In their latest annual report, H&M asserted that for global companies like itself, trade intervention affects them to a lesser extent . However, global trade growth has reached its lowest levels since 2009  and isolationist movements are on the rise in the U.K. and U.S. – countries that contribute ~20% of H&M’s total sales (see Table A).
The fashion retailer has become a global tour de force by delivering ‘fast fashion’ to its customers, shortening the time it takes for new trends to hit the shelves. In order to deliver on this promise, H&M has built a Just-In-Time supply chain designed at minimizing lead times and inventory. Given the Swedish retailer currently operates in 64 markets, the effectiveness of their JIT model depends on the ease and cost at which goods flow across borders.
In a 177-page report on the impact of Brexit on trade, Sweden’s National Board of Trade asserts that there will be “increased administration, increased costs, and reduced stability in the flow of goods” .
Although future U.S. trade policy is unknown, an important concern for H&M’s management must be: How will isolationism and declining global trade impact H&M’s supply chain, which is critical to delivering fast fashion?
To date, H&M does not manufacture their own clothing designs. Instead, they contract with over 700 suppliers across Asia and Europe , with approximately two-thirds of their sourcing from Asia as of 2011 .
To address global trade decline and isolationism, H&M in the short term is actively monitoring purchasing and transportation costs, and developing strategies to respond to future changes in prices.
In the medium term, H&M is making technological investments to develop a faster, more agile supply chain to shorten lead times. As Karl-Johan Persson, CEO, remarked in a press release in September 2017, “Technology is also enabling improved purchasing methods that allow shorter lead times and greater precision when planning the product range” .
Lead time is primarily a factor of manufacturing process time and travel time. A JIT supply chain depends on how well the company optimizes both levers – operations and the network. By investing in technology, H&M is focused on pulling the operations lever to improve lead time, rather than the network lever.
Depending on the extent to which future trade deals adversely impact H&M, it may be not only prudent, but also advantageous for H&M to consider investments in optimizing their supply chain network in the medium term. If trade administration and costs do indeed increase as expected, lead times to deliver merchandise from distribution centers to stores (within the U.K., possibly the U.S. and other countries) will lengthen. While H&M is investing to improve lead times through operational efficiencies, these gains may be fully offset by increases in administrative burdens to move merchandise across borders.
H&M will then need to shorten lead times through network optimization by reducing distances merchandise must travel across the entire length of the supply chain. Given the majority of H&M’s sales are concentrated within continental Europe and the U.S., H&M could look to source their supply closer to Europe, thereby reducing the distance merchandise must travel at the front-end of the supply chain.
H&M could achieve this through two means: 1) Shift sourcing from Asian suppliers to European suppliers, or African suppliers near Europe 2) Vertically integrate and build manufacturing capabilities in Europe or Africa. The second option is much riskier and more capital intensive, but H&M’s primary competitor – Zara – operates in this manner today. In the future, H&M may have no choice but to vertically integrate in order to remain competitive.
We have explored the potential impact of isolationist movements on H&M’s supply chain, but have not explored how the decline in global trade may impact future transportation costs. Will the decline eventually lead carrier or air freight shipping costs to rise? If so, how should H&M mitigate this risk?
Source: Hennes & Mauritz, 2016 Annual Report, p. 79, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
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1. Hennes & Mauritz, 2016 Annual Report, p. 74, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
2. International Monetary Fund, “World Economic Outlook, October 2017, Seeking Sustainable Growth: Short-Term Recovery, Long-Term Challenges” (PDF file), downloaded from IMF website, p. 37, https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/world-economic-outlook-october-2017, accessed November 8, 2017.
3. National Board of Trade Sweden, “Brexit, March 2017” (PDF file), quoted in Lee Roden, “Trade with UK will be more difficult and expensive post-Brexit, Swedish government warned,” The Local se, March 14, 2017, https://www.thelocal.se/20170314/trade-with-uk-will-more-difficult-and-expensive-post-brexit-swedish-government-warned, accessed November 2017.
4. Hennes & Mauritz, 2016 Annual Report, p. 72, http://quote.morningstar.com/stock-filing/Annual-Report/2016/11/30/, accessed November 2017.
5. Source: Bernstein Global Wealth Management, “Inditex and H&M: Very Different and Very Similar,”
February 2011, p. 98, Business Source Complete, EBSCO, November 2017.
6. “H&M Hennes & Mauritz AB Nine-month Report,” press release, September, 28, 2017, on H&M website, http://about.hm.com/en/media/news/financial-reports/2017/9/2682788, accessed November 2017.
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