Ch. 8 - Budgeting

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

All costs of production other than direct materials and direct labor are shown on the ______ ______ budget

Manufacturing overhead

Fast-fashion retailers were focusing their expansion not only in hub cities along the Chinese coast, but also in tier two, three and four cities, where the potential for growth in expenditures was higher. Consumers in smaller cities were considered more aspirational and less influenced by the luxury brands that were dominant forces in first and second-tier cities. In the wider Asian region, South Korea, Taiwan and Japan remained hot sports. With its top designers and brands, Japan continued to be a strong influencer of consumer taste across Asia, as well as an important market. By February 2015, Uniqlo had a good presence in Korea, with over 130 stores, and Taiwan, with over 50 stores. Asian fashion retailers were also on the move. Hong Kong companies were actively engaging the Mainland market, with Hong Kong-based Giordano, Baleno, Bossini and Esprit expanding, albeit with mixed results. Despite its high rents, Hong Kong attracted top retail brands seeking to tap into mainland tourism: Topshop, J. Crew, Tommy Bahama and A&F had all established retail presences in Hong Kong.6 The local retail scene in China also had its own home-grown heavyweights, like Metersbowne, which, with over 3,000 shops covering large and small Chinese cities, was the third largest apparel brand in the country, after Nike and Anta. Anta had over 7,800 shops in China, and continued to expand, opening 100 new stores annually 7 Asia, and China in particular, were "hot" for fashion retailers focusing on expanding operations in the region to tap growth and access the world's largest market. Competition would become intense, but with rapidly raising salaries and a resilient economy, China was to remain an attractive market for a long time. Inditex still had a dominant global-leader position and a significant presence in China. It was the first company to use a responsive supply chain with reduced time-to-market, producing "in-season designs" in tune with the latest fashion trends to argument sales. Responsive supply chains and the SPA model proved n operationally superior to offshoring at low-cost locations. All the largest fashion retailers—Inditex, H&M, GAP and Uniqlo—shared this approach. While the top three could be considered global companies, Uniqlo was still building its international presence. While a major force in Asia, its presence in the US, and Europe in particular, was marginal. Fast Fashion companies and their supply chains: the Inditex and H&M approach Inditex and its brand Zara initiated the so-called "fast fashion" business model, a completely different paradigm that parted with seasonal collections created by "star" designers well in advance of sale dates, manufactured by sub-contractors months before reaching stores and marketed to the public with heavy advertising support. By outsourcing all production processes to low-cost locations, traditional fashion houses maximized marginal-unit cost reductions, but at the same time increased "time-to-market." Retailers like A&F, Ann Taylor, and The Limited followed this model, were subject to high inventory levels and were forced to mark down unsold inventory at the end of each season. In contrast with traditional retailers, Inditex considered fashion apparel to be a non-durable consumer good with four-week sales periods. That meant that a continuous stream of new 6 Price Waterhouse Cooper (2015) "2015-2016 Outlook for the Retail and Consumer Product sector in Asia" http://www.pwc.de/de_DE/de/handel-und-konsumguter/assets/pwc-studie-r-und-c-outlook-asia-2015.pdf (accessed June 4th 2015). 7 Price Waterhouse Cooper (2013) "2013 Outlook for the Retail and Consumer Product sector in Asia" http://www.pwc.co.nz/KenticoFiles/5d/5dff81f2-7242-43e0-87ff-941e1d02e8df.pdf (accessed June 4th 2015), 3 This document is authorized for use only by Kevin Navarro in Global Issues in Management-1 taught by Min Li, University of Wisconsin - Madison from January 2018 to May 2018. For the exclusive use of K. Navarro, 2018. 