Supply Chain Strategies in The Apparel Industry The Case of Victoria S Secret
Supply Chain Strategies in The Apparel Industry The Case of Victoria S Secret
Supply Chain Strategies in The Apparel Industry The Case of Victoria S Secret
the Apparel
Industry: The Case of
Victoria's Secret
Abstract
This research provides an overview of the underlying dynamics, drivers, top
players, supply chain structure and challenges facing the apparel industry.
We present the case of Limited Brands Inc. and describe the positioning of
the company within the apparel industry. We then address business
processes critical to the success of the Victoria's Secret Business Unit of
Limited Brands. This research draws extensively on interviews with
company officials at Limited Brands that provided rich insight into a wide
range of supply chain practices specific to the Victoria's Secret business.
The success of Victoria's Secret can be attributed to a set of important
supply chain activities, driven primarily by a collaborative intra-company
effort.
Insights gained from this research can also be leveraged to understand other
industries such as consumer packaged goods, computers, and electronics
industries which face similar supply chain issues.
1
Final Test Exam - Operational
Management Lecturer : Astrid
Puspaningrum
Writter : Rhenno Ledhuardo
2
Acknowledgements
First, I would like to thank Astrid Puspaningrum , my lecturer in Operational
Management, for her guidance and the invaluable insights into the subject. I
learned a lot under their supervision.
I am sorry because I use english in this Final Exam, it's hard to found journal in
Bahasa Indonesia so I use english in my final exam.
Finally, I would like to thank the people who made it possible for me to make it to
Someone who really important in my life, AP (The Initial0)who stood by me in all my
highs and lows to make the MIT dream a reality, my parents who only taught me
how to dream of the best.
Table of Contents
Abstract.................................................................................................. 1
Acknowledgements............................................................................... 2
Table of Contents.................................................................................. 2
1 Introduction...................................................................................... 5
1.1.................................................................................................. Motivation 6
1.2.................................................................................................. Methodology 7
2 Literature Review............................................................................ 9
3 The Apparel Industry...................................................................... 13
3.1................................................................................................. Industry Overview 13
3.2.................................................................................................. Consumer Segments
14
3.3................................................................................................. Sales Channels 15
3.4................................................................................................. Supply Chain Structure
16
3.5................................................................................................. Trends and Drivers of
Supply Chain............................................................................. 18
6.2.................................................................Operational Objectives 53
6.2.1.........................................................Customer Response 54
6.2.2.........................................................................Efficiency 54
6.2.3...............................................................Asset Utilization 54
6.3 Objectives Balancing Framework .................................................
54
Bibliography ..............................................................................................................
. 61
1 Introduction
This research addresses today's supply chains specific to the apparel
industry in the US. Within the apparel industry, we focus on apparel companies
selling products to the consumers vis-d-vis selling to retailers in the United States.
We identify the fundamental corporate strategies,
operating models, and best supply chain processes important to
maintaining a competitive position in today's apparel supply chains.
This study is part of the MIT Supply Chain 2020 Project (SC2020). The
objective of the SC2020 project is to identify and analyze the factors that are critical
to the success of future supply chains
up to the year 2020. Phase I of this industry-wide research initiative involves
nine different industries and twenty-one different case studies within these
industries. The nine industries are:
,Aerospace, Apparel/Footwear, Automotive, Computers, Communication
Equipment, Consumer Package Goods, Pharmaceutical, Petroleum and Retail.
This research is divided into three parts. The first part studies the overall
apparel industry supply chain, from apparel manufacturing and sourcing to apparel
retail and distribution. We present
various supply chain challenges and opportunities within these individual silos
of activity. We also present relevant financial information including historical
revenues and operating margins as well as key industry trends and drivers.
The second part involves a case study of Limited Brands (see chapter 4). We
discuss the positioning of this company within the apparel industry. We
provide a brief background on Limited Brands and discuss the individual
business units within the company and their product and service offerings. We
discuss the competitive landscape in which its various businesses operate and
view the company from a strategic as well as operational perspective. The
third part of the research investigates the specific supply chain of limited
Brands' Victoria's Secret business (see chapter 5). This research identifies
Victoria's Secret's business strategy, operating model, operational objectives
and various supply chain practices required to make its supply chain
competitive and excellent.
The above framework implies that for a business to have an excellent supply
We analyze the Victoria's Secret's supply chain by dividing it into three functional
areas:
1.1 Motivation
As will be discussed in chapter three, the apparel industry faces various
supply chain challenges, many due to the fact that the major part of apparel
manufacturing activity for the United States market has moved outside the
country to low-labor-cost countries in the Far-East. Thus, due to long physical
distances, apparel companies in the US are continuously challenged to
quickly respond to changing trends, to reduce long lead-times, to execute
collaborative product development with suppliers using effective
communication and to ensure total supply chain visibility. Moreover, fickle
consumer preferences and shortening of the product life cycles make the
apparel industry very challenging from a supply chain perspective. Insights
6
gained from this research can be also be leveraged to understand other
industries like consumer packaged goods, computers and electronics
industries, which face similar supply chain issues.
6
selling its products through physical stores located throughout the United
States, as well as through a collection of printed catalogs and an online shop.
Its major product offerings lie in the category of intimate apparel, sleepwear,
apparel, shoes and accessories and swimwear. For the purpose of this
research, we focus on the intimate apparel segment of Victoria's Secret.
Intimate apparel represents the largest portion of Victoria's Secret business
and is sold through all the retail channels described above.
1.2 Methodology
This research has been executed in three different steps. The first step
involved thorough research on the apparel industry as a whole, with the help
of articles from American Apparel and Footwear Association, Harvard Business
Review, newspapers like Women 's Wear Daily, Daily News Record,Journal of
retail and Distribution, WallStreet Journal and magazineslike
Apparel. Additionally, one-on-one telephone interviews conducted with
industry experts provided a tremendous resource. These industry experts
came from 3rd party logistics, apparel and footwear software solutions and
supply chain consulting fields.
The third step, which dealt specifically with the Victoria's Secret supply chain,
was researched primarily by one-on-one interviews with company officials,
both telephonically as well as from a site visit of the Limited Brands
headquarters in Columbus, Ohio, with supporting information from public
sources. These interviews involved extensive meetings with relevant
7
personnel in charge of crucial functions within the Victoria's Secret supply
chain. The departments interviewed include: Limited Logistics Services, Mast
Industries, Demand Planning and Merchandise Allocation, Victoria's Secret
Stores and Victoria's Secret Direct. The people
interviewed hold positions ranging from Directorial level up to the President level.
8
Finally, and as a result of the above research, top operational Key
Performance Indicators (KPI) for tracking the performance of Victoria's Secret
Supply Chain are listed along with their practical application relative to the
brand. To conclude, these KPIs have been fitted into a balancing framework
and their importance relative to each other is identified.
