Da Vinci – an example of the importance of “Country of Origin” for luxury products

I spoke of the country of origin being one of the critical success factors in location and csf posts. (location and critical success factors for SCM-luxe)

Now here comes a perfect example illustrating the importance of “location” – even in China!

 The Chinese are quite blasé of counterfeit Louis Vuitton bags and Rolex watches available in almost all Chinese city corners (apparently there are well defined locations in each city which specialize in such goods – albeit done surreptitiously). So when it was revealed by the New York Times  (see http://www.nytimes.com/2011/07/19/business/global/chinese-upset-over-counterfeit-furniture.html) that the upscale furniture distribution company Da Vinci was actually selling “made in China” products as “made in Italy” the reaction of the market was surprisingly virulent. Customers revolted, stormed the press conference by the company and a web campaign started to “out” similar company’s passing of local produce as luxury products made in more exotic shores.



Da Vinci's CEO, Doris Phua, breaks down after being

heckled by customers during a press conference

to address allegations of misrepresenting country of origin

of its luxury products



This reaction is as much a sign of the maturing of the Chinese market as far as luxury products are concerned but also the more fundamental aspect of the importance of location for a luxury product irrespective of the geography or market where the product is ultimately sold.

On the other hand a common complaint by Da Vinci’s customers was that they bought fakes at the price of a genuine article. Does this mean, that customers were ok with fakes as long as it was not at the price of the real one? The customers felt cheated?  A case of limited morality or limited information sharing?

Supply chain "Make" strategy

SCM-luxe operates on mostly local manufacture with a high component of artisan suppliers in its make strategy. A part of this has been covered in SCOR framework for SCM-luxe and Upstream SCM-luxe management. Here we will quickly summarize some of the "Make" or production imperatives for SCM-Luxe

Supply Chain “Make” Strategy	Supply Chain Imperatives	Information & Communication Req	Type of Products
Make to Stock	·  Based on Forecasts incorporating POS (Point of Sale) data ·  Low cost country production	·  Automated and highly accurate forecasting technologies ·  Vendor Quality Control	·  Functional premium products which are cost sensitive but still command a premium tag
Make to Order	·  Based on POS data ·  More local manufacture for quick shipment to markets	·  Direct connectivity and up to the minute links with production and POS	·  True Luxury products with lower volumes, high prices and margins
Assemble to Order	·  Ability to modularize design of product ·  Good network of assembly suppliers	·  Connectivity between upstream and downstream supply chains	·  Luxury products with higher volumes
Purchase to Order	·  Based on ability to manage brand and control distribution	·  Licensing of brands ·  Connectivity with brand owners	·  Large distributors of luxury brands through multi brand boutiques

We need to note that the location of manufacture is a different model and is discussed in detail in “location, location, location”.

It is to be noted that in SCM-luxe, the design phase of a luxury product is typically much higher than industrial or consumer goods, ranging from 6months to a year. Also the design phase restarts almost every season since product lifecycles are shorter or require to be updated frequently. Hence the “Make” phase is preceded by a long Design phase

·         Make to Stock: involves producing the product based on forecasts which are generated from historical demand and current point of sale figures. Usually a very sophisticated and advanced forecasting system is used for Make to Order production plans. Vendor quality control is important since costs are important criteria here and it is important that quality is not sacrificed at the altar of cost. Making to stock also results in higher inventory levels and more working capital being locked up in inventory. Thus inventory control and management has to be taken seriously and frequent Ageing analysis, stock level setting etc have to be done to prevent run away inventories

·         Make to Order: Products with lower lead time benefit from “Make to Order” strategy. Here data from the Point of Sales is used to drive production. The supply chain needs to be very agile to enable quick delivery of product to customer (and thus maintain C-SAT). Local manufacture is thus a good option. True luxury products with low demand volatility can be considered for this mode of manufacture

·         Assemble to Order:  Designing products so that they are modularized, can be used to develop a strategy of “Mass Customization” (Please see details on mass customization for SCM-luxe). Here close cooperation between the designers and vendors is critical to ensure optimal design and effectiveness of this strategy. Products with large volumes and significant variety in product range benefit from mass customization

·         Purchase to Order: Some luxury companies operate as holding companies which specialize in brand management and distribution. These companies do not own brands but license them and act as distributors and brand managers. A purchase to order strategy is adopted in this case

It is also to be noted that information systems in SCM-luxe currently are very mature in downstream processes. For example most supply chains would enable re-sellers to place orders online, track the status of their orders etc. However upstream processes are less mature in implementing technology solutions. This is because suppliers, assemblers are mostly smaller players or are artisans who have lower economies of scale and financial muscle to implementing high end SCM technology suites or products.

