Supply chain digitization: From fabric manufacturing to downward dog
Lululemon, a Canadian athletic apparel retailer, has been focused on improving their supply chain with new technologies and data after inventory issues impacted margin in 2015.
Lululemon is a Canadian athletic apparel retailer specializing in yoga-inspired wear. Lululemon is constantly trying to innovate its product lines with new fabrics, new styles, and new colour palettes. Supply chain digitization is a trend that is meaningful to Lululemon as a large part of their value add to customers is being able to stay on top of and respond to new trends while offering these new trends quickly across all retail locations and online. Any issues or lag with its supply chain can directly impact the company’s performance. This was seen in 2015 when delays and cancellations in Lululemon’s supply chain resulted in significant costs for unused fabrics and other raw material waste. Many in the investment community believed this was one of the causes of raised retail prices that caused many customer complaints. 1
Another reason for the importance of supply chain digitization is that Lululemon does not manufacture any of its products or raw materials; relying completely on their suppliers. They also have a very fragmented supplier group with its top 5 suppliers making 63% of its products.2 Additionally, products materials are sourced from 22 countries around the world, adding to the complexity. 3 As seen in the Beer Challenge, without vertical integration, it is difficult to manage the flow of goods across all these different parties. This is particularly a challenge when these goods require very quick turn-arounds to ensure the selection remains relevant (high demand products are restocked and production of low demand products are stopped).
Better supply chain management will be crucial, especially since Amazon has recently entered the athletic apparel space with two private label brands. In order to compete with Amazon, Lululemon will need to ensure it trendy athletic wear is available and delivered on-demand to its consumers. 4
Lululemon has made significant efforts towards improving supply chain management. It recognizes that in order to ensure adequate inventory supply, it must forecast consumer demand by product. Inventory levels in excess of demand can cause write-downs that has and will continue to affect its margin. 2
In order to manage supply chain and inventory issues, Lululemon rolled out and is improving RFID technologies across 300 North American stores. Lululemon sees inventory accuracy as crucial to its goal of delivering the optimal consumer experience. They are now able to report real-time inventory across all stores. It was initially piloted in 2013 and rolled out through 2015 and 2016. All products are tagged at the distribution center and then each product’s location is tracked to the time it is purchase. This helps store employees see what is in the backroom versus on the floor and order additional inventory. It also enables customers to order online and pick up in store. This not only ensures the right products are available for purchase, it also limits production of low demand products. This is important for Lululemon as it tries to strictly limit discounting. A credit Suisse study of over 3,800 Lululemon SKUs on the website, found that full-price and in-stock positions improved in early 2017. 5,6
In the medium term, Lululemon wants to take the digitization of their supply chain further in order to introduce greater flexibility into their supply chain. They are looking to use data on consumer preferences and trends to better stage the development of products to respond more rapidly. One of the ways to they plan to do this is to stage the fabric development process in order to receive inputs on style and colour during the process and use these inputs to navigate the path the fabric takes after development has already been initiated. 8
In the medium term, I believe Lululemon should be taking actions to more greatly empower the parties upstream in their supply chain. At this point, the flow of information goes from the consumer through the retailer to the distributor to the manufacturer. Most of the technology advancements made have been to receive better data throughout the process so that the orders to the manufacturers can be more reflective of consumer needs. This still creates a significant delay in the chain to fill these orders. If the manufacturers were able to access, interpret, and directly make decisions based on consumer data, the time to deliver the goods will further decrease. This will then be an integrated supply chain ecosystem. 9 Lululemon will be able to react and adequately stock current trends while limiting discounting by having a quicker feedback cycle.
Open questions
- Should Lululemon try to consolidate their many global manufacturing partners to facilitate the digitization and communication across supply chain parties?
- Will Just-in-Time manufacturing ever be a viable option for an apparel retailer (can an individual consumer order trigger the manufacturing of the good)?
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- Business insider, “Lululemon changes in 2016”, http://www.businessinsider.com/lululemon-changes-in-2016-2016-1, accessed November 2017
- Lululemon 10-K, http://investor.lululemon.com/financials.cfm, accessed November 2017
- Lululemon, “Responsible Supply Chain” https://info.lululemon.com/sustainability/responsible-supply-chain, accessed November 2017
- Barrie, Leonie, “Amazon private label push to shake up sportswear?” Just Style, 19 October 2017, accessed through Factiva November 2017
- Dow Jones Industrial News “ Investors’ Soapbox: Lululemon, Coach: Doing What’s Right for Retail”, 23 October 2017, accessed through Factiva November 2017
- Marketwired, Lululemon, DICK’s Sporting Goods, PetSmart and Johnston & Murphy Recognized as Innovative Industry Leaders”, 11 January 2017, accessed through Factiva November 2017
- Event Brief of Q1 2017 Lululemon Athletica Inc Earnings Call, accessed through Factiva November 2017
- Wright, Beth, “Lululemon switches supply chain focus to speed” Just Style, 3 September 2017, accessed through Factiva November 2017
- Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy& (2016)
Thanks for the thoughtful post Lia! I find it very interesting to think about the challenges you raised in the context of international expansion.
Firstly, from a product development standpoint, I’m curious as to how they are beginning to manage the production of clothing for different seasons as they seek to distribute to different parts of the world. E.g., Would the Australian winter collection simply follow the US production months later utilizing the same specs and fabric procurement? How does the difference in scale between countries influence this decision?
