H&M, Benetton and Zara

The purpose of this essay is to discuss different supply chain management approaches taken by H&M, Benetton and Zara. It is first necessary to explain what a supply chain management means. Supply chain management involves planning, design, maintenance and control of the flow of materials and information along the chain in order to efficiently satisfy customer’s requirements (Schroeder, 2000). Such an approach, of looking at the entire supply network helps organisations identify their competitive advantages and parts of their processes that contribute the most to the performance objectives that are of the greatest importance to the customers (Slack et al., 2007). It also helps to develop long-term strategies for the company based on the identified advantages.

H&M, Benetton and Zara are all garment retailers. Key stages in their supply chains that I will discuss are product design, manufacturing, distribution and retail. Zara and H&M are so called “fast fashion” providers. Their clothes do not have to be of an exceptional quality as the most important factor is to quickly deliver catwalk design to high street customers at an affordable price (Slack et al., 2007). Benetton clothes are of better quality and higher prices but they are at the same time less fashionable and not as trendy. Despite these differences in the target markets, all three companies operate in a very similar environment and all offer innovative products with a life cycle that is very short.

Therefore, they need a responsive supply chain that will respond with flexibility to the uncertainties of the environment in which the three companies operate (Fisher, 1997). These uncertainties can be avoided by decreasing lead times, increasing a chain’s flexibility or allowing excessive inventories and lower capacity utilisation Fisher, 1997). The later, though, require great capital and leads to high costs. How do the companies balance these factors? In order to answer this question I will follow the product life cycle as it moves down the supply chain of each company, starting from the design, production of the garment, its distribution and retail.

In the fashion industry design is one of the most important things. Successful design will have to have the right cut, the right colour and pattern, and be made of the material appropriate to the rest of the design. No wonder that companies spend so much effort on this stage. Benetton staffs 300 designers who create designs for all company’s product lines and are involved in researching new materials and trends (www.benettongroup.com, 2007). H&M is similar to Benetton in the approach of keeping the design of all product lines together.The company has 100 designers who work with 50 pattern designers and around 100 buyers and budget controllers creating a team of 500 people working together to balance H&M’s components of business concept – quality and fashion at a low price (www.hm.com, 2007).

Such design of this very first stage of product creation indicates that design deportments in Benetton and H&M are organised in a cell layout that “allocates dissimilar machines to work on products that have similar processing requirements” (Chase et al., 2001, p. 189). In our case of course the role of machines are taken by different tasks of designing, choosing patterns, colour and material; whereas women, men and children’s lines have similar processing requirements.

Zara’s design department is organised differently. As with Benetton and H&M, Zara employs number of designers, market specialists and buyers who are then allocated to each of their product areas – women’s, men’s and children’s garments (Slack et al., 2007). Each product line has its own designers, its own buyers and market specialists. Running three product line designs have its advantages and drawbacks. “It is more expensive to operate three channels, but the information flow for each channel is fast, direct, and unencumbered by problems in other channels making the overall supply chain more responsive” (Ferdows et al., 2004, p.107).

What also needs to be mentioned regarding design is the volume of the designs produced. Traditional fashion retailing was seasonal, with two collections being launched for the spring and summer period and another for autumn and winter. Only Benetton may be described as following this pattern. The company introduces two basic collections per year and supplements them with small flash collections that are being put into the stores in the middle of the seasons to attract customers (Boddy, 2005). H&M and Zara rejected the traditional model and switched to a seasonless cycle where new designs are being introduced throughout the year.

Zara mastered this strategy to the extremes by bringing new designs to customers in small batches on a weekly basis. Successful designs will be modified and another batch sent to customers while those that did not meet with customer interest will be moved out of stores within two weeks (Tiplady, 2006). H&M also introduce new designs on a rolling basis like Zara but the company does not apply this strategy to all its products. Fast-fashion garments account for one quarter of H&M’s cloths, whereas the remaining three quarters are basic, everyday clothes that once designed are being produced in much larger quantities (Tiplady, 2006).

