Recycling luxe raw materials

Every supply chain has waste reduction and recycling as a major area of focus. The recycling of finished goods returns, either due to end of life or due to dissatisfaction with the product has been well established with sophisticated returns and reverse logistics value chains in place. However in this blog post we will look at how waste raw material is managed. Raw material or Work in Progress (WIP) stocks are generally marked out for removal due to:

·         End of life or obsolete items

·         Non-moving stock which has to make way for newer fast moving inventory

·         Waste generated from the manufacturing process (left over pieces or by-products of the process which are not required in the end-product)

The methods used to manage this waste are similar to that of finished goods and in order of priority are:

·         Reduce the production of waste: Either by better manufacturing processes (eg. Make the leather cut outs for handbags designed to cover maximum area of the leather swathe through software programs) or simply better inventory management (again maybe through the use of demand and supply forecasting tools and technologies – inventory optimization software such as MEIO or Multi-Echelon Inventory Optimization tools such as SmartOpps, Toolsgroup, etc. are becoming increasingly popular in the luxury goods manufacturing process)

·         Re-Use: By ensuring raw material is utilized across product ranges, the reuse %s can be increased and obsolete inventory reduced. Delayed production and mass customization are some of the strategies which are used to increase re-use of material

·         Recover: Either recover raw material through refurbishment of the material or recover energy from the product. Luxury goods industries regularly refurbish material or use raw material to convert to energy

·         Dispose: the last option will always be the landfill and luxury goods supply chain is more prone to use this option to ensure the twin ideals of SCMluxe – Quality and Brand image are not sacrificed at the altar of frugality

 

Recycled leather at petit h

The house of Hermes has bucked this trend and come up with an interesting alternative to the above – in the creation of the Petit h atelier. The basic premise of Petit h is to create beautiful objects (just as desirables as Hermes products) out of the waste and leftovers of its parent company/ateliers or in its own words “The Petit h project sees discarded Hermès materials 'upcycled' into new objects of desire, building on the Japanese concept of wabi-sabi – were imperfections of nature are viewed as assets of beauty”. Pascale Mussard (a sixth generation member of the Hermes founding family) starts off by inviting artists to the Petit h workshop at Pantin (Paris) where all Hermes discarded products are piled up for the artists to indulge their creative spirits. The outcomes are as diverse as porcelain cups are refashioned into light fittings, mirrors finished with silk ties, crystal bowls becoming lamp shades and leather scraps (from Birkin bags?) forming patterns on blouses. Thus typical Hermes waste such as discarded animal skins from the "Kelly" and "Birkin" bags, other leather wear, and various elements, such as handles, hardware, and discarded ceramics, are being recycled into highly desirable products for sale under the Petit h metier.

Luxury - the point of no return

An interesting point Kapferer and Bastien bring about in their seminal work on luxury (The Luxury Strategy) is the non-return effect or Ratchet effect. Simply stated this means that once someone has tasted luxury in whatever area, it is very difficult for them to go turn away from it even when their financial circumstances have gone down hill and spending on luxury items are no longer feasible. Luxury has also been defined as something that extraordinary people find ordinary. There can be any number of examples to illustrate this – the tycoon now in tough times who would prefer to keep his expensive to maintain mansion and sell off his less expensive apartments in the city, the stockbroker with a series of bad investments who would prefer to keep his Ferrari in his garage but cycle to work under the pretext that cycling is good for the health and the environment, the heiress with a dwindling fortune who would prefer to cut down on social engagements than having to travel to them in a commercial airline, wearing last year’s fashion and  staying in a non-luxury hotel…and the list goes on. It’s easy to dismiss this phenomenon as the ego of the privileged  but one must remember it goes beyond the ego or status and luxury defines a sense of security, comfort and well-being which is psychologically a necessity for the user (a case of the extraordinary becoming the ordinary for the customer). I was intrigues by this phenomenon and decided to look at how this would impact the supply chain? One obvious impact would be on the sales or revenue side where demand in luxury goods is seen to be stable even in recessionary times. However another impact would be on the after sales services for luxury goods. Often neglected, this could be a good revenue booster as well as help in customer retention by providing the customer with alternatives to buying newer versions or increasing after sales service levels till the tough times pass.



Sotheby's  auction of the interiors of
Versace's Lake Como Villa 



What could these after sales services be? Some could be as simple as providing for an easy warranty and repair and replacement service (servicing your Rolex or re-stitching your custom fitted leather shoes) or more complex returns services coupled with a cross or upsell (trade in your Matisse for that rare Ming vase that you always wanted but came up for auction at that inconvenient time of the year when liquid funds were in short supply). The important points to consider in designing a strategy around the ratchet effect would be:

 

·    Ensure customer discretion (nobody likes the world to know that one is flying in a private jet to file for bankruptcy)

·    Custom design the after sales service to suit the product strategy – simple or complex schemes

·    Design all strategies around the longer time horizon when the customer will bounce back into happier economic climes  - this might mean small sacrifices on the margins in the short term in view of the longer term market potential

Very few industries have the benefit of  ratchet effect, and the luxury industry being one of the lucky few, must define strategies to exploit this effect to its fullest in order to retain its already small customer base vis a vis other industries