POMS Abstract Number: 020-0545
REDESIGNING SUPPLY NETWORKS IN THE FASHION INDUSTRY
Laura Macchion1, Pamela Danese2, Andrea Vinelli3, Romano Cappellari4
1Department of Management and Engineering, University of Padova,
Stradella S. Nicola, 3 - 36100 Vicenza, Italy
+39 444 998789
2Department of Management and Engineering, University of Padova,
Stradella S. Nicola, 3 - 36100 Vicenza, Italy
+39 444998703
3Department of Management and Engineering, University of Padova,
Stradella S. Nicola, 3 - 36100 Vicenza, Italy
+39 444 998740
4Department of Economics and Management, University of Padova
Via del Santo 33 - 35123 Padova, Italy
+39 049 8274211
ABSTRACT
The Fashion industry is a global industry, where competition is planetary. Nowadays companies have to face the challenges posed by demand unpredictability and adapt to a new competitive environment. Competition from low-wage countries is increasing and consumers’ behaviours are radically changed, being more price sensitive.
This research aims at studying Italian fashion companies to:
· evaluate new managerial and organizational models that support business development in fashion industry;
· examine what variables should be leveraged and what strategies implemented in response to the crisis to remain competitive.
Firstly, 16 in-depth case studies have been conducted. Then, a confirmatory survey has been run to test and assess case study findings. Research provides fresh knowledge on fashion industry “successful” business models, by revealing the existence of different clusters of firms that have found alternative ways to compete in the new global context. This research indicates avenues of strategic innovation within the industry.
INTRODUCTION
The Fashion industry is a global industry, where competition is planetary, beyond Europe in many other areas, like Russia, Turkey, China, India, Mexico, United States, Brazil (International Textile Organization, 2003; Woolmark, 2003). The attention on this industry has been recently growing. In particular, in Italy it represents an important constituent of the Italian industrial system with a turnover of 46.3 billion Euros in 2009, which is around 10% of the whole Italian manufacturing system (The European House Ambrosetti, 2010). However, after many years of continuous growth, the industry has been hit hard by the financial crisis and in 2009 data show a general turnover decrease of 15.4% (SMI, 2010). Therefore today fashion companies have to face the challenges posed by demand unpredictability (Priest, 2005), but they have also to adapt to a new competitive environment. Competition from low-wage countries is increasing and consumers’ behaviours are radically changed, being much more price sensitive.
Because of the large reorganization of markets following from the crisis, companies rethought their marketing strategies but also operations in order to realign their whole supply chain with the new contest. According to Brun et al. (2008), it can be argued that the design and communication management is only one of the important elements that contribute to company success, while the whole supply chain is relevant for fashion and luxury industry success.
In particular, this research project aims at studying Italian fashion companies to evaluate new managerial and organizational models that support business development in fashion industry and examine what strategies can be implemented in response to the crisis to remain competitive.
Given the nature of the research questions, initially we conducted 16 in-depth case studies using a semi-structured interview protocol. Case studies focused on brand companies, export-oriented and with a turnover of over 5 million Euros. Within and cross-case analyses helped to highlight significant managerial choices related to product design, process management, business strategy, as well as new configurations of relationships within the supply network. The case studies allow us to make business models in fashion industry emerging. Afterwards we decided to design and run a large-scale confirmatory survey to test and assess case studies findings.
The paper is organized as follows. The second section provides a review of the main specific contributions in the field, the third section outlines the research aim and the forth one the methodological background and research design. Finally, conclusion discusses findings and managerial implications, highlights the limitations of our study and outlines avenues for future research.
