educate our customers about the artistic beauty of Chanel products.

However, we want to make it clear that the make-to-stock system used by Chanel is very different from that adopted by companies in the mass markets. Chanel is in the luxury industry. As such, the kind of “ready-to-wear” market served by Chanel is still at the high end of the market. For instance, unlike most of the companies using the make-to-stock system, Chanel does not have large inventory at the end of the season. We use small batches and thus the volume is small. Should a particular product sell more than expected, we re-order during the same season. Sometimes we do have a very small inventory for basic items like simple blouses, which can be sold in the next season. But even for such items, inventory rarely remains after the next season. In a very unusual case, we might have a really small leftover at the end of the season. We never move the leftover to outlets. First, we sell the leftover products to our employees at the cost. If there still remain unsold items, then we destroy them.

[CH5] What is the biggest challenge faced by Chanel now? Chanel is a company built on creativity. We are always concerned with how to create new ideas and new collections. In order to enhance our designers’ creativity, we encourage them to be open-minded and curious about everything. Often our designers spend time on visiting exhibitions and museums, and participate in other forms of artistic activities. Since the creative designing is the key, we try to ensure that the creative spirits permeate through our organization. We emphasize communications, i.e. all of the parts in our organization get together physically or virtually to share ideas. Holding a fashion show is the most important means to achieve the goal.

Zara [ZA1] What are the key competitive advantages of Zara? Zara enables our customers to feel confident about their fashion trend and uniqueness in addition to the low price. Zara leads the global fashion trend, emphasizing modern diversity. The headquarters in Spain is in charge of design, not locally focused. We sell the same sizes and same styles across the world, whether it is in Korea, Japan, the USA, or France. Thus, a customer who wears Zara in Korea feels confident that she wears something of global trend, not just a nice Korean style. At the same time, we try to make sure that each and every customer feels she is treated specially by Zara, by offering “uniqueness” in our products. It is based on our effort to keep diversity in our product offering. We do not want to mass produce the same style, same color clothes. We differentiate the clothes to the extent that each customer feels she wears a one of a kind style.

In addition to this high fashion trend along with uniqueness, we offer low prices. Making a high quality product at a high cost can be done by anyone. Zara makes fashion products, trendy and unique, at low prices! We compromise neither the price nor the high fashion trend for each other. It is not an easy task. But, Zara has competitive advantage because we know how to make profit while achieving these two things simultaneously.

[ZA2] It seems contradicting the conventional wisdom. How can Zara manage to achieve these two goals, i.e. low prices and high fashion trends, at the same time? It is from our operations capability to make us responsive to the market. There are three major elements consisting in the operations capability, i.e. outsourcing strategy, total supply chain management (TSCM), and store operations rules. While we make almost 40 percent of our products in house, we extensively utilize outsourcing for the rest. It is usual for us to place outsourcing orders in multiple outsourcing plants, say three different plants. Therefore, the order given to each outsourcing plant is relatively small. In fact, our competitors like Gap and Benetton also use the same outsourcing plants. But, they usually give a large order to a single plant. For instance, company A gives a large order to an outsourcing plant 1, while another competitor company B makes a large order to another outsourcing plant 2, and so on. The primary motivation of placing

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large orders is to enjoy scale economies. As a result, almost 70 percent of each outsourcing plant’s capacity is filled by a major competitor. Often these large orders are placed six-nine months prior to actual production. Since our competitors fill the order books of the outsourcing plants, Zara cannot place a larger order and that is why we place a small order for each outsourcing plant so as to utilize its left-over capacity. How do you think the outsourcing plants consider our small orders? Put yourself in the outsourcing plant’s situation:

Our book is almost 70 , 80% filled thanks to Gap’s order, which will help us recoup our fixed costs. Now we need to find a small order that fits with the left-over capacity. It is very important to find a customer who is satisfied with such a small commitment from us, because it is these small orders that provide us with the juicy profits, i.e. the contribution margins above the fixed costs. Who will be that customer?