2 Literature Review
The literature is divided in 3 parts:
1
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overarching company strategy is the answer to long-term sustainability. He
states that strategic positioning is a key activity for strategy.
Extrapolating this to the case of Limited Brands (see chapter four), in the mid-
90s, the company did not seem to have a clear cut strategy. With about
fourteen different brands under its umbrella, catering to a variety of different
demographics, there appears to have been an attempt to be
"everything to everyone". Limited's growth slowed dramatically and performance
was erratic, as
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competitors like The Gap swiped market share (Merrick, 2005). Evidently,
the company was losing its focus and appeal. As a result, top management
had to look into reinventing the company's strategic positioning in the
market and to concentrate on key competencies.
11
At this point, it is necessary to introduce and discuss the well known case of
supply chain responsiveness within the apparel industry, Zara. Zara is a
Spanish fashion retailer with about 650 stores in about 50 countries. With an
extremely responsive supply chain and high profit margins relative to the
industry average, Zara is the envy of the apparel industry. Ferdows et al
(2004) speculate that the deepest secret of Zara's success might lie in its
ability to sustain an
environment that optimizes the entire supply chain rather than each step. He states
that Zara's
12
senior managers seem to intuitively comprehend the nonlinear relationship
between capacity utilization, demand variability, and responsiveness. He
explains that this relationship is well demonstrated by "queuing theory",
which explains that as capacity utilization begins to increase friom low levels,
waiting times increase gradually.
customer segments, sales channels, supply chain structure, industry trends and
drivers and supply chain challenges.
By late 1980s, the U.S. textile and apparel industry, like many other
At the same time,, there was an increasing trend toward "private label" apparel
designed and labeled by retailers and produced by lower cost apparel
subcontractors. The concept of private label apparel allowed retailers to
bypass costly domestic designers and branded apparel manufacturers. Private
label apparel was offered relatively cheaper than branded apparel, making it
more affordable for the common masses. This aided the trend of mass
marketing of apparel
and was led by large retailers like Wal-Mart, J.C. Penny and Sears.
accounted for just over 52% and menswear accounted for 28% of the
year's sales in 2003
(Standard and Poor's,
2004).
14
3.2 Consumer Segments
In 2003, total US apparel sales were $166 billion, down 5.1% from $175
billion in 2002, according to the NPD Group. Women's apparel sales fell 7.1
% to $90.1 billion and men's
apparel sales fell 6.4% to $46.9 billion in comparison with 2002. The womenswear
category
accounted for just over 52% and menswear accounted for 28% of the
year's sales in 2003
(Standard and Poor's,
2004).
15
Today, most apparel companies segment their customer by demographics.
For example, Generation Y - the 75 million people born between 1977 and
1994, a cohort comprising 25% of the US population - spends or influences
the spending of approximately $200 billion a year (Standard and Poor's,
2004). This group is also influential in setting trends that influence future
product design for the slightly older Generation X (people born between
1965 and 1976). Many small specialty retailers and apparel companies - such
as Quiksilver Inc., Abercrombie & Fitch Co., American Eagle Outfitters Inc.,
Pacific Sunwear of California Inc., and Urban Outfitters Inc. and large apparel
companies such as Victoria's Secret (see Chapter 5), Jones Apparel Group,
Tommy Hilfiger, and Polo Ralph Lauren have recently either acquired or
developed products in an effort to tap into Generation Y's psyche.
location was updated to reflect trends in lingerie and beauty products. The
goal was to create a
15
To, provide a lasting customer experience and to increase store traffic as well
as the average unit retail, retailers like Victoria's secret are remodeling or
converting existing locations to improve the shopping experience. To keep the
brand fresh, the Victoria's Secret team, for example,
updates its store design every five to six years. In 2003, the New York's Herald
Square store
location was updated to reflect trends in lingerie and beauty products. The
goal was to create a
16
shopping experience representative of the Victoria's Secret lifestyle: sophisticated,
sexy, modern, feminine and loaded with attitude (Hanson, 2003).
In the past decade, many manufacturers have opened their own retail stores
as well, reducing their dependence on retailers while potentially increasing
sales. This also permits manufacturers to showcase an entire line of products,
to enhance brand awareness, to test new products, and to directly collect
customer feedback. It also carries the risk of alienating retailers who carry the
same merchandise. Some manufacturers have also established outlet stores to
move older inventory.
According to data from the NPD Group Inc., in 2002, discount stores
accounted for 31% of apparel sales, specialty stores for 25%, department
stores for 19% and national chains 16%. The remaining 9% of sales came
from channels like direct mail, internet vendors, and factory outlets.
natural fiber suppliers are very fragmented and are located both within the
US and outside. For
example, many countries including India and a few countries in South
America specialize in
16
fabrics. Figure 4 illustrates the various steps that go into making a garment
from scratch.
The chain begins with agricultural and chemical suppliers, who provide
natural or synthetic fibers. Many different types and sizes of firms supply
natural fiber suppliers are very fragmented and are located both within the
US and outside. For
example, many countries including India and a few countries in South
America specialize in
17
cotton production, Australia specializes in wool production, etc. Some U.S.-
based firms like Du Pont produce large supplies of synthetic fibers and hold
the majority of the shares in the market, although developing nations like
China and Taiwan offer significant competition.
Next in the chain are textile firms, which are responsible for spinning fiber
into yarn, knitting and weaving operations. These firms make fabrics from
yarns. This part of the chain is highly fragmented and most of these
companies are small-to-medium-sized worldwide.
Once fabrics are made and finished they are sent to apparel manufacturers
to make finished aplparelproducts. This part of the industry is characterized
by a highly labor-intensive assembly process and low barriers to entry (and
exit). As a result, a large number of small and medium- sized enterprises
(SMEs) have sprung up in many low labor cost countries.
Some US specialty retailers, like Victoria's Secret, are equipped with vertically
integrated factories that manufacture and deliver goods directly to the
company without the involvement of third party intermediaries.
In general, apparel sold in the United States is made both domestically and
internationally. As, discussed in chapter 5, most sourcing strategies are based
around the type of product being sourced. Typically, different supply chains
are chosen based on whether the product being sourced is a fashion item or a
basic item. A fashion item is one which has a short product life- cycle and
in the next decade (Standard and Poor's, 2004). In terms of order fulfillment,
there is increased
pressure due to consumer requirements, leading to shorter fulfillment lead-
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3.5.2 Distribution Channels
From the point of view of the distribution channel, it is expected that the
market share for the mail-order channel as well as the internet share of total
in the next decade (Standard and Poor's, 2004). In terms of order fulfillment,
there is increased
pressure due to consumer requirements, leading to shorter fulfillment lead-
19
shorter concept-to-market times. Product lifecycles in the retail channel are
shortening, leading to an increased number of new product launches in retail
outlets. There is also a trend toward increased distribution of tailor-made
apparel and footwear merchandise because of new supply chain technologies.