LITERATURE REVIEW
The fashion and luxury industry
The focus of this paper are companies operating in fashion & luxury industry. According to Christopher and Peck (1997), this industry is characterized by a short product life cycle and high volatility and low predictability of product demand. The term “fashion” is a broad term that encompasses any product or market. However, when analyzing economic data, it is common to distinguish between apparel, textile, leather goods and so on, while some authors make a distinction between luxury and fashion companies (Corbellini and Saviolo, 2007; Kapferer, 2008). The ambiguity of the term “luxury” emerges from the several definitions available in the literature. Danziger (2005), for example, wrote: “Luxury is what makes life more comfortable, more enjoyable, more fulfilling”. Some authors examined also Critical Success Factors (CSFs) for a company to align them with the industry’s strategy (Nueno and Quelch, 1998; Reddy and Terblanche, 2005). Caniato et al. (2009) summarized the main CSFs for those companies operating in the luxury segment:
· consistent delivery of premium quality across all the products of the line and along the whole SC, both in terms of compliance with the specifications and superior material quality;
· heritage of craftsmanship;
· exclusivity pursued through the use of naturally scarce materials, limited editions, limited production runs and creation of waiting lists;
· marketing approach that combines emotional appeal with product excellence;
· global reputation of the brand;
· recognizable style and design;
· association with a country of origin with an especially strong reputation as a source of excellence for a certain product category;
· presence of elements of uniqueness;
· superior technical performance when the brand has a technical content. Therefore, continuous innovation can become the way to sustain the product positioning;
· creation of a lifestyle so that the customer can feel to be part of a unique style, which can be recreated in everyday life by possessing special luxury products.
In particular, Caniato et al. (2009) report that “a luxury product typically includes four or five of such factors” described above. However it is clear the subjective nature of the definition of the word “luxury” and CSFs that allow the creation of a luxury product. Therefore in this study we prefer to adopt a broader definition of the “luxury and fashion industry”. In fact there is a growing convergence of business models in the fashion industry toward offering lifestyle products where the idea of luxury is becoming less relevant for the consumer (Cappellari, 2008). Furthermore the diversification process of most companies made it difficult to make a distinction among different sectors since most apparel companies are now selling also shoes, bags and even perfumes and cosmetics or home furnishings while shoe and bag manufacturers are diversifying into apparel or even jewellery.
Literature highlights many different classifications of fashion and luxury companies. First of they can be classified by the positioning of the finished products. Waddell (2006) segmented the market distinguishing between haute couture, prêt a porter and mass market. Other authors analyze this industry by the timing of new product introduction (Vona, 2004), distinguishing between “market-makers” companies that follow the traditional season (spring-summer and fall-winter) and companies that launch several small collections following the trends of market-makers.
From the literature review it emerges that there have been two recent main changes in the fashion and luxury industry because of the reorganization of markets. The first one concerns the new way to compete in the market. Because of the global crisis, in fact, fashion companies today don’t have to face just the challenges posed by decreasing demand, they also have to adapt to a new competitive environment. First of all there is an increasing competition from companies of low-wage countries (mainly from the Far East and the Maghreb region). That wasn’t such a big problem until a few years ago since these companies were targeting a different kind of consumer, a more price conscious consumer, while Italian fashion companies were selling higher priced products to more affluent and fashion conscious consumers. Recent studies, however, have demonstrated that during recession times consumer price sensibility increases even for luxury products and that even rich consumers are ready to trade down to lower priced products since “frugal is becoming the new chic” (Roche et al, 2009). This doesn’t mean there is no more room for high quality and high price products, but that companies are forced to put more emphasis on the idea of “value”. High price should be justified by superior intrinsic and extrinsic quality because the consumer is no longer willing to pay a higher price just for the brand name.
The second major change in the new competitive environment involves demand predictability (Priest, 2005). In recent years it has become even harder to guess both how much consumers will buy and what they will buy. This is not a new trend since fashion companies have always been at the mercy of rapidly changing styles (Abernathy et al, 1999), but in the past the high margins gained on sold goods could be seen as a compensation for the risk of not selling a large part of the assortment. Nowadays the increased pressure on prices makes it harder to sustain the “traditional” model where the sold goods “pay” for the unsold and it becomes more important to adapt fads to what the market is demanding. New business models are required for the fashion industry such as “fast fashion” (Ghemawat and Nueno, 2003; Barnes and Lea-greenwood, 2006), where companies develop the capability of reacting faster to market demand minimizing thus the risk of having stores full of merchandise which differ from what the consumer is asking for.