These outsourcing plants love to have small orders from Zara, which will help them achieve 100 percent plant utilization! Our orders are accepted gratefully by our outsourcing partners, and we place such orders just one to two months prior to production, implying that we can enjoy much more flexibility than our competitors and at the same time we get much better deals. The only difficulty is that we should plan deftly so as to allocate appropriately small orders to multiple outsourcing plants in an optimal way.

The second element is concerned with our global transportation planning system, which internally we call TSCM (Total Supply Chain Management). Let me give you an example. Other competitors usually have ten production points, either their own plants or outsourcing plants, five large distribution centers, and 20 regional warehouses, from which they deliver to about 70 individual country markets. On the contrary, Zara has five production points and only two large centralized distribution centers, from which we directly ship to individual country markets. An interesting case is that when a shirt is made in China and is supposed to be delivered to Japan, we do not ship it directly from China to Japan. Rather, we ship the shirt from China to one of our centralized distribution centers, from which it will be shipped to Japan along with other products. It might seem to double the transportation cost. But the physical transportation cost is just one element in the total cost equation. This system helps us save lots of inventory-related costs. Why?

It usually takes two to four weeks for our competitor to ship its products from one of its distribution centers to each country market via a regional warehouse. Their primary motivation is to save transportation costs by using inexpensive, thus slow transportation modes and keeping a large inventory at each logistical point. Sometimes it makes sense because they make large quantities at each production point in order to enjoy scale economies. Another way for them to save their transportation costs is not to overlap or duplicate their transportation routes since they ship their products made in the local markets directly to the local distribution centers, not to a few centralized distribution centers like Zara does. On the contrary, Zara uses an expensive, yet fast transportation, i.e. air freight, to ship the products from our central distribution center to each local market. It usually takes shorter than three days to ship our products from a distribution center to a country market, thus saving almost one-three weeks in delivery vis-à-vis our competitors. Of course, the downside is to pay more for our transportation. But, significantly reducing the total delivery cycle implies huge savings in our total inventory management costs. That is, shorter delivery time enables us to keep small inventory without compromising our ability to be responsive to the market demand changes. In essence, the tradeoff is between the increased transportation costs and the benefits from enhanced responsiveness and reduced inventory. We have found out that the latter can dominate the former if we can plan appropriately.

Finally, we have simplified our store operations principles. In our stores, the primary role played by our employees is not to court our customers when such service is not called for, but to display our newly arrived products fast and effectively. For instance, we do not provide formal fitting services to the customers. On the contrary, our competitors maintain a sizable number

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of staff members, who court their customers and offer fitting services that are sometimes excessive. Providing redundant services causes store operating costs to increase significantly. The fact that Zara does not provide formal fitting services should not imply we do not meet the customer’s needs properly. Rather than dealing with this kind of issues at the store operations level, we use our design function to eliminate much of such fitting need in the first place. For instance, Zara offers two more sizes for each clothe than our competitor’s and thus makes it unnecessary to fit the clothes often.

[ZA3] Could you explain how Zara can achieve responsiveness in detail? Let us look at an example. In the fashion industry, it is general for a company to begin preparing for a new season about 0.5 to one year before it actually starts. For instance, suppose the sales season starts in March. Then, the preparation should start between March and September in the previous year. Depending on the production lead-time, the company needs as many as six months before the initial production. In order to meet the March season start, the initial production must be done by the previous December. In the fast fashion industry, the sales season continues for a month, after which leftover items are moved to outlets and sold at deep discounts.

An average company would design new clothes based on the feedback from various sources such as the firm’s own store managers and merchandisers, external experts and professionals, and even its competitors. It is usual that the company initially starts with as many as over 1,000 different design ideas and eventually ends up with ten just before the production starts, retaining five design concepts as potential candidates in case they become needed. In effect, the average company determines almost 70 percent of designs during the preparation period, leaving only 30 percent in response to the market demand once the sales season starts: this is also true in terms of volume, i.e. it makes over 70 percent of entire volume during the initial production period and another 30 percent during the active sales season. These companies need to order large quantities because they usually do not have in-house manufacturing and outsourcing plants are not willing to take last-minute order changes as an in-house plant can accommodate. Another motivation to place large orders to the outsourcing plants is to enjoy the economies of scale, i.e. favorable price discounts. They also have to fix their design early to make it possible to place large orders at the beginning of their planning cycles. As a result, they will not have much flexibility in terms of changing their designs once the sales season starts.

