H&M and digitization of supply chain trends – will the [fashion] show go on?
H&M, the second largest fast fashion retailer in the world is facing challenges as consumers expect fashion to be increasingly fast-paced, affordable and personalized. The emergence of new fast fashion retailers such as ASOS and Boohoo coupled with the constant threat from its main rival Inditex has made H&M’s dual supply chain approach increasingly obsolete. H&M sources basic clothes collections from Asia (accounting for ~80% of its sourcing) and the more trendy collections from factories mainly in Europe . The heavy reliance on Asian production makes its supply chain lead-time 100% longer than that of its main competitor’s; Inditex . Historically, the advantage of this model has been lower prices compared to its main competitors while the challenges have been a lower trend sensibility and capability to adapt the supply chain to variabilities such as weather shifts.
In the age of rapid digital transformation three of H&M’s main competitive advantages within its supply chain operations diminish in value. First, the automation in the manufacturing processes of apparel evaporates H&M’s historical cost advantage as automation makes production cheaper and labor cost a smaller fraction of the total production cost – making its offshoring strategy less advantageous . Although the apparel industry has been slower to adopt production automation than for instance the automobile industry several promising start-ups leveraging robotics and 3D-printing technology show that full automation is within reach . Secondly, its ability to match supply and demand by employing skilled in-house designers and buyers whose work is to predict and capitalize on trends will decrease in value as predicative analytics will play this role in the future. Thirdly, H&M’s know-how in distribution to a global network of stores will be less relevant as consumers increasingly seek to shop online.
To address these issues the company’s CEO has predicted that advanced data analytics and AI technology will change how H&M currently predicts trends, forecasts inventory and communicates with customers . H&M has indeed taken steps to digitize its supply chain by large investments in IT and system integration across its supply chain . As H&M doesn’t own any of its factories, the automation efforts haven’t been focused on production but rather taken the form of investments in automation of logistics and digitizing its inventory management. More specifically, H&M has invested in warehouse automation, metadata analysis and wants to introduce RFID technology tagging of its cloths in 2018 to better match supply and demand, hence avoiding shortages and oversupply leading to unwanted mark-downs and margin erosion . In order to shorten lead-time in its core market: Europe over the next years, the company has also announced that it will likely increase local production .
As for the adaptation of its distribution model to better accommodate for online demand, H&M has expanded its online store offering (as of July 2017 providing online sales in 41 of its 68 markets) and plans to continue online expansion . It also aims to integrate its online and offline distribution by expanding in-store pick-up/returns of online orders and mobile services such as Image Search – enabling customers to take pictures of clothes they like to match them with similar clothes offered by H&M through image-recognition technology .
Although these efforts are relevant, H&M seems to be slowed down by historical competitive advantages. For instance, instead of making incremental changes to inventory management and relying on its designers to predict customer demand it should acknowledge the benefits of radically changing its approach to customer demand forecasting. In essence, the company should adopt predictive analytics as a central part of its design process and make sure to integrate the technology across its supply chain. There are already competitors leveraging AI and predicting algorithms to produce and deliver fashion apparel within ~10 days from indicated customer interest. By using own data but also acquiring data from search engines and social media these companies are predicting what customers want even before the customer has placed an order . If H&M wants to stay relevant in the fast-fashion industry it has to adopt to this way of predicting demand.
In the medium-term perspective, H&M should embrace the opportunities within manufacturing automation in the apparel industry by investing in its own factories and build up this capability or partnering with factories that are innovative enough to leverage the technology. As mentioned above, robotics that manufacture complete garments already exist and will increasingly make offshore manufacturing less cost-advantageous. This will allow the company to move closer to its core markets and hence decrease its supply chain’s lead-time.
Although some of the suggested measures will help H&M stay relevant an important remaining question is; what will be H&M’s future competitive advantage in this new setting? Furthermore, what are the strategic partnerships and acquisitions that H&M can make to boost the process of supply chain digitization?
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