For instance, on its website, Nike, a well known shoe brand, provides the
opportunity to customize a shoe according to individual customer
preferences. Lands' End, a division of Sears, Roebuck and Co., provides an
online tool on its website called the "My Virtual Model". This tool helps a
shopper in trying Lands' End clothing on a virtual model that is practically a
mirror image of the shopper.
Last but not the least, an important trend in the apparel segment is the
continued pressure to reduce lead-times. There is a constant shift from
seasonal collections to reproduction and replenishment collections. Pressure
to decrease lead-times is causing a shift to faster transport modes, from sea
to inter-modal sea/air to complete air. For replenishment collections, there is a
trend towards local inventory points and express deliveries, and for
reproduction collections, a trend towards CAD/CAM and flexible
manufacturing systems.
Overall, three distinct delivery schedules are emerging (DHL Logistics, 2005):
1
9
- Short-term: Collections designed in response to the first results of the season.
1
9
only.
The primary reason for this decreased share is price deflation. Average selling prices
for most apparel and footwear have been in long-term
decline due to factors including the continued influx of imports, retail
promotions, and market share gains by discounters. Other factors may include
increased spending on fashion accessories compared to apparel. Therefore,
although overall total dollar sales of apparel and footwear have risen since
1999, average selling prices have declined, as indicated by the apparel
consumer price index (CPI) published by the Bureau of Labor Statistics (BLS).
According to BLS data, US
apparel prices fell five years in a row beginning in 1998.
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In the past, retail stores often carried apparel products months in advance of
the season in which they would be worn. Times have changed, however, and
consumers nowadays tend to buy closer to need. To meet this demand,
manufacturers have had to shorten design, development, production, and
distribution cycles.
21
years for most companies to bring new products to market. Most apparel
production, even today, is typically planned far in advance, based on highly
speculative forecasts. Long lead-times, distances and hand-offs between
members of the supply chain create tremendous losses for retailers due to
mark-downs, stock-outs, high inventory levels and shrinkage. In an effort to
mitigate these losses, the players in this industry have tried to shift risk either
back to the suppliers or forward to their customers.
In 1993, the company closed many of The Limited and Lerner stores. It
opened four Bath & Body Works stores in the UK (its first non-US stores) to
compete with British rival The Body Shop. In 1995, with 17 operating
businesses, the company decided to trim some of its poorly performing
divisions. A portion of Victoria's Secret, Cacique, and Bath & Body Works
was sold to the public in 1995 and A&F was sold in 1996. In 1998, The
Limited sold its remaining 84% stake in A&F (Hoover's Online).
In 1997, the company closed more than 100 of its women's apparel stores; the
next year it closed nearly 300 more companywide (excluding the Intimate
Brands chains) and all but one of its
Henri Bendel stores. Also in 1997, Intimate Brands closed the Cacique
chain. In 1998, The Limited launched White Barn Candle Co. (candle and
home fragrance stores). The following year the company spun off Limited
Too, its most successful chain, as Too, Inc. The Limited (as well as Intimate
Brands) declared a two-for-one stock split in 2000 (Hoover's Online).
to Limited Brands later that same year. Also that year, the company sold off
its remaining stake
23
In 2001, the company sold its Lane Bryant chain to retail store operator
Charming Shoppes. It also spun off its former subsidiaries, Alliance Data
Systems (in which it retained about a 20% stake) and Galyan's Trading Co.
(whose remaining 22% stake it sold off in 2004). In March 2002 The Limited
bought back the remaining shares of Intimate Brands it did not already own
and,
over the course of the year, phased it into a business segment. The Limited also
changed its name
to Limited Brands later that same year. Also that year, the company sold off
its remaining stake
24
in Lerner New York and in late 2003 sold its Structure label (which it had re-
branded as Express Men's) to Sears, Roebuck and Co. In 2004 it sold off 1.6
million shares of the plus-size United Retail Group Inc. after a decade of
investment (Hoover's Online).
With shrinking sales and store numbers in its apparel unit, Limited Brands is
currently focusing on its star players, Victoria's Secret and Bath and Body
Works.
Fitch, Lane Bryant and six out of seven Henri Bendel stores (Limited
Brands Presentation,
24
that controlled its own retail distribution channels and seeking a consistent
repeatable business, the company soon incorporated vertically integrated
capabilities into its supply chain. In its quest to narrow its portfolio and create
a distinct brand image, the company closed all of its poorly
performing businesses, including the sale of its bank, and spun off or sold
Abercrombie and
Fitch, Lane Bryant and six out of seven Henri Bendel stores (Limited
Brands Presentation,
25
2005).
2
5
(Columbia Business School, 2003). Victoria's Secret Stores' year-over-year
same-store
sales comparisons improved from -1% in 1995 to a peak of 12% in 1999. Amidst a
difficult
2
5
retailing environment, same store sales comparisons declined in 2000 and
2001, but rebounded in 2002.
The continued focus on bras drove a 2004 comparable store sales increase of
5%. This increase was primarily driven by the new Pink sub-brand, and by
continued growth in the bra category and the Beauty business, partially offset
by declines in casual sleepwear (Limited Brands Annual Report 2004). Pink,
Victoria's Secret's latest collection of intimate apparel aimed at 18 to 22
year-old customers, and "Angels," continue the brand strategy of introducing
new products every four to six weeks in order to generate interest in the brand
(Columbia Business School, 2003).
Currently, two new lines, Very Sexy and Body by Victoria , are successful
both in lingerie and in beauty. The glamorous "Very Sexy for Him and
Her" are new fragrance launches that build on this approach.
Victoria's Secret Direct, the catalog and online business, also experienced
growth. Direct enjoyed a 13% increase in sales in 2002. The growth came
from improved clothing assortment at more competitive prices and growth of
its intimate apparel category, especially of panties and sleepwear. Direct now
represents approximately a third of Victoria's Secret sales (Columbia Business
School, 2003).
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which is a line of everyday intimate apparel (Columbia Business School,
2003).
27
2004 (Limited Brands Annual Report 2004). This growth was primarily
driven by continued sales growth in the home fragrance, anti-bac and Daily
Beauty Rituals product lines, as well as the successful launch of the
TuttiDolci product line. Moreover, sales increases were supported
by successful semi-annual sales during both the Spring and Fall seasons. The
apparel businesses showed dismal performance with an 8% decrease in
comparable store sales at Express. This was driven by significant declines in
almost all of the women's categories, primarily related to the poor
performance of the fall season product assortment discussed previously.