Another difference between H&M’s and Zara’s approach and Beneton’s strategy is the design range offered. All three companies operate world-wide. Zara and H&M however do not differentiate their products depending on where the garments will be sold. Whereas Benetton up until recently had quite a lot of its designs customised to the needs of specific countries market (Slack et al., 2007). Currently however, the company is standardising its range world-wide which will mean major process and product range simplification for the entire supply chain.

The next stage in the garment life cycle is its manufacturing. At this stage the three companies differ the most. Half of all Zara’s clothes are produced in Zara’s 20 Spanish factories. 40% of all fabrics used are bought from one of Zara’s parent companies and its dyestuff come from another Inditex company (Ferdows et al., 2004). After the design stage has been completed, fabrics are cut using a highly automated production line and the pre-cut pieces are sent to Zara’s subcontractors – small workshops in Spain and Portugal – that take care of the labour intensive part of the processing (Jobber, 2006). Zara tends to use subcontractors in Europe rather than carrying out the work in the Far East, famous for its cheap labour. In 2006 for example, 64% of all production was done in Europe and the rest took place in Asia (www.inditex.com, 2007). Zara owns most of the infrastructure needed to produce its clothes and has great control over its suppliers. Therefore the company is backward integrated. The advantages of this are that they have a lot of control over production in terms of scheduling, quality and capacity but at the same time this requires greater capital to be invested in the infrastructure and the costs of running it are also higher.

H&M uses completely different model. The company does not have any factories of its own but buys everything from around 700 independent suppliers in Europe and Asia (www.hm.com, 2007). H&M has around 20 production offices all around the world that are responsible for placing the orders with the right supplier, ensuring the quality of garments, the production standard and the timing (www.hm.com, 2007). H&M is outsourcing their entire manufacturing stage of a product life cycle. By doing this H&M is able to keep its cost very low and therefore sell the finished product to the customer at very competitive prices. But outsourcing does not only mean saving money. It may cause a company a lot of trouble, as the company does not have the same amount of control over a process as it would have if it were kept in-house.

The usual problems associated with outsourcing is maintaining the quality standards, delivering goods on time and being able to respond quickly to any changes in the market. H&M however managed to overcome these problems by setting up their production offices close to their suppliers. Moreover, the employees in the production offices are drawn from the local population, which means they know the suppliers and the environment in which they operate very well (www.hm.com, 2007). They communicate with suppliers very effectively and as they buy in big amounts, they have managed to maintain a lot of control over their suppliers.

Yet another model is being used by Benetton, which may be said to fit somewhere in-between Zara’s and H&M strategy. Just like Zara, Benetton perform itself the manufacturing operations that require great skills and technology while outsourcing the labour intensive activities (Slack et al., 2007).Previously Benetton was famous for using the same network of suppliers who were either former Benetton employees or had a family ties to Benetton (Giannakis et al., 2004). These close ties between Benetton and its contractors encouraged dedication to quality and enabled quick responses in the case of changes and created a clearer understanding of Benetton’s objectives (Giannakis et al., 2004). More recently, Benetton started to outsource more and more of its manufacturing to China to take advantage of cheap labour.

The only thing in common with all three companies at the manufacturing stage is their strategy of postponements in terms of placing orders and choosing the colour of the garments. This strategy helps companies to keep the cost low as late ordering means keeping lower inventories and choosing the colour of the clothing at the very end of production allows greater flexibility in meeting the actual demand of customers.

In terms of distribution, Zara and Benetton use similar strategies. Both companies invested huge capital in building high technology distribution centres to which all produced goods are sent, checked and prepared to be delivered to individual stores (Slack et al., 2007). Zara currently owns two such warehouses one in La Coruna the other in Zaragoza, which not only prepares the order for each store but pre-prices and tags each garment and hangs most up on racks (Ferdows et al., 2004). The difference between Zara and Benetton is in the frequency of shipments. Zara sends new batches of clothes to stores twice a week and these reach their destination within 24 hours in Europe and 48 in U.S (Ferdows et al., 2004). Whereas Benetton now send stock to its stores every two weeks, much less frequent than Zara but still quite often in comparison to its earlier practice of restocking stores every two months (Andraski, 2007).

