1.0 The Client
The client is an apparel company with global brand recognition and products available in virtually every country in the world. To keep their competitors in the dark, we will call the client Big Brand. Big Brand has been delivering sports apparel and accessories to customers for most of a century. Big Brand has a simple strategy – to continuously strengthen brands and products to improve their competitive position and financial performance. The client had annual sales of € 7 billion with ½ billion in annual net profit. Six billion of the annual sales are to Retail Partners and 1 billion comes from Big Brand’s own retail stores.
They have two seasons annually. To remain competitive, manufacturing moved to third world countries to take advantage of low cost labor. Manufacturing lead time is between 2 and 4 months and transportation lead time is between 4 and 6 weeks. Today Big Brand orders inventory 5 to 9 months before the inventory is introduced to the public.
1.1 Retail Business Challenges
Here are some operational facts that Big Brand was facing in its European retail segment:
1. Big Brand has over 200,000 SKUs overall, when size and color are considered. In any given store, 3,000 to 6,000 SKUs are present at a given time, depending on the size of the store.
2. In-store shortages of about 30% – customers were often not finding what they were looking for.
3. 2.2 inventory turns per year in retail segment stores – this inventory was just what was in the stores, not including stock in the distribution centers or on the way from suppliers.
4. They suffered from too much inventory:
a. Stores shelves were clogged with slow movers – blocking potential sales from faster movers.
Big Brand – Engagement Results
b. Old season’s inventory was sold at discounts directly effecting Big Brand’s margin.
c. Inventory not sold was returned to distribution centers for aging so its subsequent sale in rural factory outlets would not undermine the sales of wholesale customers – another hit to Big Brand’s margin. d. Finally, remaining non-salable goods were shipped to third world countries where Big Brand’s products were not marketed – the final blow to margins and the brand’s caché.
Forecasts developed 6 months to a year previously proved anything but accurate.
New season roll outs were hampered by improper inventory levels at the DCs, caused by shipments which were late or in the wrong quantity. This occurred despite orders being placed 5 to 9 months in advance. They experienced the expense of stock transfers between various DC’s around Europe – the inventory was often in the wrong area and had to be moved to where the goods were selling.
At the retail level, reordering occurred once every week or two, based on the availability of the store manager’s time. Buyers monitored thousands of SKUs in multiple stores in several markets and manually replenished. With so much to look at daily, it was a challenge for Big Brand’s buyers to help the stores keep even hot sellers on shelves.
Like many other companies, the client was caught in a conflict. On one hand, to protect and grow sales Big Brand wanted more inventory to eliminate shortages. On the other hand, they needed to control costs and cash, which required Big Brand to reduce inventory to avoid carrying costs and obsolescence. Of course, this did not seem like a conflict to the client; it was just the difficulties associated with ordinary, every day business. How could there be a problem? After all, hadn’t Big Brand been profitable and briskly growing for decades? It was scary to contemplate a change. What if they stopped producing the current ½ a billion Euros per year?
1.2 A New Approach
IDEA, LLC suggested to Big Brand that any good approach toward improvement should meet certain criteria – criteria that can be used generically to evaluate any potential change. Together, IDEA and Big Brand came up...