4.4 CompetitiveLandscape
Because of a varied business portfolio, it is difficult to identify one company
as a direct competition to Limited Brands. However, some individual
business units face both direct and indirect competition. Victoria's Secret, for
example, competes with Gap Body" directly, Bath and Body Works competes
directly with Body Shop and indirectly with cosmetic sections within
department stores. Apparel businesses like Express compete for a customer's share
of wallet with companies like Gap, Banana Republic, H&M, Zara etc. Victoria's Secret
is unique in this way.
There doesn't seem to be present any head-to-head competition in the
market at this point. Hoiwever, Victoria's Secret competes, in a minor way,
with lingerie brands in department stores, such as Sara Lee and Jockey.
Victoria's Secret's sub-brand Pink, however, competes in the same space as
Abercrombie & Fitch.
Hoovers identifies Gap, Inc, Sears, Roebuck and Co., and The TJX
Companies, Inc. as Limited Brands' top three competitors (see Table 6 at
the end of this section).
5 Victoria's Secret Stores
Victoria's Secret (VS) is the most profitable as well as the biggest revenue
generating brand for Limited Brands. Its net sales for the year 2004 were
$4,232 million with an operating income of
$799 million (Limited Brands Annual Report 2004). Figure 11 illustrates
Victoria's Secret's growth in annual sales from year 1995 to 2002.
In 2004, a total of 1001 VS stores with 4,868 thousand square feet in selling
area generated net sales of $3,113 million, a 9% increase in comparable
store sales from the year 2003. The sales per average selling square foot
amounted to $648 (see Table 4).
5. 1 Products
Victoria's Secret consists of several sub-brands or collections (see Figure 12).
Each sub-brand can be said to focus on a central theme. For example, the
recently introduced Victoria's Secret sub-brand called 'Pink" is a new
collection of intimate apparel aimed at a 19 year old woman (Limited Brands
Interview, 2005), and the "Very Sexy for Him and Her" are new glamorous
fragrance launches that build on its fragrance business. Each of these
collections is offered in a variety of different styles based on the extent of
coverage given by the bra, the configuration of the bra strap or even its
entire silhouette. Finally, the consumer has the choice to shop by fabric
type such as cotton, smooth stretch, lace & embroidered, and satin.
Overall, the products carried by Victoria's Secret Stores can be divided into
3 broad categories: Launch Fashion Products, Non-Launch Fashion Products
and Basic Products. About 60% of units in store are basic, 25% non-launch
fashion and the remaining 15% are launch products (Limited Brands
Interview, 2005). Basics consist of products which sell all year round and
have styles and colors which can be sold in all seasons and for the most
part, never go out of style. Beige Angel's bra, white and black bras from
Body by Victoria are examples of basic products. Fashion products are
loosely defined as items with styles, colors or silhouettes which typically sell
for one season (1 season = 6 months) and then shift to regular
replenishment. Launch
products are fashion items which are heavily promoted and may even
announce the introduction of a completely new category. These products
involve special planning and are typically
launched two times per year, in spring and fall. An example of a highly
successful recently launched product is the IPEX bra, by Body by Victoria .
The company also engages in about fifteen annual reconfigurations of its
stores also termed as "floorsets". A floorset may or may not involve a launch.
With the Pink sub-brand, the space Victoria's Secret is trying to fill is "young and
casual", a
3
0
Target to shop for good apparel, but it has become quite the opposite in last
five years. On the other hand, another executive notes that the fact that
today's women are buying more bras & a wider range of bras for several
occasions including everyday, work, and
casual, creates opportunity for product and fashion innovation brands like Victoria's
Secret.
3
0
5.4 Victoria's Secret's Supply Chain
The critical processes that make up the Victoria's Secret's supply chain
are: 1) Product Design and Product Launch; 2) Merchandise Planning,
Allocation and Forecasting; 3) Production & Sourcing; 4) Logistics; and 5)
Store Operations. A design idea, from the point it is
conceptualized to the point the product is delivered to the Victoria's Secret
Stores, termed by the company as "Concept-To-Market", traverses through
each of these processes comprising the supply chain.
These individual elements that make up the supply chain are described below.
concepts from all over the world. Typically, merchants travel all over
the world attending
3
1
- Open commercialization: This consists of sub-brands which have been inspired by other
concepts from all over the world. Typically, merchants travel all over
the world attending
3
1
trade shows in the look out for inspiration. An example of a product
that followed this pathway is Sexy Little Thingt)
Additionally, innovation can also take place at the functional level. For
example, VS has 23% of un-lined bra category market share, compared to
45% - 52% of market share in the padded and lift:support bras category
(Limited Brands Interview, 2005). The IPEX bra was developed in
collaboration with innovative raw material manufacturers who successfully
developed an un- lined, unpadded bra that provided adequate nipple
coverage, ensuring a successful entry into the un-lined bra market.
After a concept is decided there are several ways of testing it. The Henri
Bendel store in New York helps the individual brands to probe the outer
reaches of what is "sexy", what is ''sophisticated" and what is "young", and
whether any of these images apply to brands being tested through in-store
product placement. The store uses creative visual displays as an aid to market
test. Victoria's Secret also has its own set of laboratory stores where it tests
new product. Few important design metrics used are:
- Edit ratio: This is used in the middle of the design process to restrict the
number of prototypes that are brought to design to make final decisions.
3
2
The following sections illustrate how the launch calendars are used to drive
3
2
5.4.1.1 Concept-To-Market (Launch Calendar)
Concept-To-Market defines the path of all the activities involved in taking an
All brands within Limited Brands including Victoria's Secret follow a Concept-
To-Market calendar for launch products. There are clearly defined steps within
this calendar that define the amount of time taken for each activity defined in
the calendar. The current launch calendar is 76 weeks long.
3
3
The company identifies time-to-market as a critical aspect across every sub-
brand including VS. There has been a consistent effort within the company for
the past 1 2 years, through a technology-based project called INSIGHT,
involving external consulting firms, to shrink the
concept-to-market calendar to 40 weeks or less. The effort is currently concentrated
on one sub-
3
3
Brands Interview, 2005).
3
4
taking into account the initial dollar mark up, potential mark down dollars and
the targeted average unit retail (AUR).
For example, the Angels Demi bra might be chosen because it has
commercial appeal and the potential to meet 20% of total volume of the plan
being generated.
In the meantime, every brand, including Victoria's Secret, has a few global meetings
on its
calendar. These meetings include the Strategic Alignment Meeting and the Initial
Edit Meetings
3
4
with the General Merchandise Manager to rehash and rethink the product line.
After the Initial Edit Meeting, the designers are given orders with a specific
deliverable called the "Design ratio". A "Design Ratio" is the ratio in which
various designs will be selected to be produced. The team then meets in the
Final Edit Meeting to look at prototypes, which is followed by a Buy Meeting to
write purchase orders (PO). When the Orders are written they are passed on
to Victoria Secret Production group (VSP).