Chains of Luxury – Harmonized Upstream and Downstream SCM-luxe strategy chains (Part 3 of 3)

It is important to note that both the up and downstream processes need to be harmonized in terms of strategy. For example, the upstream strategy cannot be one for “true” luxury products say using in-house design, local manufacture and premium sourcing strategy while the downstream strategy is one for more “premium” products, say using a distribution network supplying to department store corners as the point of sale. We need to judiciously use strategies in a holistic way to achieve end to end SCM-luxe harmonization.

An end to end supply chain strategy could be on various levels:   

1. Chains of gold – use true luxury strategic components for both upstream and downstream functions
2. Chains of Silver – use a mixture of true luxury and premium components
3. Chains of Steel – use more cost effective components of the strategies. In this case the product risks being commoditized

Managing the downstream process of SCM luxe – Distribution (Part 2 of 3)

SCM-luxe is characterized by a much shorter downstream value chain as compared to the upstream processes. This is because most luxury goods need to have much closer contact with the customer and prefer to keep the distance between them and the customer to the minimal

Distribution

Normally luxury firms sell directly to the retailer or point of sale avoiding the multi echelon route of having wholesalers and distributors. This helps keep direct customer contact and build competencies in being able to responding to the customers pulse (crucial in the fashion industry!). A better control of how the brand is projected and marketed is another reason to forego a multi echelon distribution chain. Some companies use the distributor network of their country franchisees (see POS below) on a licensee basis to reduce costs and maintain efficient distribution of goods

Point of Sale

The retailer is the focus of the luxury firm and this is where significant investments are made in the supply chain. Uni-brand boutiques which reinforce brand values on a high street is an expensive strategy that most high end “true” luxury firms adopt.  One way of reducing the costs of maintaining a network of uni-brand outlets is to build a franchisee model where the store layout, location etc is strictly controlled and administered by the luxury firm.  Multi brand outlets are also favored for premium products and is a less expensive option – display in this case has to be administered and managed very coherently so that its brand value is not compromised nor diluted. Similarly high end department store corners is another inexpensive option (department stores here indicate the higher end of the market such as for example Galleries Lafayette in Paris or Harrods in London). Location, corner display, other products displayed in terms of completion all play an important part f this strategy is chosen.

Management of the Upstream SCM-luxe (Part 1 of 3)

Design

The upstream supply chain processes in SCM-luxe is defined by “Design” and is the overriding factor in the success of the supply chain.  Design is often regarded the core competency of a firm and most luxury goods boutiques tend to retain this in house with well established design teams lead by a “Star Designer” who is often the face behind a brand and is widely communicated in most advertising and brand communications.  Co Design is often used by luxury firms when they collaborate with external designers but retain the translation of the external designer’s vision within the internal in-house design team.  At times if the individual luxury boutiques happen to be licensees of a brand, design might involve co-design with the brand owner’s design team. It is important to note that in whichever case the design function is treated as a core competency and sufficient investment and importance is accorded to it. The last design strategy of outsourcing design to specialized third party vendors is almost never exercised in the luxury goods industry (atleast should not be!)

Supply

Supply indicates the location of suppliers and sourcing of material for manufacture as well as consumables.  Here Local might not always signify premium as in regular supply chains. For instance, diamonds and other gemstones will need to be obtained from mines in Africa/Australia and not from local markets in Italy/France.  Consumables (say packaging for perfumes) on the other hand can be kept local due to lower costs in transportation and reliable supply. Low Cost supply on the other hand indicates sourcing of both raw materials and consumables from global suppliers with costs being the major criteria – this involves taking benefits from economies of scale such as mass production of fashion items – again a strategy normally not resorted to by luxury firms

Production

Earlier blog posts both regarding origin and manufacture have discussed this topic in detail: SCOR for SCM-luxe and Forms of Luxury

Essentially Local manufacture is considered true luxury whereas keeping assembly local and outsourcing manufacture is an option used by some firms keen to take on the benefits of mass customization

In the next part we will look at the downstream function of distribution and point of sale strategy…