This report provides an analysis of the supply chain of H&M and management of that supply chain. A brief company background will be established to better understand the analyses that follow. These analyses will include the structure of the supply chain; key challenges within the supply chain; competitive strategies used to differentiate H&M’s supply chain; value adding activities in the supply chain; and concluding recommendations based on the aforementioned analyses to sustain and strengthen their position in the market place. Company Background
H&M is a Swedish brand, founded in 1947 in Västerås, Sweden by Erling Persson, which over the years has brought into its product range own-brand clothes, accessories, footwear and cosmetics and caters to women, men, teenagers and children. H&M currently operates as the predominant part of Hennes and Mauritz H&M AB. The H&M Group also owns COS (Collection of Style) targeting an older, more discerning affluent customer and as well as recently acquired FaBric Scandinavien, which includes the chains Weekday, and Monki in addition to the Cheap Monday brand. (H&M Hennes and Mauritz AB 2009)
At the end of the 2008 financial year the H&M group had 1,738 stores in 33 countries including 18 franchise stores, 13 COS stores, 17 Monki stores and 8 Weekday stores (H&M Hennes and Mauritz AB 2009). Since then the Group has increased its fascia to over 1800 stores in 34 countries, most recently expanding into the Russian market. [pic] (Hm. com (b) 2009) Alongside its stores it has also operated an e-tail website since 1998 in addition to a catalogue service, both currently limited to Sweden, Norway, Denmark, Finland, the Netherlands, Germany and Austria, although plans are in place to increase coverage in the near future. Hm. com (a) 2009) H&M operates on the premise of offering “fashion and quality at the best price” (H&M Hennes and Mauritz AB 2009). The primary target consumer is aged 15-34, although H&M offers products aimed at and appealing to either side of this age bracket, with their youth and baby ranges and less fashion forward tailored pieces and its designer collaborations (Mintel Group 2008). Chief competitor to the H&M brand is Zara, which whilst vending higher priced merchandise is H&M’s top competitor in terms of lead-time reactions to new trends, vital in the fast fashion environment of the high street.
Other competitors include USA’s GAP, Japanese brand Uniqlo, and Britain’s high street behemoth Topshop. Group sales for fiscal 2008 totaled SEK 104,041 m, up 13% from fiscal 2007. Although the operating profit margin for fiscal 2008 fell to 22. 7%, down from 23. 5% from fiscal 2007, the net profit margin remained the same, 17. 3%. Taking into consideration the global recession these figures were “regarded as satisfying” (Hennes & Mauritz H&M AB 2008). Interim figures released for the first half of fiscal 2009 indicated that sales amounted to SEK 49,837 m, an increase of 21% (Hennes & Mauritz H&M AB (b) 2009). pic] (H&M Hennes and Mauritz AB 2008) H&M’s biggest market is Germany, which accounted for approximately one quarter of sales revenue in fiscal 2008. The declining domestic market in Sweden was overtaken in fiscal 2008 by France as the second largest market in terms of sales including VAT; the UK is the fourth, although the British market is predicted to also surpass Sweden in fiscal 2009 if current growth rates are maintained. (Mintel Group 2008) (H&M Hennes and Mauritz AB 2009). [pic] (H&M Hennes and Mauritz AB 2008) Supply Chain Structure
Jackson and Shaw (2002) define the supply chain as being an integrated chain of product responsible for the manufacture, delivery and sale of a product to a consumer. Effective management of the supply chain results in increased efficiency and higher profitability, minimising stock mark downs and quickening response to consumer demand, highly critical in the current age of fast-fashion prevalent within the high street fashion brands. H&M’s supply chain is the factor which has made the brand what it is today, setting it apart from its competitiors and is of vital importantce to its ongoing success.
Using a double supply chain H&M carefully balances time, quality and price to get the right product to the consumer at the right time. Supply and demand form the basis of the retail world, and it is the demand created by the consumer for a product could be seen as a starting point in the supply chain process. It could also be argued that creativity forms the basis of the fashion industry, but without market demand and end consumer it would not be an industry.
H&M’s head offices are located in Stockholm, Sweden; where some 100 buyers collaborate with over 100 in-house designers and 50 pattern cutters, to produce ideas and designs for the forthcoming season, these are then moulded to suit consumer demand. Over half the designs will be rejected before even making it off the page. Although the year is hostensibly divided into two retail seasons, Spring/Summer and Autumn/Winter; these are divided into six sub-collections, allowing H&M to ensure specific items are not on the shelves for longer than a month, fuelling the consumers’ need for newness.
The key differential in H&M’s supply chain is that the brand actually has two; an efficient operation for garments with long lead times, based with Asian suppliers, and a ‘rapid reaction’ closer to the brand’s distributions centres, utilised for emerging trneds that may only have a shelf life of a few weeks and the products are required on the shop floor before the flash-in-the-pan trend has died. Approximately 60% of production takes place within the Asian branch of the supply chain with H&M placing orders for hundreds of thousands of units of simpler, basic apparel.