In-between the Final Edit Meeting and the Buy Meeting, the Merchandise
Allocation team works with Merchandise Planning to identify which color
variations will be continued and which ones will be dropped, and various
lengths of introduction. The allocation team is also responsible for designing
the flow to the VS stores based on the priorities set for different stores.
Additionally, the Planning group is bound by "Cost of Goods Available for
Sale" (COGAFS) guidelines. COGAFS defines the target dollar amount of
inventory at the Distribution Center (DC) they have to operate with at any
time, within each individual sub-brand. Inventory is measured in
dollars/year/square foot. The COGAFS model originated in the apparel
brands division to evaluate pockets of risk within inventory. VSS is
somewhat risk averse, which
implies that when there is an opportunity to fill a volume void to reach certain
stock levels within at sub-brand, it is more likely that a basic product would be
chosen over a fashion product.
Merchandise Planning reports to the Finance team. All brands including VS
go through a quarterly business review process with the Chief Financial
Officer (CFO) for next buy period. Physical store inventory is done once a
year.
35
commonly used for fashion and launch products. In this method, product is
pushed from the DC to the stores based on the decision from the upstream
authority, in this case from the Merchandise Allocation group. This is done
because there is not much sales data available to dynamically regulate the
product flow. Typically, an average store receives fashion merchandise about 3
times per week (Limited Brands Interview,
2005).
36
On the other hand, Victoria's Secret uses pull-based allocation for its
replenishment of basic bra categories. In the pull method, shipments are sent
to individual stores based on the POS data transmitted. This is done for basic
products because for these products, consumer demand is relatively stable
and historical point-of-sale (POS) data available. VSS uses an in-house
forecasting tool which looks at the history, seasonal profile of style, and event
history for 50 basic styles in basic colors to create a forward view of demand.
In order for this forecasting tool to be functional, it has to be fed in with at
least 3 months of historical selling data. The more selling history there is, the
better the forecast accuracy. Some styles have considerable historical
information and therefore all that is required is changing a few colors in case
there are new color additions. The system is monitored on a regular basis and
every 52 week forecast is evaluated and adjusted, if required, on a monthly
basis.
The actual frequency of store shipments from DC, for both fashion and
replenishment products, ultimately depends on the type of product, the type of
store (stores are divided into 7 tiers based on selling square footage and
priorities are set in accordance with the tier ranking), and type of season,
whether holiday or sale.
5.4.3 Sourcing and Production
80/, of the merchandise sourcing and manufacturing for The Limited Brands is
handled by Mast, which is a wholly owned division of the company. Mast's
CEO also holds the title of SVP Production and Sourcing for Limited Brands
(Limited Brands Interview, 2005). About twenty
five percent of Mast's current revenue come from third party businesses
outside of Limited Brands, like Abercrombie and Fitch, Chico's and Triumph,
the largest intimate apparel company in the world.
The strategic sourcing process is carried out in following four steps. The
process is initiated by the brand, in consideration of the overall company
strategy. The group estimates possibilities of distortions at an operational
level, like snowstorms, port strike, damages etc. This is followed by selection
of key vendors based on criteria mentioned below and last, the worldwide
trade situation is taken into account as well.
Mast identifies China and Sri Lanka as important long term players, and
India as a strategic
38
dramatically higher. Out of these 20 vendors, 7 to 8 vendors are launch
vendors. These launch vendors do the vast majority of VS production. The
second important criterion for vendor selection is "speed". For a constant
demand stream for basic bras which sell 12 months a year, 100% availability
is very important. The selected vendors are able to work
with a 4-week replenishment cycle.
Mast identifies China and Sri Lanka as important long term players, and
India as a strategic
39
satellite location fr Sri Lankan production. Mast currently holds equity interest
in several intimate apparel factories, including one in Sri Lanka and one in
India. Over the years, these factories have developed significant
manufacturing efficiencies with the help of Mast. Currently, about one-third of
Victoria's Secret's total bra volume is produced by these two factories. The
relationship with Sri Lanka dates back more than ten years. The Sri Lanka
factory runs two shifts a day at full capacity and produces finished goods at
costs which are comparable to China. This factory, which is vertically
integrated, exports on average $350 million worth of finished goods to
Limited Brands in USA.
Other than Sri Lanka and India, Mast works with a set of three factory types:
primary, secondary, and tertiary. In the primary factories, Mast utilizes about
90-1 00% of their production capacity, in secondary about 50%, and in
tertiary about 10-20% (Limited Brands Interview, 2005). The ultimate goal for
Mast is to consolidate all of its production so that every single product can be
made in two of its large factories in India and Sri Lanka.
Mast produces a small percent of its goods in Europe. Apart from finished
goods production, the Eastern-European region has been identified as
particularly good for raw material innovation.
Mast also does some of its production in the Israel/Jordan area where they
work with a few vertically integrated plants.
5.4.4 Logistics
All logistics related activities for Limited Brands are handled by Limited
Logistics Services (LLS). Even though LLS is an integral part of Limited
Brands, it acts as a captive third party, billing businesses and centers as
39
would an outside agency. As a result of these services LLS keeps some
margin in-house. LLS operates under a Shared Service Model in which a
service level agreement (SLA) is used as a contract between the
individual businesses and LLS. This
detailed contract lists metrics for measuring performance of services provided by
LLS, as well as
40
of LLS. Brands get daily, weekly and monthly updates from LLS about how
they are doing against these performance metrics. If there is a disruption
somewhere in the environment, LLS adjusts its production cycle time metrics
accordingly. LLS also customizes this agreement based on specific
requirements for each business unit and in most cases compares the rates it
charges for these services to those of an outside provider.
On the whole, LLS plays three important roles: First, it acts as a logistics
provider, ensuring smooth flow of goods from factory through to stores, and
direct to consumers in case of VSD. It also manages all engineering related
tasks within the company, and builds and maintains distribution centers and
shipping buildings. Second, LLS is responsible for managing all the
compliance-related activities for the flow and storage of product, including
quality assurance and all activities associated with labor standards throughout
the world. Last, LLS is responsible for procurement of all non-merchandise
products for the enterprise including bags, boxes, and
nn-iscellaneousproducts required during a store launch. These products
may or may not be directly associated with the sale of product. Figure 15
illustrates typical movement of product flow for Victoria's Secret.
5.4.4.1 Inbound
Using an Internet-based module tied to an overseas factory, LLS gets a 48 to
72 hour notification for shipments pickup. LLS takes ownership of these
products as soon as they are picked up from the factory. LLS may decide to
bring in these goods in using either ocean transportation or air transportation.