15/562C UNIQLO: A Supply Chain Going Global products, inspired by the latest luxury, fashion and media trends, had to hit stores continuously, on an almost weekly basis, to meet customer demand. Instead of having a single designer, Inditex worked with a large in-house design team that constantly monitored trends to anticipate what the public wanted. In addition, POS sales data from Zara shops around the world, indicating which styles and products were selling the most, reached headquarters twice a week. Detailed sales data was essential in catching trends, and Inditex was the first to structure its operations in a "pull" supply chain that could match market demand by means of a shortened design-to-retail cycle, set in motion by a constant feed of POS data from stores. Inditex was vertically integrated and owned 14 automated factories, all located in Spain. Production processes related to fabric procurement, dyeing, printing and marking, fabric cutting, quality control, packaging, logistics and retailing were all under direct control. Inditex outsourced lower value-added activities, like sewing, to a network of small cooperatives located around La Coruna and in the north of Portugal.8 In Inditex factories, robots worked around the clock dyeing and cutting fabric, creating so- called "grey goods" that could be finished in a variety of ways at later stages of production. Before being distributed to shops, all garments were returned to Zara's five-million square meter main distribution center for quality control. Its fast supply chain allowed for 10-15 days from design to retail. Stores could be restocked twice a week.9 Inditex's business model innovated radically. In particular, it traded a cost advantage for responsiveness in a vertically integrated, tightly controlled and localized supply chain. Inditex's operational model greatly influenced the retail clothing industry: the fast fashion model allowed production of new "in season" designs that could be rolled out to stores quickly. Sales figures showed that only 39% of Zara revenues came from seasonal collections, while 61% came from "in season" designs. The short time-to-market allowed Inditex to keep its inventory at 7% of sales, compared to its competitors' 13%.10 H&M, the world's second largest apparel retailer, operated without directly owning production facilities and with longer planning times than Inditex. The design and planning process was centralized at Stockholm headquarters, where over 100 designers worked under the supervision of Mr Van Den Bosh, H & M's head designer for 20 years. While Zara was constantly exploiting fashion trends and rolling out a large number of new "in season" designs, H&M sales were dominated by seasonal collections, which accounted for 80% of total sales. The design process at H&M was integrated with sourcing and merchandising, as the retailer outsourced its production to over 700 garment manufacturers and 60 pattern suppliers, 60% of which were based in China, and the rest in Europe. H&M had over 30 directly owned production centrers that controlled supplier quality, and a sophisticated IT infrastructure connecting its design center with the entire supply chain. In contrast to Zara, H&M sold basic items of clothing that had a longer shelf- life than Zara's more fashion-oriented items.11 8Stephanie 0. Crofton, Luis G. Dopico, (2007)" ZARA-INDITEX AND THE GROWTH OF FAST FASHION", Essays in Economic & Business History — Vol XXV, 2007 9Greg Petro (2012) "The Future Of Fashion Retailing: The Zara Approach (Part 2of 3),"Forbes online http://www.forbes.com/sites/gregpetro/2012/10/25/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3/ (accessed April 15th 2015). 10Stephanie 0. Crofton, Luis G. Dopico, (2007) "ZARA-INDITEX AND THE GROWTH OF FAST FASHION", Essays in Economic & Business History — Vol XXV, 2007 11Lau, C. (2014) "Behind H&M's fashion forward retail inventory control," http://www.tradegecko.com/blog/hm-retail- inventory-control (accessed April 16th 2015. 4 This document is authorized for use only by Kevin Navarro in Global Issues in Management-1 taught by Min Li, University of Wisconsin - Madison from January 2018 to May 2018. For the exclusive use of K. Navarro, 2018. 15/562C UNIQLO: A Supply Chain Going Global Inditex and H&M's supply chain were markedly different. Inditex's was vertically integrated, while H&M used a supplier network monitored by production offices overseeing a dispersed global supply chain. Uniqlo's supply chain emerged as a mix of elements from both Zara and H&M. Uniqlo was a younger company, and while it took inspiration from its competitors, new elements were introduced, creating a mix of Inditex and H&M operational strategies. Uniqlo's SPA model and China-centred supply chain: the early years The "Specialty Store Retailer of Private Label Apparel" approach adopted by Uniqlo was pioneered by the GAP in 1986. GAP started giving its own private label merchandise more prominence at the end of the '70s, pushing other top name brands into the background. The move proved successful, and thanks to lower pricing. GAP brand merchandise started to drive the majority of sales. The new business model allowed the retailer to have direct visibility on sales data, and use it to plan and design apparel collections that better matched customer demand.12 Uniqlo's business model and supply chain developed gradually, having followed the SPA model since beginning operations in 1984. For the first