H&M again outsource a lot of its distribution especially in its new markets (www.hm.com, 2007). H&M run one centralised transit terminal in Hamburg where all produced goods are sent for quality checks and then shipped either to individual stores or to a call-off warehouse used to re-stock stores with greater demand for certain items (Jobber, 2006).

The final stage of a product life cycle is retail where the items finally reach the customers. Zara & H&M use a similar strategy in their retail channels as they both own and run all of their stores situated in the prime locations. H&M stores are large and are designed in a way to inspire customers as they wonder around (www.hm.com, 2007). To ensure that the H&M brand is communicated transparently in each market, each store follows guidelines on how to expose garments and set up displays (www.hm.com, 2007). This is also the case with Zara but here stores also play another role apart from being a retail channel. Zara does not carry out any standard advertising but instead uses its stores as a promotional vehicle (Jobber, 2006). Stores are spacious and stylish with large areas being left empty and it is an informal policy of Zara to allow occasional stock-outs (Ferdows et al., 2004). This strategy creates the feel of exclusiveness of Zara’s designs and encourages customers to visit the store much often. Stock-outs of one item surprisingly do not mean loss of sale but help to sell other items (Ferdows et al., 2004).

Benetton operate their retail stage very differently from the two other companies. Benetton’s own a handful of stores themselves whereas the majority of the company’s retail operations are done though franchised and partnered shops (Jobber, 2006). The company use the two collections per year model and therefore make its stores order way in advance. Benetton also does not accept returns of unsold products at the end of the season but make it up to their sales force by allowing some order adjustments in the middle of the season and postponing the colour choice of goods until much later (Giannakis et al., 2004).

All three companies are successful apparel retailers. The common characteristic of all three companies is the fact that all of them use their operations as a source of competitive advantage. For them operations are a source of excellence that if managed accordingly may not only support but also drive a company’s strategy. They all apply the five operations performance objective – quality, speed, dependability, flexibility and cost- and use the best possible mixture of them to meet their customers’ demands. The other similar aspect of the supply chain management approach of the three companies is their use of technology. All three invested in the high technology communication systems that link all stages of the supply chain. Yet the companies differ in other aspects.

Zara is not only backward integrated as it owns the majority of its manufacturing but also forward integrated by running all its distribution
and retail operations. Such a high degree of vertical integration enables Zara to stay in control at every stage of the product life cycle and makes the entire supply chain super responsive. The strategy of producing small batches of each design helps to keep the inventory levels at minimum and increase flexibility to customers demand. This great flexibility and responsiveness of Zara’s supply chain help the company to tackle the bullwhip effect, “the phenomenon of variability magnification as we move from customer to the producer though the entire supply chain” (Chase et al., 2001, p. 335).

H&M has a different approach. It holds total control over design and retail while outsourcing entire manufacturing and a lot of distribution. By doing that H&M keeps the costs low while at the same time is able to deliver good quality garments with a top design created by an in-house design department.

Benetton on the other hand is said “to be close to being a virtual organisation as it outsources large parts of the production to third party suppliers and directly owning only a handful of stores” (Jobber, 2006, p.324). Although I cannot whole-heartedly agree with this statement, Benetton’s approach does differ from this of Zara’s and H&M’s.

Unfortunately the length constraints and the extent of the topic did not allow me to look into details of the supply chain management approaches of any of the three companies. I hope however that I have managed to discuss the most evident stages in their supply chains and compare and contrast the three different approaches taken by Zara, H&M and Benetton. Although the companies differ greatly all of them prove to be very successful. To me this shows that it does not matter which model of supply chain management a company decides to follow as long as it uses operations’ five performance objectives and keeps customers requirements in close sight at all times.

Reference:

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