The ultimate decision to fly versus ship is made by the brand based on a
variety of factors such as fashion versus basic products. As a loose rule, basic
items (60% of total volume) are ocean shipped and fashion items (40% of total
4
0
volume) are aired (Limited Brands Interview, 2005). The main reason behind
the air shipments for fashion items is that fashion bras are light and have
higher AUR. The benefits of airing these goods to ensure 100% availability in
peak
selling season more than offsets the cost of air transportation. Once picked up from
the factory,
4
0
An ocean shipment from the port of Hong Kong to the west coast and then
to Columbus, Ohio typ)ically takes about 21 days and slightly longer from
Sri Lanka. In contrast, air shipment lead- time including customs clearance
in the US takes from anywhere between 5-7 days (Limited Brands Interview,
2005). LLS works with 5 primary and 2 secondary freight forwarders who
help clear these shipments from U.S. customs.
The ocean shipments typically arrive in the US west coast, where they are
transported via inter- modal using truck or rail to Chicago and then trucked
from Chicago to the Columbus distribution center (DC). Nearly 100% of
apparel shipments come to the DC from vendors. In contrast, 75%
of beauty products go through three cross-dock buildings straight to the stores
and never visit the warehouse.
The store ready cartons are brought to the shipping building for a designated
outbound delivery. The shipping building is equipped with highly automated
4
1
consolidation mechanisms and once a picker chooses a box for outbound
delivery, 97% of the times, it is not touched until it reaches the loading area.
The shipping building ships 300 to 400 thousand cartons a day and has the
capacity to ramp up to 1.2 million cartons at peak (Limited Brands Interview, 2005).
4
1
cartons/hour.
5.4.4.3 Outbound
LLS has line haul relationships with domestic carriers like J.B.Hunt and
Schneider who help to hLaulthese boxes to a dedicated pool of about 45
delivery agents. Delivery Agents are responsible for cross-docking these
incoming shipments and delivering to stores within approximately a two hour
window, with a 97% on-time accuracy (Limited Brands Interview, 2005). In
place of using third party carriers like FedEx or UPS, the company has
developed its own logistics network
which it claims is cheaper and more efficient for its distribution purposes.
Moreover, as holiday and weekend deliveries are not uncommon, especially
in the busy seasons, these service providers do not ensure weekend
deliveries. For example, in peak holiday season, some stores like the Herald
Square location in New York, require deliveries three times per day, which
turns out to be very expensive if outsourced. LLS charges the brands
published discounted sale rates firom UPS and is still able to meet these
demanding service levels (see next section). The shipments carried in a
Delivery Agents' truck contain products which pertain to all the brands
within a Mall. The agents deliver in short hauls delivering products to each
Mall on their way. Currently, it takes about 72 hrs for aired shipments out of
Hong Kong to reach the Columbus DC. At peak, the DC can make this
shipment store-ready in a day. From that point, it takes approximately 2.2
days on average to get to every US store. Therefore, fashion goods leaving
Hong Kong on a Friday would make it to every store by the following Friday.
4
2
5.4.4.4 Measuring Success
Apart from the service level agreement (see beginning of Logistics section),
one of the key tools that LLS uses to measure success is benchmarking. LLS
formally brings in outside consulting firms to do a thorough logistics
evaluation. Additionally, internal teams do informal evaluations
every 24-30 months. Pricing evaluations are done twice per year. All such
benchmarking
4
2
outside service providers due to internal capabilities like providing value-added
activities and weekend deliveries. Moreover, LLS operates at a low margin and
has relatively minor overhead costs in comparison to the large external 3rd
party providers. The other aspect of success derives from a collaborative
working relationship with the brands. For example, in one instance a Brand
agreed to SKU rationalization to help solve capacity problems.
The other area where LLS uses well defined guidelines and metrics is in its
relationship with stores. These metrics measure on time deliveries for
replenishment goods as well as floorsets, along with many other key
characteristics of performance.
4
3
carries Victoria's Secret Beauty boxed in between the Victoria's Secret lingerie
store. Finally, the company has several free standing beauty stores.
Each of these stores maintains a POS database with the help of a server setup in the
back-room.
The store prints a POS report two times per day to view inventory levels. Daily POS
data is
4
3
store sales and sell-through the following day and makes adjustments to the
originally allocated orders. On the other hand, the stores are not equipped to
have stock ledgers connected to store inventory, so it is difficult to ascertain
exact inventory levels at any particular times, except for
the last inventory count. The stores currently do not have the provision to order
as and when they like from the distribution center, a process called "trickle
pulling". This is planned to be
available from July of 2006. A trickle pulling process would ensure each store
has a stock-room which has basic replenishment products stacked like
greeting cards. The stock-room typically takes 20% of space within a store.
About one-third of Victoria's Secret stores also have off-site storage either in
the mall or a nearby public storage facility for storing new merchandise, props
and non-sale merchandise. Currently, stores are not integrated and so cannot
view the inventory of other stores in the network. Store to store visibility of
inventory is planned for 2006 -2007.
Finally, Finance doesn't have the provision of maintaining a store specific profit
and loss statement. The only information that it receives is of top-line sale and
payroll expenditure. For an accurate store-specific financial statement,
accurate count of both merchandise and non- merchandise inventory along
with an accurate information of store overheads is critical. If this information
can be maintained, a store specific profit and loss statement will enable
Victoria's Secret to exert tighter control over the performance of individual
stores.
outs in a store. This metric is calculated based on the current inventory, the
average dollar sales,
4
4
is "PAR". "PAR" is specifically used for a comparison of a Victoria's Secret
Store to another competitive store in the same center or mall. So, for
example, A Victoria's Secret Beauty store would be compared with Sephora,
a leading fragrance retailer, or beauty counters within department stores. On
this scale, a typical Victoria's Secret Store is observed to perform higher than
any other competing retailer within its center or mall. A third
metric is "Opportunity Volume" which quantifies the potential dollar losses because
of stock-
outs in a store. This metric is calculated based on the current inventory, the
average dollar sales,
4
4
and the number of transactions.
The sales force within a store in measured on the percent of sales plan,
payroll, individual competencies and. the percentage of damaged or stolen
goods, also called "shrink". Victoria's Secret has a bonus structure in the
form of a program called "Angels of Excellence Ranking". The ranking is in
the order of bronze, silver, Gold, Platinum.
4
5
which makes the forecasting process very difficult and results in errors.
Merchandise Planning purchases sizes based on historical pattern of sell-
through of the size curve.
On one occasion, out of the size curve that was purchased, two particular
sizes, 34B and 36B, sold at twice the rate that they were projected at (16%
versus 8% of volume), causing stock-outs
and potential lost sales. Although this disparity in consumer behavior is difficult to
predict in
4
5
fiaster through use of Point-of-Sale (POS) information immediately transmitted
to its suppliers. Lack of transmission of real-time POS data from stores to the
corporate head-office has other disruptive effects as well. On holidays like
Black-Friday, the day after Thanksgiving, when many consumers begin
Christmas shopping, the corporate head-office has to deal with huge volumes
of hourly phone calls from individual stores for updates on sales figures.
