Synopsis: “Katja Ruth and Constantine Moros sat facing each other in the empty conference rom. Covering the table between them were the latest operational and financial figures from the supply chain optimization pilot Hugo Boss had been running in its global bodywear and hosiery Division.
Ruth, the director f the division, agreed with Moros, the division’s head of operations and procurement, that the pilot had been a success- better product availability and lower inventory to sales ratios had been observed for the stock-keeping-units involved in it- but was not convinced that the expansion of the initiative beyond those SKU’s would enjoy the same success. With Hugo Boss’s chief operations officer expecting her assessment in a few days, she and Moros had a lot of work to do.
They needed not only to precisely quantify the pilot’s financial impact, but also to determine whether the initiative should be rolled out to other products. Hugo Boss’s two distinct brands, Hugo and Boss, were divided into five subsidiary lines- HUGO, Boss Black, Boss Green, Boss Orange, and Boss Selection- designed to meet the needs of specific men’s and women’s fashion segments. The bodywear and hosiery division produced bodywear, hosiery, terrywear, and swimwear products for Boss Black, Boss Orange, and HUGO, and loungewear and nightwear products for Boss Black.
The division was further segmented by replenishment type. The division’s 711 product SKU’s included a wide selection of men’s underwear variously classified as Selection, News, Athletic, Basic, and Packs styles. Styles differed in terms of raw material composition, cut, elastic type, and color, each style being sufficiently different that an average customer would be unlikely to substitute one style for another. The majority of the 513 SKU’s of Boss Black bodywear and hosiery products were classified as Never Out of Stock (NOS) products to discourage customers from substituting similar product offerings from competitors.
NOS products differed from the majority of the other collections in that they did not change seasonally in style, color, or fabric for each season, remaining consistent year to year for a period of approximately three years. Products that did change from season to season, were classified as fashion items. These items were rarely repeated once featured in a specific collection. Fashion items for which inventory was depleted were permanently stocked out. Fashion items needed to be designed, prototyped, sampled, and presented to buyers associated with the more than 200 Hugo Boss retail accounts.
The division’s procurement and production management team negotiated production capacity and established production schedules with contract manufacturers and assisted them with raw material procurement and workforce scheduling. The design, prototyping, and preproduction steps were skipped for NOS items, for which the division needed only to plan production, perform quality checks, and arrange for shipment from the factory, warehouse storage, and delivery to retail accounts.
In 2004, Moros had been thinking hard about what changes could be made to improve the efficiency and responsiveness of the division’s supply chain. Operational performance metrics for the last half of the year revealed average availability for NOS items to be 97. 9 percent, not bad, but still shy of the 100 percent product availability guarantee. Moros was concerned that retail partners such as Oy Stockmann would threaten to take their buying dollars elsewhere if the division was unable to full unexpected NOS orders promptly and in full.
But filling unexpected NOS orders, Moros knew, often taxed the capacity of Hugo Boss’s production partners. Knowing that retail customers, like consumers, might substitute for or delay the purchase of an out of stock product, or take an entire order elsewhere, Moros had set out to quantify the impact of warehouse stockouts on sales. He observed that stockouts often occurred during key retail replenishment periods like the month of December, and that stockout patterns differed across product styles.
He calculated that stockouts among NOS items during 2004 resulted in lost revenue of 1. 1 percent of net sales. It was with these figures in hand that Moros had approached Ruth, believing that she would be extremely interested in the performance impact of poor product availability in NOS items. It was she, moreover, who would have to approve his next proposed step, a detailed process mapping exercise that would track orders from the time they were placed through fulfillment.
Having learned in business school about the complex interrelationship between inventory, availability, and sales, Moros was convinced that doing so would enable him not only to identify opportunities to lower current inventory levels and thereby reduce costs, but also to improve the NOS product availability and improve sales. The SCO Proposal- Upon reviewing the flow of product through the supply chain, Moros indentified a number of opportunities for improvement. Among the most promising was to change the frequency with which inventory planners ordered from the contract manufacturers.
Why did they order only monthly? Would ordering more frequently afford greater flexibility, enough to offset the attendant cost? Moros proposed a pilot project to answer some of these questions. His specific proposal to Ruth was to change order frequency for a subset of bodywear NOS SKU’s from monthly to weekly. The subset he suggested, 45 similar SKU’s within the Black Brand known as Packs, was produced in a single factory owned by Delta Galil and accounted from 16 percent of the divisions 2004 unit sales.
He maintained that the proposed change would improve product availability and planning flexibility, reduce lost sales and inventory levels, and lower transportation and ordering costs. NOS products not selected for the pilot constituted a control group of SKUs. Delta Galil was to produce all NOS products including the subset involved in the SCO pilot in a single factory located within a tax free zone in Cairo. Both parties would extend their supply chain management know how and continue with a monthly production commitment based on a six month forecast.
