H&M: Stitching Core Business & Operational Effectiveness Together

What makes H&M one of the largest and most effective retailers in the world?

To understand why H&M is arguably the most effective retailer in the world we need to examine their core operating and business models. H&M has come a long way from their first store in Västerâs, Sweden that opened in 1947 based on the ready-made-clothing industry in America. Today, they have over 3,700 stores in 61 countries and about 132,000 employees- handling an enormous supply network, warehousing and logistics. H&M has a business model that focuses on outsourcing non-core operations so they can focus on the core business model. To do this, H&M buys clothing and accessories from a large selection of suppliers and does not own a single factory.
Their core business is to have “fashion and quality at the best price”. By eliminating the intermediaries and out-sourcing production they are able to focus on the design of their clothing and the retail experience. This gives consumers fashionable product with good quality and the best price. That said, they closely manage the production processes to ensure that you get that chic, trendy jacket at a great price.

How is H&M getting you stylish clothing at the right price?

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H&M prides itself on understanding emerging trends and they do it with a large team. H&M has over 700 suppliers, about 60 pattern makers and 20 worldwide production centers.[1] Their manufacturing operations depend on building strong relationships with suppliers and operating under manufacturing strategies that reduce lead times so their fashionable items are on trend.

Strong relationships with supplier:

It’s all about the relationships H&M makes with their suppliers through collaboration and partnership. With over 30 production oversight offices globally, these offices take on a mediating function with local suppliers ensuring efficient communication. Further, these offices are the checks and balances for maintaining quality, price and compliance with the company’s code of conduct.

H&M also builds their relationships with vendors by putting a strong emphasis on ethics and compliance. An example of this was when they were recognized in 2015 as the World’s Most Ethical Company by the Ethisphere Institute, a global leader in defining and advancing the standards of ethical business practices.[2] Even more impressive, they are leaders in aiding factories to be models for others in emerging markets such as Bangladesh.[3] They stress the importance of running a factory that’s environmentally sound, quality-conscious, efficient, fair to workers, and profitable. This focus on compliance for factory conditions aids manufacturers and H&M.[4]

“The H&M road map rests on strategic relationships with factories producing two-thirds of its products. For the pilot group of model factories in Bangladesh and Cambodia, H&M has committed to purchasing 100% of its production for five years. This represents a significant shift towards business incentives for improving working conditions, as opposed to a compliance model that focuses on inspections. To be sure, it will be easier for H&M to manage those incentives when it’s buying all of a factory’s production than it will be when H&M is one among several brands buying from a factory.”[5]

Manufacturing strategies:

At the end of the day, H&M is bound to price economy. This is where inventory management strategy steps in. They place bulk advance orders to manufacture with about 80% of their retail inventory and the balance 20% are speed to market items to meet market trends. Placing these bulk orders also help with scale of economy, which keeps production lines full and gives competitive pricing. H&M offers a Spring and Fall collection each year with each season having sub-collections that keep inventory refreshed. The main Spring and Fall collections are traditional long-lead items whereas the trendier items have a short lead-time.

Additional, they have adopted an IT infrastructure that has brought the average lead-time down by 15-20%![6] The IT system connects all stores with corporate logistics, procurement systems and the central H&M warehouse. The system integrates the design and product development teams, keeping a transparent view of the commercialization process.

The clothing industry is extremely competitive and H&M’s business and operating models help them be a leader in the industry. Outsourcing their operations has situated them to focus on getting you the trendiest designs at great prices; thus reducing their costs and becoming as resourceful as possible. H&M is creating a long term business and operating model by building relationships with their suppliers, fostering compliances for future suppliers, managing their inventory and placing bulk orders. As a global company, how will H&M keep suppliers happy so they can continue to focus on their core business? What will keep H&M winning in the retail space?

[1] http://erply.com/in-the-success-stories-of-hm-zara-ikea-and-walmart-luck-is-not-a-key-factor/

[2] http://www.supplychain247.com/article/the_art_science_of_supply_chain_leadership

[3] http://www.bloomberg.com/bw/articles/2013-04-04/h-and-m-goes-public-with-list-of-suppliers

[4] http://sustainability.hm.com/en/sustainability/commitments/choose-and-reward-responsible-partners/supply-chain.html

[5] http://spendmatters.com/2013/12/05/hm-consolidates-spend-strategic-sourcing-supply-risk-reduction-101/

[6] http://erply.com/in-the-success-stories-of-hm-zara-ikea-and-walmart-luck-is-not-a-key-factor/