4
bra, to name a few.
6
was merchandised in the basic category and the remaining in fashion
(Limited Brands Interview, 2005). At a $45 retail the IPEX is the maximum
selling bra in this price range for VS. As with
the IPEXX, the company believes that for constant innovation within the
existing sub-brands, it is important to work with the best component factory,
the best manufacturing processes and the
best people in the world -- who can constantly innovate new technologies like the
shaving
4
bra, to name a few.
6
Last, from standpoint of human resource management, Victoria's Secret
Stores faces challenges due to the fact that managers are not trained in
managing store inventory, keeping cycle counts or verifying data integrity.
The problem is magnified by a large number of scan errors. For example, if a
customer buys one black bra and one white bra and the cashier rings them as
two black bras instead, then inventory counts will show errors.
Direct carries out its product development work in concert with Victoria's
Secret Stores. Although it operates independently of Victoria's Secret Stores,
and selects its own assortment of merchandise, it has regular brand meetings
with Victoria's Secret Stores. Direct carries approximately 90,000 SKUs in the
category of lingerie, shoes, apparel accessories and
sleepwear, and beauty. Apparel constitutes about 40% of Direct's products,
and intimate apparel is the remaining business. Apart from carrying its own
brand, Direct also carries third party merchandise from brands like Calvin
Klein. In comparison, Victoria's Secret stores carry only about 12,000 SKUs of
its own brand. There exists only a 15-20% overlap in the SKUs sold between
Victoria's Secret Stores and Direct. The Victoria's Secret Direct website is split
4
merchandise assortment
7
into regular and clearance categories. The regular website carries 2100 styles
totaling to about 42,000
SKULsand the clearance website carries between 500 to a 1000 styles at
anytime totaling to about 20,000 SKUs (Limited Brands Interview, 2005). It is
estimated that the largest customers for
Victoria's Secret as a whole are multi-channel buyers. These are customers who
shop from the
4
merchandise assortment
7
between the Direct business and Victoria's Secret Stores, but it is
speculated that the Direct channel drives many Victoria's Secret customer
to its stores.
4
8
Direct to leverage assets between the catalog and web operations such as
common photography. About 400 million catalogs are mailed in a year;
approximately one fresh book a week having anywhere between 60 to180
pages and including between 250 and 600 items. About 95-98% of the Direct
products are sold in US. Semi-annual sales are tied together with Victoria's
Secret Stores and a sale period is comprised of 8 weeks, requiring
approximately 8 mailings during this
time (Limited Brands Interview, 2005). Last, but not the least, if a product doesn't
perform well
4
8
5.5.2 Sourcing and Production
Victoria's Secret Direct utilizes the Mast network, as do the Victoria's Secret Stores.
Direct is
4
9
an 88% in stock and 12% back-order at the item level. This level of data
integrity allows Direct to be much more
responsive than Victoria's Secret Stores and as a result allows them to make
dynamic changes to order quantities, pre-packs and size-curves based on
latest selling patterns. In contrast to placing large orders with Mast, as do
Victoria's Secret Stores, Direct can thus place smaller and more frequent
orders. Moreover, Direct doesn't require excess inventory for the purpose of
its floor
arnd window displays as do Victoria's Secret Stores.
4
9
5.5.4 Goals and Challenges
As a part of the INSIGHT project, Victoria's Secret Direct is working closely with
its production team to create a library of fabrics and raw materials to make a
choice matrix such that lead times can be reduced dramatically. They are also
a part of the same initiative to reduce concept-to- market lead times from 72
to 40 weeks.
One of the challenges that Direct faces in its online business is to notify its
customers when products are in stock. On the catalog side, the challenge is
severe, as Direct is often faced with demands from its customers who order
styles from an older catalog which are currently out of stock. The other
serious challenge for the company is in the area of returns. Currently, returns
amount to approximately 25% of demand and are primarily driven by the
Swim and Apparel categories; however a considerable part of returns are put
back in stock. These are products which are in reasonable condition to be
resold. The return rate for lingerie is negligible.
One of the challenges that Victoria's Secret faces overall is in the category of
fringe sizes. Fringe sizes are the ones which are on the tail-end of the demand
curve and whose demand patterns are harder to predict. Customers looking to
buy these sizes typically feel the need to try them on before purchase. If these
products are carried by Direct, there is potential for reduced customer service
levels. On the other hand, if Victoria's Secret Stores decides to carry these
sizes to
provide better customer service, they will be faced with challenges of less
predictable demand patterns for these sizes, leading to over or under stocking
of product. Therefore, the company has to work a delicate tradeoff between
providing better customer service levels and the subsequent financial impact of
this service.
50
A survey about multi-channel retailing tactics used by retailers, conducted by
Forrester research, showed that 87% of retailers allowed purchases made
online to be returned to stores (see Figure 16). Limited Brands aspires to
integrate Victoria's Secret with its Direct business. This may involve large
logistical challenges for the brand but may have a positive impact of
customer
satisfaction levels as the customers will be able to return goods purchased online to
Victoria's
51
Secret Stores, and may even be able to pick up products in stores which
they purchased online. Limited Brands aspires to make its other brands
Direct-capable as well.
6 Victoria's Secret's Supply Chain
Framework
Victoria's Secret's business strategy has evolved from a shop-and-copy system
to a branded concept, that of selling innovative, technologically advanced
products at reasonably high profit margins. The Victoria's Secret brand is
positioned to be the dominant, young, sexy and sophisticated lingerie and
beauty concept, targeting young customers who appreciate the value of
possessing innovative lingerie. At the same time, the company is somewhat
risk averse. It does not rely solely on its fashionable bra launches for all of its
sales. It distributes risk by having a mixed assortment of fashion and basic
goods. However, having this mixed assortment adds complexity, in that the
brand has to operate two supply chains; one for each of these types of
products. This chapter introduces the underlying operating model, operational
objectives and important tailored business activities that drive sustained
competitive advantage within the Victoria's Secret supply chain (see chapter 1
for framework) and align with the overarching business strategy.
availability of its products. Most of the Victoria's Secret Stores' new product
The supply chain for Victoria's Secret's fashion items is driven by "Speed-to-
Market" to ensure responsiveness. This is reflected in the company-wide
initiative to shorten its "Concept-to- Market" calendar. This supply chain is
further governed by a sourcing strategy that requires a set of suppliers with
an excellent record of product innovation, value-adding capabilities and no
minimum volume requirements. Due to the prioritization of speed over low
labor cost, these items are made in the most capable factories in the world,
wherever they may be, and are consistently air shipped to the company's
distribution center in Columbus, Ohio.