These order sizes mean that H&M can command enormous unit cost reductions, which it is then able to pass onto the consumer. The rapid response supply chain can produce garments with a lead time of just 20 days, 5 days longer than its rival Zara which using its own vertically integrated supply chain can have new garments from concept to shop floor within 15 days. However this extra time allows H&M to offer product at 30-50% of the price of Zara, giving it a clear cost advantage.
Cost is a priority in the H&M supply chain and the brand therefore establishes its production bases in areas of inexpensive but skilled labour. H&M further cuts costs by having as few middlemen as possible, acting as importer and wholesaler, as well as retailer. However H&M does not own any of its own factories but relies on around 800 independent suppliers and manufacturers from a variety of countries within both Europe and Asia.
This is another key differential in their supply chain which allows the brand to maintain more liquid assets with which to maintain its expansion targets of 10-15% annually. One of the biggest problems of outsourcing production is separation from the product and supply chain, which can result in serious problems. H&M combats this with 20 offices at the productions bases who source the most suitable local supplier as well as ensuring supplier relationships are maintained, as are standards of quality and working conditions within the supply chain. (Li, L. 2007).
Before bulk production can be begun by the chosen supplier all elements of the garment must be sampled This begins with the chosen fabric which must undergo laboratory testing to ensure its suitability and that of any finishes used. Testing is comprised of two stages, the first to guarantee minimum standards are met for the intended purpose, which may include piling/abrasion, tensile strength, extension and recovery and wrinkle recovery. H&M endeavours to have a maximum of 3% shrinkage factor for woven clothing and 5% for knitted garments, and it is this stage which confirms this (Hm. om (d) 2009). The second stage of testing deals predominantly with colour fastness, exposing the fabric to washing, light, water, and perspiration amongst others. Should a fabric be found unsuitable for its intended use, normally a different fabric would be sourced, or an alternative finish utilised. Trimmings such as buttons and zippers must also be sourced and undergo their own quality assurance tests to ascertain durability and safety. (Jackson and Shaw 2002).
Upon fabric approval by the production office sample garments can then be produced, including a fit sample which after any required amendments are implemented is made into a final approval pre-production sample. This sample has all trimming, except labels present and is made up in the entire range of sizes to check size grading is correct. Following approval of these samples bulk production can begin, with a production sample from the batch checked against the pre-production sample and to ensure all labels are correct. (Jackson and Shaw 2002).
Following production products are delivered to regional distribution centres, originally one in every country in which H&M operated, however in the light of its aggressive expansion to save on start up costs distribution centres in the geographical location were used. For example, Poland was initially supplied by the distribution centre in Germany. Delivery is usually handled by another 3rd party, with the majority of items being shipped via sea in another cost cutting operation, whilst road or rail are used for garments required sooner. Air freight is used sparingly in order to maintain H&M’s sustainability (Hm. om (e) 2009). (H&M Hennes and Mauritz AB 2008). These goods are then allocated according to need either into a central stockroom warehouse, or directly delivered to stores. Stores are replenished from these central stockrooms, having no on-site stockrooms, allowing them to utilize maximum space for product vending area. This process occurs daily, normally from 7-9am, although flagship stores may have as many as three deliveries daily in order to cater to demand. Point of sale (POS) data is relayed immediately via the ICT network to both the distribution centre and head office.
As soon as an item is sold and scanned through the till system an order is placed for its replenishment. This synchronisation allows H&M to keep stock inventories at their lowest and most efficient. End of season markdowns are minimised as the stock is focused where the demand is greatest in a timely fashion. Flow Chart Showing the Processes Involved in H&M’s Supply Chain Conclusion and Recommendations Continued use of the integrated ICT system throughout the supply chain will allow H&M to continue to function efficiently.
The brand should resist sacrificing quality in return for faster lead times in response to its competition, as the balance between price and quality is a delicate one, and could result in loss of revenue rather than gain, particularly as consumers seek longer lasting garments due to economic restraints, even in the fast fashion market. The author would recommend H&M take advantage of its liquid assets to funnel into expansion in order to make the recession work in its favour, but do so selectively to ensure assets are being to put to best use.
Care must also be taken as its biggest markets, including those of Germany and the UK, are maturing and opportunities for expansion are close to being saturated. The brand must also ensure continued revitalisation of the brand particularly in these older markets to make sure the brand is not at risk of being replaced by fresher’s ones. Whilst outsourcing its production leaves assets free, H&M are hugely dependent on the performance of its suppliers to meet standards and deadlines.
Two manufacturers account for 25% of all production, should there be a problem with either resulting in orders not being delivered on time, loss in sales could potentially be huge, and in the current economic situation is not something the brand afford to happen. The brand’s e-commerce venture has huge potential and the brand should strongly consider expanding the coverage, if not to include Europe as a whole then to allow the British markets its fourth largest increased access and exposure to the brand’s product, particularly as the market matures, this may soon become the sole option for British expansion.