In such context competition level is high and differentiation advantages are built on brand image and product styling (Richardson, 1996). The literature deals with topics of brand management (Keller et al. 2002; Reddy and Terblanche 2005) for the mass and luxury market. Kunde (2002) highlights that consumers nowadays are heavily influenced by an appropriated brand management and that brands are “the world’s new opinion makers”. According with Kapferer (2008) a brand is not only as a name, a logo, but at a much more profound and abstract level is a collection of values, a relationship and a promise to the customer. A correct brand management becomes very strategic for the company and must be integrated into the core of the firm and the importance of brand management involves thus all phases of product realization.
Supply Chain Management literature on fashion and luxury industry
The fashion and luxury industry has attracted also the attention of researchers in the area of Supply Chain Management (SCM) mainly because this sector in recent years is becoming increasingly complex and dynamic. The globalization of markets, the high level of outsourcing of activities and the evolution of consumers changed the way to make business in fashion industry requiring a growing number of innovative and customized products. The evolution of markets has led to the globalization in the logistics and operational side of supply chain in terms of three dimensions: the replenishment level, time and distance. Additionally, the changing consumer purchasing behaviour has distorted the previous models of supply chain management and has raised awareness between professionals of fashion industry that "one size does not fit all" (Shewchuk, 1998).
In the nineties the studies in this area focused in particular on Quick Response. Lowson et al. (2000) defined QR as a state of responsiveness and flexibility in which an organization seeks to provide a wide range of products and services to consumer in the exact quantity, variety, quality and at the right time, place and price as dictated by real-time consumer demand. The Quick Response (QR) is a movement originating in the USA textile and apparel industries and described in the research of Blackburn (1991). It can be seen as an excellent model for time-compressing supply chain because of its emphasis on cooperative efforts among all members of the chain from raw materials right through to the end customers (Forza and Vinelli, 1996; Christopher and Towill, 2002).
Many authors studied SCM issues and underlined different relevant aspects for the organization of the supply chain in this business. Some of them highlighted the importance of lead-time reduction to improve sales forecasts and increase flexibility (Jacobs, 2006), someone else emphasized the characteristics of this particular kind of industry (i.e. type of product, channel and brand) to figure out the right supply chain (Brun and Castelli, 2008). In particular, product features influence the configuration of the whole supply chain. Fisher (1997) proposes a model for classifying SCM strategies based on the nature of products that distinguishes between functional and innovative products, identifying a physically-efficient supply chain and market-responsive supply chain. Functional products tend to have stable and predictable demand with long lifecycles. Innovative products, instead, generally have unpredictable demand with short lifecycles. Also in fashion industry it is possible to categorize products in functional (basic and continuative products) and innovative (more fashionable that follows new trends). Fisher's model was then improved by Lamming et al. (2000) that consider other important categories of variables to identify a taxonomy of strategies: degree of innovation, product complexity and product uniqueness. The characteristic of uniqueness, that identifies in particular luxury products but not only these ones, often depends from the brand reputation, especially in market segments in which the brand name is a determinant of company success (Bruce et al., 2004). Moreover Barney’ study (2004) presents a model based on firm resources. He highlighted the importance of entry/mobility barriers, rare resources, imperfectly imitable resources that are very important also for fashion and luxury industry.
In addition, other authors agree on the need to formulate a focused supply chain management strategy, coherently with the product/market considered (Lee, 2004). Childerhouse et al. (2002) developed an integrated framework for the development of focused demand chains. The classification system utilized five key product characteristics, called with the acronym of DWV3, Christopher and Towill (2002), that influence decision making in the selection of demand chain strategies: duration of lifecycle, time window for delivery, volume, variety and variability. Other contributions to the literature concerns the lean and agile paradigms. The lean paradigm was developed within manufacturing (Womack et al., 1990) and the main focus is efficiency, which is realized through waste elimination and activity streamlining. The typical domain of application is a predictable and non volatile environment. The agile paradigm focused mostly on speed, flexibility, and responsiveness and is appropriate for highly unpredictable markets. However, lean and agile approaches are not mutually exclusive and are not conflicting paradigms. In many cases there is a requirement for a hybrid “leagile” strategy (Naylor et al., 1999) that considers the base level demand, satisfied by lean supply chain, and the surge demand, satisfied by agile supply chain (Christopher and Towill, 2002). In particular Christopher et al. (2006) identified the right supply chain strategy evaluating the predictability of demand and the replenishment lead time.