ten years, the company relied on major Japanese trading houses, such as Marubeni, Mitsubishi Shoji and Sojitsu, to produce its garments at low cost, sourcing materials from Chinese manufacturers. Uniqlo was unable to meet the minimum order quantity (MOQ) of major garment manufacturers, and did not have the expertise and structure to source directly from China or monitor quality. Only in 1994, when sales started to reach approximately US$500 million, did the company begin to revise its sourcing strategy, taking direct control of supply-chain management. Up to that point, Uniqlo had relationships, via its trading partners, with over 100 garment manufacturers in China.13 It was critical to Uniqlo's business model to retain and develop the capability to source garments in China at low cost, as price advantage was fundamental to the brand. While Uniqlo sold a jean jacket for the equivalent of US$24, the corresponding Japanese GAP store sold it for US$58 to $66, while Matsuya department store charged US$175. Uniqlo's outsourcing production to China resulted in far more competitive prices for end consumers.14 Uniqlo reformulated its overall strategy in 1994, focusing on three core objectives: accelerating retail sales growth by opening over 50 stores per year in Japan; restructuring the supply chain by bypassing trading companies and lowering purchase costs; and maintaining a high-quality product level. Bypassing trading companies and maintaining efficiency and quality was not an easy task. Only four years later, in 1998, did Uniqlo establish its first two overseas production offices, one in Shenzhen and one in Shanghai. The new offices' first task was to reduce the supplier base, bringing it from a total of 120 to 40 suppliers. The rationale was that only by working with fewer suppliers and increasing order sizes could unit prices be lowered. With growing sales and fewer suppliers, the average order size became 8.75 million pieces. While available styles sold at Uniqlo stores went from 200 in the late 1990s to 400 in 2012, the number was 12Huijuan Du, Yanjun Huang, Yan Liu, (2014)" The Analysis of the SPA Apparel Company Strategy", College of Quartermaster Technology, Jilin University, Changchun, China 13 Usui, T. (2014) "Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal Qualitative Data Analysis" http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 14 Benjamin (2001)"One-man restructuring act", Forbes magazine online post http://www.forbes.com/forbes/2001/0709/106.html accessed 21 April 2015 5 This document is authorized for use only by Kevin Navarro in Global Issues in Management-1 taught by Min Li, University of Wisconsin - Madison from January 2018 to May 2018. For the exclusive use of K. Navarro, 2018. 15/562C UNIQLO: A Supply Chain Going Global still only 10 to 30% of that offered by Inditex or H&M, so each item was produced in larger quantities. 15 In 1998, Uniqlo deployed an advanced IT system to connect supplier factories, stores and its head office online in order to improve inventory management and forecasting processes with POS data. After the opening of the Tokyo flagship store and simultaneous introduction of a cheaply priced polar fleece jacket, sales at Uniqlo almost doubled from its 1998 level to 2.7 billion units in 2000. Uniqlo polar fleece was a great success, as it was of good quality and cost a fraction of competing products sold by established sportswear brands and Japanese department stores. Uniqlo's visibility and appeal increased considerably beginning in 1998. In 2001, sales reached a level of US$5 billion, with 433 stores having opened in Japan by the end of the year. All production continued to be managed in China, by the 40 suppliers originally selected in 1998, plus another 20 added in 2001 to cope with sales volume expansion. Uniqlo considered product quality and overall efficiency key elements of success, and, in 2000, the company created the Takumi team to assist suppliers in developing production processes to reduce defects, increase efficiency and better coordinate the entire supply chain. The so called Takumi team was composed of veteran technicians from the Japanese garment industry, who each had over 30 years of experience in various specific phases of garment production, such as fabric cutting, dyeing and sewing, and who were all versed in operation management. The technicians were hired with performance-based salaries and went to Chinese suppliers' factories with the specific purpose of improving production processes to meet the quality and efficiency standards Uniqlo required. Based at production offices in Shanghai and Shenzhen, the Takumi team visited suppliers' factories two or three times per week, far more often than the H&M and GAP teams did. GAP in particular had only quality-control (QC) managers visiting