Delta Galil then allocated production capacity based on these six month forcasts. This long term horizon forecast was initially specified on a style color basis, with detailed orders placed weekly for Packs products and monthly for NOS products, and continually compared against monthly production commitments. Weekly orders were an opportunity to fine tune production to demand patterns while working with Delta Galil to meet unofficially agreed upon production levels. If production volume fell short during one six month period, Delta Galil management trusted the division’s lanners to make up for lost capacity in the following six month forecast. If, on the other hand, production volume exceeded what was anticipated, Delta Galil would do everything but compromise production lines dedicated to other companies to provide it. Save for products destined for North American distribution, which were delivered to central warehouses in North America, all merchandise produced by Delta Galil’s Egyptian factory was delivered to the Wenldingen distribution center.
Ruth and Moros expected the change in order frequency implemented would result in lower on hand inventory as well as improved product availability for the NOS items involved. The change in order frequency was accompanied by a four week reduction in total lead time. Moreover, the change allowed Moros’s production planners to readjust their forecasts on a weekly basis ensuring that current production schedules accurately reflected observed changes in demand. With the pilot in progress for a year now, it was time to take stock.
Comparing divisional performance one year before the pilot to the past year, figures showed a 16 percent increase from 41,697 units to 48,372- in the average weekly on hand inventory held for all 45 piloted NOS SKUs. Moros wondered whether he should reduce the targeted on hand inventory level used by his production planners even further. In anticipation of an upcoming SAP implementation, Moros had chosen to play it safe for the duration of the pilot by asking his team to maintain on hand inventory levels close to two months of forecasted demand.
Product availability, as expected, increased from a weekly average of 97. 9 percent to a 99. 9 percent after the pilot. The division also managed to reduce inbound transportation costs by 9 percent. More frequent ordering meant smaller shipment quantities, which, in turn, allowed the division to utilize a single, twenty foot shipping container. This was a more efficient alternative than the shipping method used prior to the pilot. With sales growing by nearly 31 percent during this last year from a weekly average of 3,107 units to 4,065 units, any increase in transportation or handling costs was a concern.
The pilot was receiving praise from warehouse managers who reported fewer instances of inventory obsolescence and a reduction in billable hours for warehouse staff due to smaller, more frequent and more predictable deliveries. Members of the sales team, although unaware of the pilot, noted how easy these products were to sell. One retail partner went so far to label these items as “safe” not just because they were basic in color and good value for the money but also because of the NOS service level of 99. percent almost guaranteed that these products would be in stock and available to purchase when needed. Because most clothing companies could not guarantee such a high service level, retailers generally had in place a contingency plan known as insurance brands, but implementing and maintaining insurance brands was resource intensive and costly to monitor. Glimpsing the blazing evening sun through the venetian blinds, Ruth suddenly realized the afternoon had flown by. She had been consumed by thoughts of what to make of the SCO pilot’s results.
Although the SCO pilot, being restricted to select NOS products, did not deal with the typical short-run fashion items, the division had still the challenge of balancing production cycles, inventory levels, and accurate demand forecasting. Ruth turned to look at the organization chart on the wall as the question “what’s next? ” kept crossing her mind. Could the SCO initiative be successfully applied in the current corporate framework of division centered performance? Could the project realistically be extended to other product groups, or were the results for the NOS Bodywear Packs product an anomaly? (Dehoratius) _____________________________________________________________________________________ Major issues from the course that are discussed in the case: -Forecasting -Inventory management -Creating and maintaining supplier relationships -Lead time reduction -Warehousing and Distribution _____________________________________________________________________________________ The most essential cause for implementing the SCO pilot was the mediocre product availability guarantee percentage of 97- which clearly needed to be higher because Hugo Boss was losing a number of sales as a result.
Just one year after the implementation of the pilot, the availability guarantee percent was nearly 100 (99. 9)- which was the objective. Consequently the pilot works. However, along with the higher percentage of the availability guarantee, there were also other beneficial factors that came about as a product of the pilot such as: a measurably shorter lead time, increased forecasting capabilities for production planners, a more efficient and low cost method of shipping, and furthermore a cost diminution in warehousing due to reduced billable hours for warehousing staff.
To answer Ruth’s question of “what’s next? ”- Expansion. Undoubtedly the SCO pilot works! Expansion of the SCO pilot to other product groups should absolutely be the next step for Hugo Boss. Is it realistic? Yes it would be sensible to do so; especially with the unpredictable fashion market. Fashion items included in the expansion as well! With the shorter lead time, it would be easier to react to the changing fashion market. Moreover there are the added bonuses of reduced costs and stronger supplier relationships. It’s mostly a win-win situation, so Ruth, go ahead and expand!