Supply Chain Innovation: Avoiding losing your shirt in the fast changing China fashion retail market.

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1 Supply Chain Innovation: Avoiding losing your shirt in the fast changing China fashion retail market.

2 Innovation - the act of introducing something new.. Need or Opportunity Research and Inspiration Design and Development Deployment and Execution Delivering Customer Value

3 Supply Chain Innovation in Fashion Retailing: The fashion retail sector in China is expected to generate USD $21bn in revenue in Sustained double digit growth will see it become the worlds largest fashion market by The biggest selling category is ladies wear accounting for 29% followed by intimate apparel and kids wear. The luxury end of the market is dominated by European high end fashion houses. The middle ground is also dominated by international brands from Europe and the USA. However it is a highly fragmented market and local mass discounters dominate in terms of volume.

4 The need for Innovation in a challenging trading environment: China has to date been a more successful hunting ground for International fashion brands than for their grocery counterparts. However market trends now clearly emerging will make sustained growth and profitability more challenging going forward. Luxury fashion has been hit by a change in shopper behaviour driven by perceptions of excess. The middle market is being hit by stronger local competition who have learned and adapted. All segments are being challenged by the strength of the on-line channel with players scrambling to respond.

5 Luxury Fashion Case Study: A luxury fashion retailer that has enjoyed stellar sales growth since entering the China market. The top line has been driven by strong new store openings with over 50 outlets across China, supported by good comparative sales growth. The business model was fundamentally about feeding the growth machine, open stores, fill them with merchandise, take the cash. Recently, comp sales growth has gone backwards and with it some of the appetite for new store openings. This has significant implications for how the supply chain must support the business to win in a new environment.

6 The Flow of Goods: Global DC Airfreight CFS Store Shanghai DC

7 Supply Chain Challenges: The Doom Loop: Volatile Sales Numbers Long Lead Times Poor Forecast Accuracy Inventory or Availability Issues Lost Sales or Mark Down Not Helped By: The risk of brand damage The challenge of duty drawback The constraint of range purity Products crafted not manufactured

8 Supply Chain Performance: Lumpy Inbound Volume The supply chain worked in so far as merchandise moved efficiently from Europe to China stores on time and in full. However it crucially failed in so far as more often than not it was the wrong merchandise in the wrong place at the wrong time. DC Congestion Store Congestion KPI Driven Behaviour Handling and Storage of Redundant Stock Weekly Store Replenishment Manual Push Allocation High Levels of Mark Down

9 Supply Chain Improvement: Work in Progress 1. DC to Store Lead Time and Frequency - no longer than 48 hours from order to store arrival - no less than twice a week frequency 2. Lean Principals in the DC - from batch and queue to flow - from push to pull 3. New Merchandising System - joins up the back and front end ordering - driven by a single store item forecast

10 Supply Chain Transformation: The Great Undone 1. A Total System Agility Programme Leverage the Network Daily Back End Replenishment Most Items Every Day Pulled Through in Line with Sales Flowed Through the DC Minimum In-Country Inventory 2. An Explicit Trade Off Inventory Cover vs True Availability Risk

11 On Line Fashion Case Study: An on-line fashion retailer that was a new start up earlier this year, founded by an experienced industry player with extensive experience in the west. The brand was established with its own on-line store as well as a store on T Mall so served two retail channels from day one. The business model was fundamentally based around fast fashion principals and new start cash flows. Sales were slow to get going, then heavily skewed towards T Mall, and performance across the range was volatile. Early lessons were learned about localised styles particularly around trim, there was a lot of pain to get the range right.

12 The Flow of Goods: 80% from China Shenzhen DC Consumers 20% from Cambodia

13 The Need for Speed: Lead Time Mix - What Good Looks Like % 30% 20% 40% A very different operating model to luxury fashion, here the emphasis on speed goes right back to the factory. In luxury the range is what it is, in fast fashion online, the range is what customers want it to be. Speed gives the online retailer time to react and change course mid season. Speed to market is a source of winning competitive advantage, first to sell through, last to mark down, matching customer needs always. Speed is an integral part of the sourcing decision, it's only great product at a great price and quality if you can get it to market!

14 The Time Bandits: Style to PO PO to Consumer Supplier Waiting for Buyer Sign Off Samples not Meeting Expectation Waiting for Production Capacity Waiting for Materials Amendments after Sign Off Samples Needing Rework Lack of Trust from Suppliers Inspection Delays Samples Delayed in Transit Late Decisions as Buyers Absent Price Negotiations Transportation Delays

15 Supply Chain Re-engineering: 160 days Integrated Design - 30 Hold Fabric - 60 Hold Blanks - 20 Planned Capacity - 10 Zonal Sourcing days

16 React with Pace and Precision: Get Out of the Bad: Rethink - change the merchandising Recut - change or stop the PO's Reduce - mark down on reduced margin Remove - switch to outlet or jobber channel Regress - mark down on negative margin Get Into the Good: Go deeper - buy more within season Go wider - create and buy similar within season Go again - remember the winners for next year

17 So what are the key take outs: Forecasting sales accurately is the silver bullet in retail supply chains. Supply chain agility, reducing the lead time, is the most powerful lever for improving forecast accuracy. In luxury fashion this is a logistics and replenishment challenge, fast and frequent. In online fast fashion, it is a sourcing and planning challenge, time to react. In both cases, agile and lean supply chains are the source of winning competitive advantage.

18 ..and in terms of Supply Chain Innovation: Driven by creating value for customers, helping the organisation to serve customers better. Focussed on addressing specific pain points, not just for the sake of it. Developed by talented teams who understand the levers and the impact of supply chain. Supported by external resource bringing insight, experience and pace.

19 Consulting: We are a boutique supply chain consultancy that combines the maturity and experience of 22 years managing supply chains in the west, with the energy and opportunity of the east. Operating out of Shanghai, London and Cape Town, our uniqueness lies in our knowledge, our experience, and our passion to make our customers supply chains quicker, simpler and cheaper. International Buying and Retailing Quicker, Simpler, Cheaper for Consumers Optimising the Flow of Merchandise

20 Training: A fundamental deliverable of consulting is to embed innovation and change into the customers organisation by landing it willing and well through their own teams. Our knowledge, experience and passion for supply chain excellence means we are the perfect training partner to make sure those teams have the skills and knowledge to deliver innovative supply chains that are quicker, simpler and cheaper. Delivering Learning Developing Talent Creating Excellence