factories, while H&M was sending personnel in to monitor production progress only once a month. Uniqlo's Takumi team had a far broader scope than quality control. It was in charge of developing direct manufacturing skills and quality-control systems. It worked side-by-side with supplier personnel, teaching best practices and the Kaizen philosophy of continuous improvement. Fabric dyeing was one of the most challenging processes. Obtaining the same color using different cauldrons at different production sites was extremely difficult and required specific, un-codified knowledge supplied by the Takumi team experts on-site. At the production process level, the Takumi team aimed to perfect every phase, from yarn sourcing to final quality control, optimizing the production process as a whole to achieve just-in-time performance and quick operational response.16 Uniqlo was a large customer of the Chefeng Group, a medium-size garment manufacturer located in Guangdong province. As a result of the Kaizen philosophy, signs bearing the word "Kaizen" were displayed in every production department, embedding quality control at each stage of the production process. Chefeng molded its operations with the help of the Uniqlo Takumi team and implemented a three-step process. These included: a detailed analysis of every production process to identify systemic quality issues; strict product quality control to identify defective stock-keeping units (SKUs) at every production stage; and a comprehensive staff training program. 15 Usui, T. (2014) "Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal Qualitative Data Analysis" http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 16 Usui, T. (2014) "Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal Qualitative Data Analysis" http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015), 6 This document is authorized for use only by Kevin Navarro in Global Issues in Management-1 taught by Min Li, University of Wisconsin - Madison from January 2018 to May 2018. For the exclusive use of K. Navarro, 2018. 15/562C UNIQLO: A Supply Chain Going Global The Takumi team and Uniqlo's own production experts worked daily with Chefeng staff to tackle production issues as they arose. To promote change, Uniqlo's experts at times did practical demonstrations to factory managers of alternative ways of carrying out particular operations. Uniqlo quality control requirements were demanding, and included inspection of every single SKU produced, a procedure that most other fashion brands did not implement.17 In an effort to coordinate all actors in the supply chain, in 2014, Uniqlo instituted a "One Table Meeting," where, under the supervision of Takumi experts, fabric suppliers and garment manufacturers would meet to coordinate their respective production scheduling and processes to meet Uniqlo targets. These "One Table Meetings" allowed fair negotiation and coordination among materials suppliers, garment manufacturers and Uniqlo, leading to a more satisfactory overall relationship among all participants in the supply chain.18 In 2000, Uniqlo sold a total of 300 million pieces divided into 200 SKUs, maintaining the average order size of every SKU at around 1.5 million pieces. After years of collaboration with Uniqlo's Takumi team, supplier partners had acquired the capability to sustain Uniqlo's level of quality at competitive cost.19 Uniqlo's evolution: fashion as utility and supply-chain upgrades From 1998 to 2000, Uniqlo sold over 35 million fleece jackets at the very affordable price of ¥1,90020 per piece. The item's success was unprecedented and crystallized Uniqlo's product strategy of functionalism. Rather than serving the purely hedonistic aspects of fashion, its products were to supply practical performance and function, keeping customers warm and fresh, regulating moisture and dryness. Innovation was key to consolidation of the new LifeWear philosophy. In 2003, Uniqlo partnered with Toray to develop new fabrics. Toray was one of the leading composite material and advanced fiber manufacturers in Japan. The partnership's objective was to create a superior-performance synthetic textile, in an effort to repeat the success of "Uniqlo fleece" and consolidate the LifeWear philosophy. The Heattech fabric was introduced in 2002 and used to manufacture a line of high- performance thermal underwear. Its considerable success sustained the sales-growth momentum Uniqlo experienced in 1998-2000, reversing falling sales trends [see Appendix 2 for Uniqlo Sales Growth]. Heattech was a special synthetic fabric designed for warmth. Toray improved its performance season after season on the basis of Uniqlo customer feedback. The fabric became softer, incorporated new anti-microbial properties, and became anti-wrinkle and anti-static. Uniqlo management believed