Website Management for luxe companies: e-commerce or e-inform?

The internet is an increasingly important sales channel for most mass mechandizing products and one that traditional SCM has incorprated as a unique distribution channel with very low set up costs. SCMluxe however treats the internet as more of an channel to inform a customer of the product rather than to actually sell. This is mainly due to the nature of distribution in luxe products that requires a high customer touchpoint and experience before the purchase is made. Thus SCMluxe will normally utilize the internet to inform and build brand awarenedd for potential customers. Hence one needs to keep in mind several very imporatnt facets when designing and maintaining an internet presence for a luxury good:

• Utilize own websites to promote and inform about the product or associate with an internet site that suitably identifies with the brand. "Never" utilize mass e-retailing sites like e-bay, amazon etc (as seen from the recent slew of court cases between Tiffany and e-bay...)
• Ensure the website informs rather than "sells". This also means go slow on the animations/ special effects etc which might not really show up on devices like iPads or iPhones. Alternately have dual versions for mobile devices. Remember customers will prefer to intensively research and compare a high value product before heading down to a store for the actual purchase
• Meta tag appropriately so that the web site shows up for the correct search criteria and is ranked fairly high up. Use SEO or Search Engine Optimization techniques. Remember that using excessive flash diminishes chances of search engines recognizing and ranking web sites higher up in priority/relevance
• Use membership based access to special views on the website

Any other pointers readers can suggest for websites?

Half minute to download and heavy on flash

Meeting modern SCMluxe challenges - a lesson from Azimut-Benetti

Many European luxury goods companies have faced bankruptcy in the current recession and recently have been acquired by business houses that are neither in the luxury trade nor from the same geographical and cultural sphere. An example is the recent acquisition of the Italian yacht maker Ferretti by the Shandong Heavy Industry Group, a Chinese enterprise with very little exposure to the luxury trade. Though Ferretti was saved from bankruptcy, it lost its “Made in Italy” tag and all the brand value this implies in the customer’s mind. How can luxury goods companies retain its cultural heritage (location and artisan workmanship included) and yet retain its cost effectiveness and cater to markets that demand industrial mass production mindsets in terms of quality. A successful example of a company which achieved these seemingly contrasting goals is of another Italian luxury boat maker Azimut-Benetti which continues to be family owned and debt free while maintaining their market share and profitability through the years. Let us look at some of the strategies that Azimut has put in place and see if lessons can be drawn from them:

1.       Constant Innovation

Azimut has recognized that a totally manual approach to production will not survive long term if the brand had to retain its “Made in Italy” tag without offshoring  to cheaper locations of manufacturing with low labour costs like China rather than the expensive Italian labour market. Hence the company has developed innovations that help address the high cost of Italian labour (or European for that matter). For example painting a yacht which takes thousands of man hours of effort is today done by robots (a first for any yacht maker). Also innovations in the product design itself such as lighter hulls (created by a process of vacuum infusion) resulting in less pollution and greater strength enable differentiation of the product vis a vis competition. Lastly a corporate mandate to increase fuel efficiency of every new model by 10% ensures that Azimut-Benetti remains leagues ahead of cheaper alternatives from low cost countries or competition (which uses cheaper mass production techniques)

2.       Building an entrepreneurial organization structure

Azimut is organized into 3 segments with each segment manager effectively running his unit as an entrepreneur. This level of delegation of authority and responsibility ensures that it’s not purely the “creative” minds at the top who manage the organization in its entirety. Managers can then build boats and manage their business profitably rather than rely on the “creatives” or the professional technical design team who may not be geared up for this role. Thus independent manufacture and marketing of boats is possible without the assistance of the core design team (normally a part of the family behind the business). Thus a level of professionalism is created within a family owned business

3.       Focus on Quality at activity level

Azimut has divided the entire process of boat making into 25 different activities with each activity headed by a process owner who signs off on the quality of the output for that activity. Thus as the construction passes through each activity or process, a series of quality checks are done, and the process owner for that activity signs off on the quality sheet before it passes onto the next sequential activity. Hence by the time the boat emerges at the end of the 25^th activity one has a perfect product. An example of a quality test in one of the activities is immersing the boat in a swimming pool for 48 hours post which it is immersed in its natural environment, the sea. A battery of tests carried out at these stages before the activity owner signs the quality sheet for this activity

Azimut 62S Italia - "Made in Italy"

Lastly an important lesson from Azimutt-Benetti for luxury companies is to go easy on debt – all expansion and investments have come from internal accruals and Azimutt even today is a zero debt company. Ferretti on the other hand was heavily leveraged ....... until Shandong Heavy Industry Group came along to help manage its debt repayment schedules and avoid bankruptcy

SCMluxe for premium products - a lesson from Apple

I bought an iPhone...yes, not a "smartphone" but an iPhone. So what makes this difference between Apple products and its competitors? The difference is in the strategies of SCMluxe that Apple uses more in parts than in its entirety. Does this make Apple product luxe or even premium? - not really (the Vertu could be one), but it does show that some of SCMluxe strategies could work very well for non-luxe products.