Secondly, I think this also poses an interesting question on the strategic location of their suppliers and the possibility for consolidation. Likely they ought to be optimizing to have suppliers as close to the country of final sale as possible after solving for country specific manufacturing costs. This being said, to your point on diversification of supplier place, there are also added expenses in not consolidating sourcing of goods to capture economies of scale.
Given the focus on the athletic apparel space that Lululemon has vs. breaking into other product categories, I do think there is merit to consolidating their manufacturing partners, if not at the very least for certain key parts of their business be it for tops and bottoms vs. jackets and bags. As we have seen in several instances, e.g., Li and Fung, IKEA or Domino’s Pizza, the more control a company has over its supply chain, the more ability it has to ensure quality, timeliness and reduced cost.
That said, because Lululemon is not only creating the apparel but also often setting athletic apparel fashion trends, I would not recommend JIT manufacturing. While responsiveness to customer preferences is important both to capture sales and reduce inventory holding and/or discounting, I believe part of Lululemon’s value proposition is to show customers designs and outfits they otherwise would not think to purchase by having them modeled in stores or seen in major cities. Consequently, I would think having more control over its supply chain, either through consolidation or even building very strong relationships with suppliers, would be Lululemon’s best tactic to ensure it delivers on time at the highest quality for its customers vs. trying to respond one to one to customer demand.
Thank you for the article.
Regarding the first open question:
I believe Lululemon should actually not consolidate their global manufactures. It is true that such a move can create better information sharing throughout the supply chain. Having said that, as studied in Li & Fung there are many advantages to having many suppliers such as diversification of risks. I do believe, as mentioned, a single system monitoring operations should be in place.
Thanks you Lia!
I agree with you that integrated supply chains are critical to ensuring minimum stock and on-time delivery. Since vertically integrating is highly unlikely for LuluLemon, this is the next best thing, and potential a smarter business decision considering the expertise and assets required for vertical integration is usually not recommended for apparel. My concern with the approach is that RFID tracking and inventory control is still a lagging indicator. Fashion tastes change and can not always be predicted by algorithms. We saw this in the GAP case. How do we balance the efficiency of a integrated, efficient supply chain with the agility and intuition of a LuluLemon fashionista?
Rather than regarding vertical integration or suppliers consolidation to minimize the risk of inventory shortages in an industry with high-turnarounds, Lululemon may consider a the implementation of a “fast-fashion” like production process, like the one used by Inditex brands (Zara, Bershka, Massimo Dutti, etc.). In this business model, constant exchange of communication optimizes inventories by rapidly reacting to consumer tastes on limited items on display, focusing only on producing items with positive reaction from end-customers.
“In Zara stores, customers can always find new products—but they’re in limited supply. There is a sense of tantalizing exclusivity, since only a few items are on display even though stores are spacious. Such a retail concept depends on the regular creation and rapid replenishment of small batches of new goods. Zara’s designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. This “fast fashion” system depends on a constant exchange of information throughout every part of Zara’s supply chain—from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on.” – HBS Working Knowledge (https://hbswk.hbs.edu/archive/zara-s-secret-for-fast-fashion)
Fascinating read, Lia. I, for one, had no idea that Lululemon does not manufacture *any* of its products. So what is this company’s value-add? Literally the logo. This is highly disappointing considering that a pair of Lululemon stretchy long underwear costs upwards of $100. Capitalism at its finest, no?
RFID implementation is crucial! I totally agree with your point that “if the manufacturers were able to access, interpret, and directly make decisions based on consumer data, the time to deliver the goods will further decrease”. Lululemon needs granular insight into how their products are moving to even begin to understand how to improve operational inefficiencies, understand consumer tastes and trends, and innovate across the supply chain.
I am always so flabbergasted by products that I see in my favorite stores, often wondering how much of design choices are dictated by consumer tastes vs. designer inclinations. This definitely takes me back to our Gap case… if you’re not using data to inform product (and supply chain) design… you will inevitably lose.
Thanks for sharing this insightful piece on digitalization in the retail industry. I agree with Lululemon’s move toward RFID technology to increase inventory visibility throughout the supply chain. Not only will this allow the company to better track its inventory, it should hopefully lower out of stock incidents and may even improve sales in the process as item availability improves. To answer your question whether or not Just-In-Time manufacturing is a viable option for retailers, I do believe that it is a great option only if the company is vertically integrated to some extent. Fast fashion retailers like Zara do operate under the JIT principle, but I believe they are able to do this in part because they are vertically integrated (Zara manufacturers about 50% of its SKUs at company-owned factories), and can leverage information transfer more easily throughout the supply chain. Thus, Zara and other fast fashion rivals have achieved a truly pull model of supply chain management that Lululemon has yet to fully incorporate at this stage [1]. Now, whether or not Lululemon wants to take on the costly burden of integration is a question for management given that there current outsourcing model does hold some advantages as cases like Li & Feng have shown us in class.
[1] https://www.supplychaindive.com/news/retail-supply-chain-shift-turn-times-holidays/510607/
Thanks Lia, the questions you raise require immodest action from my perspective. Apart from just the well know impact of consolidation and digitization on inventory management and better ability to scale distribution, it is also important towards the brand core values. Lululemon is targeted towards active, aware, premium customers, who are always concerned with convenience as well as anything else, with its fragmented supplier base, Lululemon could suffer setback on the long term to satisfy the overall needs of the market in terms of service offering of the product and not merely its availability. Also, we have seen many brands hit by accusations of child labor, modern slavery and human trafficking, in that sense, having a less fragmented supply chain allows for more control and ability to maintain a certain level of customer promise.