On the contrary, Zara operates quite differently. We make less than 30 percent of entire volume during the initial production period, often employing outsourcing plants. The remaining 70 percent is made during the sales season in response to the actual customer demand patterns. This is similar in terms of the number of designs. That is, unlike other companies, we start the sales season with only three design styles that may be outsourced to our partners. As we observe the market’s reaction to our initial design styles, we quickly introduce 12 new or refined designs, which are usually manufactured in house. In effect, our responsiveness is mainly supported by our operations strategy including how to utilize the in-house manufacturing effectively.

[ZA4] What you have just described seems pretty simple. I wonder whether such approaches can be strong competitive advantages against the competitors. What do you think Zara needs to make an extra effort to improve? You are absolutely right. As you can see, there are no secret ingredients in our strategy, each of which, when viewed individually or separately, our competitors cannot imitate easily. Although each element seems easy to mimic, however, it is very difficult to integrate all of these individual elements together and make them work seamlessly. For instance, although everybody knows that it is better to offer new designs during the sales season as the company understands the customer’s needs more accurately, not everyone can implement that strategy. Why? If you want to do that, you cannot place a large order as the initial production lot. Unless you have your own manufacturing capacity, then you forego price discounts from your outsourcing partners and it means that you cannot afford to charge your customers low prices. You cannot sell expensive items in large quantity, and you further become unable to enjoy the economies of scale. The vicious cycle goes on. Now you can see my point. Everybody can try to imitate a small piece of our strategy. But unless you know

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how to integrate all of the key ingredients effectively, you cannot gain true competitive advantage. Zara’s strength is exactly to know how to achieve that integration!

Finally, although our simple store operating policy enables us to save unnecessary costs and focus on displaying newly-arrived clothes more effectively for our customers, we believe we can improve further in providing superior customer services. In particular, as Zara tries to become more globalized, we should be able to tailor our customer services to specific local markets. In effect, we want to move more towards a pulling strategy. The challenge is how to offer better customer services without jeopardizing our current strategy that is working very well now.

UNIQLO [UN1] How do you define the mission for UNIQLO? UNIQLO’s brand mission is to become a global fashion brand to help every customer wear high-quality low-price casuals. More specifically, UNIQLO aims to provide our customers with highly fashionable, high-quality basic casuals at the lowest possible prices whenever and wherever they want. In effect, UNIQLO endeavors to be the “Global #1 Casual Brand,” by studying our customers incessantly and maximizing efficiency through low-cost management and direct integration of manufacturing with sales.

[UN2] How can UNIQLO achieve high quality and low price at the same time? First and foremost, from the early stage of product development and design, we try to make sure that our product meets not only the customers’ fashion-related requirement, but also their expectation about an appropriate price. Once a new product is designed, we ask our manufacturing department to calculate the expected manufacturing cost. If the expected cost warrants an appropriate price, i.e. a price acceptable to our customers, we go ahead with production. Otherwise, we further try to reduce the cost until it satisfies our criterion.

There are two main elements determining the manufacturing cost, labor and raw materials. We are saving labor costs by producing our products in places like China and South-East Asian countries, where the labor costs are still relatively low. Currently we are making 60-70 percent of our products in China and the remaining in South-East Asia or Eastern Europe. We have about 70 outsourcing plants as our key business partners, and dispatching master team members to the local plants for active technological support. Master team members are retired experts with over 30 years of experiences in the fashion and textile industries in Japan. Their mission is to transfer advanced technologies to our outsourcing partners and help them improve their quality and process management throughout the manufacturing processes. Although these outsourcing partners are not part of UNIQLO, they are strategic partners, who work with us very closely as if we are under the same roof. In fact, almost 70-80 percent of our partners have been working with us for ten to 20 years and over time developed close relationships in terms of partial ownership sharing and transaction activities. Once UNIQLO clothes are made in the outsourcing plants, most of them are shipped to destination markets through sea, only 2-3 percent being shipped via air.

