Retail and Consumer Supply Chains

On 27 March 2018 H&M, the Swedish clothing retailer that had spent the 2010s opening hundreds of stores a year, published its results for the first quarter of its financial year. Sales had fallen, profit had fallen sharply, and one figure dominated the coverage: stock-in-trade of about SEK 35 billion, about $4.3 billion, up about 7% in local currencies from a year earlier and equal to about 18% of sales (reported). The shares fell to their lowest level in about thirteen years. The company said markdowns would rise in the second quarter to clear the stock, and by the second quarter inventory had reached about SEK 36 billion, up about 13% (reported). It set a target of bringing stock down to 12–14% of sales in 2019.

The explanations were several. H&M's model placed large orders with Asian suppliers months before a season, shipped them by sea and sold them through stores; shoppers were moving online and to faster rivals, and demand for its assortment, particularly in stores, fell short of what had been ordered. The chief executive, Karl-Johan Persson, attributed part of the build-up to filling about 220 new stores (reported). The company was also replacing logistics systems and opening automated distribution centres for online growth, and reports in 2018 said the transitions had delayed deliveries of new items to stores, which swelled stock and forced price cuts (reported). H&M launched an off-price marketplace, Afound, slowed store openings and invested in RFID tagging and AI-assisted forecasting and allocation. Danish media reports in 2017 that it had burned unsold clothes, which H&M said had been unsafe to sell, had already linked overproduction to criticism of the industry's environmental record (reported).

The comparison every analyst reached for was Inditex, the Spanish group behind Zara, which had built its chain on the opposite principle. Inditex kept the steps that commit capital and set the product, fabric buying, some dyeing and cutting, close to its base in Galicia, subcontracted sewing to workshops nearby and in Portugal, Morocco and Turkey, and sent every garment through central distribution centres in Spain to stores that ordered twice a week. Case studies reported that Zara could take a design from concept to store in a few weeks, often cited as two to five, and committed only part of a season's volume before it began (reported). It paid more per garment and much less in markdowns. This chapter explains how retailers and consumer brands design supply chains around what their customers will buy, and why the cheapest unit is often not the cheapest sale.