Profitization Through Supply Chain Digitization at H&M

H&M has leveraged the power of its digital supply chain to outpace competition.

The rapid introduction of technologies to business is vastly transforming historical business practices. In particular, the application of technology to the supply chain has introduced advanced analytics and clarity to an often fragmented process of production and distribution of goods. Most importantly, the digitization of a supply chain creates greater efficiencies across the value chain, resulting in lower costs and increased competitiveness.[1] One company that has truly excelled in efficiently digitizing its supply chain is H&M. H&M creates value for customers by offering economical, fashion-forward apparel through more than 4,100 stores in 64 markets.[2]

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What is the digitization of a supply chain?

To truly understand how H&M has leveraged technology to transform its supply chain, it is critical to understand what digitizing a supply chain entails. When quantifying improved supply chain efficiencies, most businesses use quality, cost, timeliness of delivery, lead time, and inventory levels as indicators of success. The introduction of real-time big data and analytics have allowed companies, such as H&M, to analyze every aspect of their supply chain from product design to manufacturing to distribution through digital communication across the supply chain. Companies collect data throughout their supply chains through sensors, which when incorporated with the Internet of Things can provide immense clarity across a supply chain.[3] Furthermore, advances in robotics have decreased lead times while introducing additional manufacturing data to draw deep insights into various nodes within the value chain.[4] Lastly, the application of 3D printing has reduced labor costs and introduced further product variation. Ultimately, such factors allow companies to more fluidly react to shifting customer demand patterns through digital communication, resulting in reduced costs, increased quality, and decreased timeliness.

How does H&M’s business model interact with a digital supply chain?

H&M executes its design process internally, allowing for complete control over the earliest part of its supply chain: product development. It develops its products in two channels, long term seasonal planning and reactionary design to new fashion trends. H&M manufactures 20% of its inventory in real-time to meet changing market trends.[5] H&M employs the power of its efficient supply chain to deliver products to meet the real time transitions of fashion movements.

While H&M does not own any factories, it partners with over 820 independent suppliers globally that must comply with its strict Code of Conduct.[6] To closely monitor the manufacturing process, H&M places production offices strategically close to its suppliers to monitor quality standards and increase digital information flow. Additionally, the company ships manufactured products directly to regional distribution centers to limit excess inventory holding costs at its stores.

H&M’s innovative IT integration allows the company to execute on this supply chain distribution model, ultimately reducing lead time and costs. Notably, there is strong digital information flow between the production offices and the central national office. Inventory monitoring systems coupled with advanced communication flows allow H&M to observe supply and demand mismatches within its supply chain and quickly adjust. Additionally, this fluid digital communication infrastructure allows H&M to see which of its suppliers have the necessary raw materials to produce its newly developed orders, allowing for direct order placement with its suppliers. These manufacturing efficiencies have allowed H&M to “reduce average lead time by 15-20%”, resulting in increased flexibility and reduced risk for the company.

What additional steps can H&M take?

While H&M has a clear competitive advantage due to the flexibility and speed created by an efficient operating system, such a heavy reliance on its digital supply chain introduce additional risks. One major concern is the growing risk of cybersecurity and IP theft. Because a digital supply chain “links all activity inside [the] company and it expands the flow of data with suppliers, customers and even customers of customers”[7], it is critical that H&M invests in its IT capabilities to support the level of security needed to keep such data safe. Additionally, the cost and production benefits of H&M’s digital supply chain have led to a significant investment in new stores (413 in 2015).[8] With e-commerce overtaking traditional retail distribution channels, H&M must combat the emergence of e-commerce giants like Amazon into the fashion space.

H&M has leveraged the power of digital technology to vastly increase its supply chain capabilities, resulting in significant efficiencies. In particular, it has aligned its business and operating model to offer high quality products at a low cost while being able to quickly adapt to the evolution of future fashion trends.

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[1] Bailey, George, Craig Moss, and Jim Whittaker. “Digital Supply Chain: A Frontside Flip.” The Center for Global Enterprise (2016): n. pag. Web. 15 Nov. 2016. <http://thecge.net/web/viewer.html?file=/wp-content/uploads/2016/09/FINAL-DSCiwhitepaper.pdf>.

[2] “H&M Group.” H&M Group. N.p., n.d. Web. 16 Nov. 2016. <http://about.hm.com/en.html>.

[3] Bailey, George, Craig Moss, and Jim Whittaker. “Digital Supply Chain: A Frontside Flip.” The Center for Global Enterprise (2016): n. pag. Web. 15 Nov. 2016. <http://thecge.net/web/viewer.html?file=/wp-content/uploads/2016/09/FINAL-DSCiwhitepaper.pdf>.

[4] Nanry, John, Subu Narayanan, and Louis Rassey. “Digitizing the Value Chain.” McKinsey & Company. McKinsey Quarterly, Mar. 2015. Web. 17 Nov. 2016. <http://www.mckinsey.com/business-functions/operations/our-insights/digitizing-the-value-chain>.

[5] Hiiemaa, Kris. “In the Success Stories of H&M, Zara, Ikea and Walmart, Luck Is Not a Key Factor.” In the Success Stories of H&M, Zara, Ikea and Walmart, Luck Is Not a Key Factor. N.p., 18 Mar. 2016. Web. 16 Nov. 2016. <http://erply.com/in-the-success-stories-of-hm-zara-ikea-and-walmart-luck-is-not-a-key-factor/>.

[6] H&M Group. (2015). H&M Annual Report 2015. Stockholm, Sweden. http://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/Annual%20Report/Annual%20Report%202015.pdf.

[7] Bailey, George, Craig Moss, and Jim Whittaker. “Digital Supply Chain: A Frontside Flip.” The Center for Global Enterprise (2016): n. pag. Web. 15 Nov. 2016. <http://thecge.net/web/viewer.html?file=/wp-content/uploads/2016/09/FINAL-DSCiwhitepaper.pdf>.

[8] H&M Group. (2015). H&M Annual Report 2015. Stockholm, Sweden. http://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/Annual%20Report/Annual%20Report%202015.pdf.

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2 thoughts on “Profitization Through Supply Chain Digitization at H&M

  1. Wonderful post Jenna – thank you! H&M has made great progress in digitising their supply chain but I can’t help but wonder if more could be done in-store to create an enhanced digital experience for the customer. Specifically, I think investment in self-check outs in fast fashion stores like H&M and Zara could both enhance the customer experience and also lower headcount costs, leading to a more efficient operating model. Unlike supermarkets, fast fashion stores would not have the difficulty of needing to ‘weigh’ various items to check out – one would simply need to scan the tag and bag the items themselves. For millennials, who are increasingly pushed for time and hate to queue for anything, digitising the checkout of bricks and mortar stores could have a measurable positive impact on their H&M customer experience.

  2. Great post! I think H&M’s efforts in digitizing their supply chain is quite impressive, and I am happy to see they have invested money towards this end because with increased efficiency they are also helping to combat waste and other climate change factors such as emissions.

    I do think it is interesting you bring up customer data safety and cyber security as we have seen these kinds of hacks and breaches of information happen to retailers such as Target. I am curious what steps H&M is taking and whether they are investing money towards protecting this data (both their own, and their customers) as they are truly a global company. I have posted an article below from the Financial Times which I think is very interesting – H&M was called out in the article as having a somewhat weak cyber defense system which the company needs to pay more serious attention to. [1]

    [1] https://www.ft.com/content/d6bde8a2-00c0-11e6-99cb-83242733f755

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