that working with synthetic fibrer opened a path of progressive improvement that could further differentiate its products. Other innovative products followed from the collaboration of the two companies, such as Air-Sim and the Ultra-light down jacket.21 The integration of the Uniqlo and Toray supply chains was based on a stable flow of orders that could saturate production capacity throughout the year, as the fiber manufacturer's 17Fast Retailing (2013) "Partners in Quality," http://prd01-tky-web-main-fastretailing-62349252.ap-northeast- 1.elb.amazonaws.com/eng/csr/report/pdf/csr2013_e_06.pdf (accessed May 3rd 2015) 18Fast Retailing (2014) "Partners in Quality," http://www.fastretailing.com/eng/csr/report/pdf/csr2014_e_05.pdf (accessed May 3rd 2015). 19 Usui, T. (2014) "Dynamic Development of Competitive Hybrid Governance Structure in Supply Chain: A Longitudinal Qualitative Data Analysis" http://www.law.nihon-u.ac.jp/publication/pdf/seikei/51_1/06.pdf (accessed April 20th 2015). 20 Equivalent to 16.001 USD average exchange rate July-December 2001 Japan Yen to US Dollar 118.74 21 Hong Kong Exchange website, Uniqlo Hong Stock Exchange listing prospect 2013, http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0214/LTN20140214033.pdf Accessed 29th April 2015 7 This document is authorized for use only by Kevin Navarro in Global Issues in Management-1 taught by Min Li, University of Wisconsin - Madison from January 2018 to May 2018. For the exclusive use of K. Navarro, 2018. 15/562C UNIQLO: A Supply Chain Going Global production plans could not accommodate seasonal peaks and zero-production periods. Uniqlo had to manage the inventory and production schedule of Heattech and other fabrics Toray supplied in order to guarantee the constant utilization of the production capacity it had booked. To do this, Uniqlo relied on early POS data to shortlist best-sellers and develop similar designs. It utilized a responsive supply chain with a design-to-store lead time of six weeks, mimicking the "just-in-time" supply methods used by Japanese automakers. 22 Inventory management became central to execution, and only the inventory of year-round items like jeans, long-sleeved shirts, t-shirts and sweatshirts was carried over. Inventory carry-over for seasonal items was minimized by utilizing inventory pooling techniques, moving slow sellers at one store to locations where demand for the same items was strong.23 Store, warehouse and factory-level inventory positions were updated daily. Inbound store logistics were outsourced to Third Party Logistics (3PL) providers and supervised at store level by inventory controllers that monitored deliveries and inventory levels in real time. First batches of new products in particular were closely monitored. Inventory controllers analyzed new-item sales levels, and issued specific delivery instructions to logistics companies to assure that stores were never out of best-selling items. Forecasting of future production volumes based on early sales data was central both to Uniqlo's production planning and pricing strategy.24 Slow-moving SKUs were tracked and their prices changed to stimulate sales. Prices varied almost daily based on sales forecasts versus actual sales. If an item failed to reach target sales volume, its price was lowered as often as every two days. If price reduction lifted sales, the price was again adjusted upwards, and, if sales were on target, all the way back up to the original price.25 To better serve customers, Uniqlo, in collaboration with Casio and Microsoft, created a device that allowed each member of the 40,000-strong in-store sales staff to check inventory on hand, prices and the availability of every item being sold, all in real time. Introduced in 2010, the handheld device was connected to a central database containing all information about SKUs in current production, including stock available at stores. Readily available information made it possible for employees to redirect customers to nearby stores in case stock ran out. Further, quick access to information improved customer service, helping staff in stores find rapidly updated prices.26 With regard to retail networks, Uniqlo had still more stores in Japan than in the rest of the world combined as of February 2015. Store numbers were flat in Japan, where the company was focusing instead on e-commerce. In China, Uniqlo had 340 stores as of February 2015, an increase of 80 stores in one year. This was 20% below the expansion target of 100 stores per year, but still staggering. China was Uniqlo's second-largest international market, but Japan still had more than double the number of stores. The second-largest international market was Korea, where the number of store was stable at around 130 as of February 2015.

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