We believe that the quality of raw materials determines the quality of clothes significantly. Also stable supply of raw materials is critical. We collect information from the market and industries, based on which we develop and supply materials by working with R&D, merchandising, and material planning teams along with our production plants in China. In addition, we try to develop new materials through strategic alliances with raw material suppliers. For instance, we worked with one of our strategic partners, Toray Industries, and developed the “Heat-tech” garment, a functional new material that has superior attributes such as comfortable body fit stretch and heat protecting. Another example is Kaihara Corporation. The company is the world’s best denim manufacturer and also UNIQLO’s strongest strategic partner, who has been supplying UNIQLO with high quality denim at surprisingly reasonable prices ever since UNIQLO opened its first ever urban store in Tokyo’s trendy Harajuku area in 1998. For natural materials like wool and cashmere, our expert team with 20-30 year experience visits actual farms in countries like Mongolia and Nepal, and directly makes deals so as to minimize the cost. Moreover, in order to secure a stable supply, we sign contracts with suppliers

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about two to three years ahead of the time we actually need the raw materials. Again our expert team works on both developing new suppliers and managing the existing ones.

[UN3] What is UNIQLO’s primary target market? What is UNIQLO’s strategy to be competitive in the target market? Our direct competitor in the fashion industry, Zara, is focused on young people in their 20s and 30s. But, UNIQLO tries to position itself as a family brand covering from teenagers to customers in their late 30s. Zara tries to compete in the market through design and pattern diversification. On the contrary, UNIQLO seeks to appeal to the customers by offering diverse choices in colors and materials. For example, almost 60-70 percent of UNIQLO designs are basic clothes, with the remaining 30-40 percent being fashion-trendy products. Unlike other competitors that bring five-ten different colors to the market, however, UNIQLO offers clothes in ten to 20 different colors. In addition, we develop functional materials such as the heat-tech and leverage them to win the customers. As such, we pay much attention to new material development, where lots of relevant teams in the company get involved. That is, teams in charge of design, marketing, merchandising, and material get together and do intensive brainstorming. After the active discussion, the CEO makes a final decision for critical issues. After gathering key information about the market trend and customer preferences, UNIQLO holds meeting for new material and product development four to six times each year.

[UN4] What is UNIQLO’s operations strategy? Inventory management, forecasting, production planning, etc.? Inventory management is important to every company. UNIQLO is no exception. In fact, we make an extra effort to manage inventory, aiming to have zero leftover at the end of the sales season. The first step is to try to minimize the mismatch between supply and demand by simultaneously establishing marketing, store operations and sales, and inventory plans before placing raw material orders. Currently we do not have a formal centralized control tower for such coordination. Each department or team reports its plan as well as assessment to the chairman and CEO, who makes the final commitment based on the consensus among submitted plans and assessments. That is, we are using an informal coordination process, where the chairman is closely involved. Once the plan is finalized and implemented, we trace inventory at each SKU level. Based on the inventory tracking, we either place additional orders for those under-stocked, or offer price discounts for those over-stocked so as to minimize the leftover inventory in the end.

We have to do thorough pre-planning because we need to place initial orders in large quantity in order to enjoy economies of scale. Our strategic outsourcing partners are willing to accept a wide range of “initial” orders. For instance, we can place an order of 6 or 26 million fleece jackets as long as it is made once at the beginning of the production cycle. In that sense, we have a very high level of volume flexibility. However, we do not place additional orders once the initial order is placed. There is only one exception, i.e. we allow an additional order for core products with a strict condition that it is within 5 percent of the initial order. Of course, from UNIQLO’s own perspective, it is more profitable to place additional orders after observing the market. But, it could destroy the trust between UNIQLO and our strategic suppliers regarding the integrity of the original contract. Moreover, we may not be able to enjoy economies of scale for the additional orders, i.e. the unit cost for the order of 1,000 is certainly more expensive than that of 10,000.

