“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...