Lets see what Apple does and does not do, that makes it so successful vis a vis other competitors:

SCMluxe Strategies:

1. Distribution is controlled and in-house with almost no external contractors/wholesalers or even retail points. Notice the long queues outside Apple iStores every time a new product is released....the deliberately restricted volumes of first sale, hype before release and carefully constructed point of sale experience
2. The iStore experience - unlike its competitors the point of sale for Apple is an extension of the brand and its carefully managed to convey their messaging across all the stores especially in the iconic stores in London's Covent Garden or New York's Fifth Avenue. The retailing is very much done in high streets with expensive decor and location just like all luxury goods stores
3. Product quality - is another factor that Apple scores over its competitors. The design and quality makes no allowance for mediocrity (or the customer, for that matter). And like all self respecting luxury goods companies makes no allowance for the convenience of the customer (the BMW experience in leg space in earlier posts) - note the requirement for Apple customers having to lug the product to an iStore every time one has to replace its batteries instead of being able to do it at home. No other competitor actually would dare inconvenience its customer this way
4. Design - is the soul of Apple and is kept not only in-house (and in the country of origin, USA) but kept fiercely guarded with heavy investments/budgets
5. Pricing - though the price of its products are only nominally higher than its competitors, Apple strictly follows the no-discount or sale policy of SCMluxe

Non SCMluxe strategies:

1. Production/Manufacture - is almost completely out of its country of origin with a supply chain spreading across global low cost locations (mainly China)
2. Traditional mass production conveyor belt production systems - almost no artisanship or manual craftsmanship involved or communicated
3. Broad based customer segment not exactly targeting the high end luxury customer

Surprisingly this unique mixed up strategy works for Apple remarkably well and there are lessons to be learnt from it - the most important one being that SCMluxe components work for non-luxury products too. Only one must carefully analyse and see where and what components will work for the premium/mass premium product that one is considering the supply chain strategy

Disposal of obsolete or dead Stock and SCMluxe

Obsolete stock or dead stock is the bane of all supply chains and traditional industries have evolved innovative ways of dealing with this. In this article we’ll discuss what is to be done with existing obsolete stock and not on ways to reduce it.

Obsolete stock?

Obsolete stock is managed in traditional supply chains by:

1.       Disposing off vide discount sales

2.       Refurbishment (seen especially in home electronics industries)

3.       Stripping and recycling parts of the product to recover as much value as possible

4.       Lastly responsible disposal (landfill, incinerators etc)

In SCMluxe these options don’t really work:

1.       Discounts or Sales: No discount or sales offered in the luxe industry since this will affect the brand and the more loyal customers

2.       Refurbishment: This would mean that the quality of the product was not of the highest level earlier, again a violation of a luxe product’s positioning

3.       Stripping for parts and recycling: Gives raise to fears of counterfeiting and brand logo/recognition appearing on non-luxe products

The only option left to most luxe houses is then to dispose off obsolete stock in landfills or incinerators. Another method is to donate obsolete stock to a carefully controlled but worthwhile cause which might result in some publicity as well as disposal of stock. Are there any other ways or strategies that luxury houses use to dispose dead stock? Do let me know….

Centralization as a key to visibility and profits

The key feature of the retail industry and luxury goods in particular is the large variation and seasonality of sales. This seasonality is compounded by the high number of SKUs and the turn over in these SKUs by season and geography. Fashion apparel is a stark example of this with last seasons’ fashion quickly becoming obsolete or dead stock. Similarly product variations by geography (smaller clothes sizes in Japan vis a vis Western markets) pose a problem in fulfilment as well as losses from excess inventory or stock outs.

This variation and seasonality leads to the well known bull whip effect wherein standard demand with only small variations in demand at the retail or point of sale grows into large variations as demand moves upstream into the supply chain (distributors, wholesalers, aggregators etc).  This ultimately results in supply chain inefficiencies of excess stocks/ stock outs growing as we move more and more upstream.