In principle, we had a “Help yourself!” rule for our store operations. That is, our store employees do not provide close services to the customers, who are supposed to find what they want to buy. However, we realized that we cannot ignore cultural differences unique to individual country markets such as China and Korea. Therefore, in certain markets, our store employees spend 50 percent of their time on helping customers in the store. For instance, we do fitting for jeans for free as part of our complimentary services to our customers.

[UN5] Why do the outsourcing partners cooperate with UNIQLO so as for the company to achieve high volume flexibility? What is their true motivation? The question is indeed very critical to understanding the fundamental sources of UNIQLO’s competitive advantage. But, I feel a little bit embarrassing to say that there is no grandiose secret here, which other competitors cannot replicate. To sum up the essence of our competitive strategy, it is the “trust” we build with our

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strategic partners. In particular, we have been committed to building trust regarding the risk involved with unwanted inventory. Suppose one of our competitors places an order of 10 million units and its outsourcing plant produces and delivers the order as requested. Now the company sells the clothes in the market, but unfortunately 5 million units are unsold and become leftover inventory. Do you know what happens in the industry usually? The company returns the unsold clothes to the outsourcing partner for refund. In this example, the fashion company does not take any risk related with leftover inventory. In fact, 100 percent of risk is borne by the outsourcing company. Assume that the fashion company has bigger bargaining power and so the outsourcing company has to accept the deal. Now think about the next season. The fashion company anticipates huge surge in the demand and wants to reserve large capacity from its outsourcing partner. But, what do you think the outsourcing company’s reaction would be? After experiencing the terrible situation, when 100 percent of the risk is forced to be on the shoulder of the supplier, it is not quite difficult to see that the outsourcing partner is much less willing to cooperate with its client, the fashion company.

UNIQLO’s strategy is exactly the opposite. If we place an order of 10 million, then we will pay for all of the 10 million units no matter what happens, i.e. whether the leftover is 1, 5, or 9 million. We take the full responsibility for the risk associated with ordering. Once we made the promise and kept it, our strategic partners trust UNIQLO firmly and always are willing to accommodate our orders with the highest priority. Of course, in order to continue this much trust, we always try to make sure that our initial forecasting is extremely accurate. Developing new and innovative materials is closely related with the strategy, since our forecasting can be more accurate if we can generate the demand more actively by marketing innovative materials.

Now you may see the virtuous cycle in place. We develop innovative materials and colors, which appeal to the target customers. Through these active initiatives, our forecasting becomes very accurate and our sales volume becomes large. Believing in our forecasting accuracy, we place a large order and can afford to honor our promise to our suppliers, taking the full responsibility for absorbing any market risk. In turn, trusting our commitment, our strategic outsourcing partners accommodate our large orders, which are sometimes fluctuating in volumes. With this unwavering support from our suppliers, we can deal with uncertainty in the market demand and maximize sales without serious mismatch between supply and demand. Now we make healthy profit in the market and increase our market share. As we grow, we open new stores in diverse areas and as a result our ability to sense the market improves. Our forecasting ability increases and our potential customer base expands. With all these positive forces and outcomes, we become even more capable of honoring our promises to our strategic partners. Now the virtuous cycle continues.

About the author Dr Bowon Kim is a Professor in Operations Strategy and Management Science at KAIST Graduate School of Management in Seoul, Korea. He received Doctor of Business Administration from Harvard University and Master of Science in Operations Research from Stanford University. His research interests are in supply chain management, new product innovation, and value chain sustainability. He has published papers in academic journals like Journal of Operations Management, Production and Operations Management, Omega, R&D Management, European Journal of Operational Research, International Journal of Production Research, International Journal of Project Management and Long Range Planning. Bowon Kim can be contacted at: [email protected]

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