The Dunhill experience in centralisation

A selection of  SKU variations for a single product

Dunhill had a similar problem wherein small variations in demand at retailers magnified as the demand moved upstream. With over 30% of sales coming in from its wholesalers, the variation of demand at wholesalers was far more than that at the retailers end.  Some of the problems experienced by Dunhill other than stocking and storage was the complete lack of visibility of inventory across all stocking locations. With sales spread across 120 retail stores worldwide, this posed a huge logistical problem in fulfilling demand in an efficient (both in cost and lead times) manner. A strategy adopted by Dunhill to address this was “Centralization”. This included:

·         Centralisation of distribution – One distribution centre in Paris to service the US and European market and one distribution centre in Hong Kong to cater to the APAC market

·         Centralisation of merchandise planning and inventory management operations

This has resulted in increased profitability (“up 5% since implementation of centralisation initiatives launched” as per Rachel Brain, Merchandise Director), reduced inventory levels, lower dead stock and improved supply chain agility.

Taking back distribution: Balancing investment with returns

Licensing has always been a strong channel of distribution especially for the fact that it takes very little upfront investment (Refer: Outsourcing and SCMluxe). However we have seen from recent developments that "true luxury" firms prefer to keep control of distribution due to reasons of control and quality ....and preventing counterfeits (Refer: Licensing and Counterfeits). But taking back distribution or licensing agreements involves capital investment to set up distribution channels or buy out licensing agreements. The benefits of taking back distribution or buying out licenses are manifold:

1. Better control of quality and brand messaging
2. Control over volumes in the market and less fear of market flooding and dilution of "desirability" of brand
3. No fear of counterfeiting and non-authorised sale of products in less desirable point of sale (retail locations)
4. Better client relationships and keep direct link with customer.

Balance Investment with Expected Returns

But these benefits are impeded by high investments which require shareholder buy in which is typically not forthcoming since higher returns/profits are not totally apparent when volumes (very visible to shareholders) are compromised. But controlled volumes and scarcity is a key luxury strategy and such capital investments must be seen from a long term perspective.

Typically reducing (buying out) total distribution by licenses by X% will increase net profits by 2 X% over a 5 year period. This is of course assuming everything is executed perfectly since the ball can roll either ways. For example Ralph Lauren decided on taking back distribution by buying out its licensees in Japan and France from the years 2002 onwards. The net profits increased from $172million in 2002 to $845 million in 2011 with Ralph Lauren boutiques almost completely taking over distribution from licensees. YSL on the other hand launching a similar strategy is still struggling to get its figures into fashionable black rather than gauche red!

Economies of Scale and Luxury

Economies of scale has been a marked feature of cost reduction in supply chains. A BCG study indicates that a doubling of production results in a 30% reduction in Cost of Goods Sold (COGS) which shows up in a similar increase in gross profits. Economies of scale would mean following strategies of consolidating production in a single or few locations, using techniques of mass production, automation, bulk sourcing etc. However increasing production implies a corresponding increase in sales to justify the increase in investment to set up production and logistics facilities. A good barometer of the extent to which economies of scale can be pursued would be the Return On Investment (ROI) for setting up facilities and supply chains. A positive ROI greater than cost of capital will be a sign of success in going ahead with the strategy.

In the case of luxury goods, an additional complexity in terms of volume or markets is introduced. For example, what is the sales or market penetration that the brand is comfortable with?  A flooding of the market with increased sales would simply run counter to the brand's perceived value. Hence this imposes a natural limit to the economies of scale a particular luxury brand can support. Typically doubling of production for instance for a 30% reduction in costs is not tenable for most luxury brands (other than fragrances).

Similarly another natural limit is the concept of location or origin. Economies of scale cannot be provided by moving production away from the brand's orgin (Champagne from Champagne in France) at the risk of loosing its luxury status. Also there will be a limitation to increasing the headcounts in these brand origin locations (number of artisans available in Italy for instance).

A good takeaway would be that for SCMluxe, economies of scale must be pursued upto a point where:

1. Sales volumes are in line with the brand and marketing plan for the product
2. The location of the brand can support the production both in terms of artisans and production facilities
3. There is a high ROI on the proposed investments

The ROI, though applicable for industrialized goods as well, needs to be much higher for luxury goods. This is to enable the longer gestation period, smaller volumes, higher manual effort required and greater risks that are typical of the luxury goods industry