On the other hand, the supply chain for Victoria's Secrets basic items is
driven by factors like asset utilization and supply chain efficiency. As a result,
basic goods are manufactured in vertically integrated factories which
provide close control over capacity utilization and productivity. These
factories run at full capacity and provide economies of scale (Limited Brands
Interview, 2005). Mast holdings has an equity stake in two of Limited Brands'
largest factories in India and Sri Lanka. This is a strategic decision in order to
maintain tighter control and better supply chain visibility.
53
'lith the help of Limited Logistics Services (LLS), Victoria's Secret has drafted a
Service Level
Agreement that defines various performance metrics for services to Victoria's Secret
Stores. This agreement also defines the role of the Victoria's Secret Stores in
objectives. The performance metrics are divided into three broad categories
as defined below.
54
6.2.1 Customer Response
These metrics are customer-focused and customer-facing. They include a set
of distribution metrics as well metrics related to store performance such as
Responsiveness, Floor-Set, Business Priorities, New Stores, Value Added
Services (VAS), Meeting Cadence, Reporting, and Air Shipments.
6.2.2 Efficiency
These are internal metrics. They are productivity and cost-related and include
a set of metrics at the manufacturing as well as distribution center level such
as Auditing/Cycle Counts, Through- Put, Network Productivity, DC Metrics, DC
Throughput, and Store Throughput.
metrics are seen to carry more weight overall. The focus in this model is to
increase in-season
54
categories of fashion goods, particularly in highly promoted launch-related
fashion goods, which are most often a result of innovative product
development and have relatively short-product-lifecycle of just one season,
responsiveness
metrics are seen to carry more weight overall. The focus in this model is to
increase in-season
55
product availability to reduce lost sales and maximize margins. Figure 18
illustrates the focus on the metrics that the company places for basic items.
The shaded portion implies in that this model is heavily skewed toward
efficiency and asset utilization metrics. Figure 19, illustrates the focus on the
metrics that the company places for fashion related items. The shaded
portion, in this figure, implies that this model is heavily skewed toward
customer-response.
The first tailored activity emanates from the company-wide open innovation
model. The de- centralized design culture within Victoria's Secret adds
unique capabilities to its supply chain design. Product Innovation can come
from the supplier, from in-house development or through design inspirations
from external concepts. This creates the possibility of inter-company
operating ties with outside suppliers. For example, if Limited Design Studios
in New York initiates a design concept, it can go to a preferred supplier to be
further developed and even changed. This relationship during the design
process adds flexibility, which is hard to replicate. The second tailored
activity has to do with the sourcing model that Limited has adopted as a
whole. The presence of Mast Industries as a wholly-owned subsidiary of
suppliers who were experts on foam manufacturing for a leading
automotive manufacturer to
55
Limited Brands is of tremendous value to the company. Mast carefully selects
its vendors based on capabilities to manufacture and deliver fashion versus
basic products. Mast works with a set of vertically
integrated factories as well as raw material suppliers to create a product that is
hard to replicate.
For example, in the case of the IPEXproduct development, Mast worked with raw
material
56
create a padded bra which is incredibly light and comfortable. The light
weight of the product also makes it a good candidate for air-shipping at
lower cost per unit.
Vertical integration helps the company to control the production process from
fiber to garment. On one hand, this leads to greater manufacturing efficiency
required for producing basic products, which generate relatively lesser profit
margins than fashion items. On the other hand, vertical integration also helps
to speed the product development process essential for new and fashionable
products.
Finally, the role of Limited Logistics Services' (LLS) "shared service model" in
the smooth operation of its supply chain is indispensable. As mentioned
earlier, the Service Level Agreement with each of its brands, including
Victoria's Secret, not only defines the detailed performance metrics but also
defines the role of the each brand in order to carry out the objectives on
time. LLS consistently benchmarks itself against outside logistics providers
and has been able to provide higher service levels to its brands at
competitive costs. The dynamic ability of LLS to constantly evaluate and re-
evaluate its performance against external agencies helps Victoria's Secret to
stay ahead of the competition. In its logistics design, LLS incorporates the
fact that whether a product being delivered is fashion or basic. For example,
in most cases, fashion lingerie is air-shipped from Asia to Columbus, OH and
basic products are ocean-shipped. This is because the fashion products,
which have relatively higher margins, are less price- sensitive to
transportation costs per unit. Fashion and launch products may also have to
go through a customized value-added service process in order to cater to the
requirements of the
There are interesting contrasts between the Victoria's Secret supply chain
and the supply chain of Zara. Zara's strategy is to target customers who
want fashionable but cheap clothing and Victoria's Secret, on the other hand,
is looking to "trade up" while maintaining a distinct brand image. According
to an industry observer, Zara's clothing has a premier look, as they are often
copies from top designers. This resembles the shop-and-copy strategy that
Limited Brands adopted prior to the early nineties.
void to reach certain stock levels within a sub-brand, it is more likely that a
basic product would
57
but in case of Victoria's Secret may lead to lost-sales, as availability is a key
driver of sales for both basic and fashion items.
void to reach certain stock levels within a sub-brand, it is more likely that a
basic product would
58
be chosen over a fashion product. As Victoria's Secret's business has a large
replenishment element, the planning team often constrains its fashion buys
to support the replenishment business. This hurts VS on fashion products, as
they risk experiencing regular stock-outs. This is in contrast to the regular
apparel business like Expressw here inventories completely turn between
12-16 week periods (Limited Brands Interview, 2005). Zara, on the other
hand, completely relies on smaller quantities of risky fashion items, using
scarcity to generate sales.
5
8
6.5.5 SKU proliferation
Zara introduces about 12,000, mostly non-repeatable styles per year in
various colors and sizes (Dutta, 2002). Victoria's Secret, on the other hand
has a total of 12,000 SKUs including different
sizes
Brandsand colors and does about 70 new product introductions in one year (Limited
5
8
Interview, 2005). Again, this difference is primarily driven by the fact that
Zara does not create these designs, but instead copies high-end fashions.
6.5.6 Conclusion
Victoria's Secret and Zara operate based on different business strategies,
which are well suited to their individual needs and geographical locations.
Both strategies are supported by specific supply chain operations which work
well for their needs.
As noted earlier, VS heavily relies on a technologically advanced and
innovative product development process. So, for a faster concept-to-market
cycle, Victoria's Secret may have to reduce its product design complexity,
something it may not be willing to compromise on from a strategic
perspective. The IPEX bra, for example, has been marketed as an advanced
piece of construction and product complexity in this case adds a unique
competitive advantage. Zara, on the other hand, still works on a shop-and-
copy model and produces fashionable products which do not go through
elaborate design development processes. This brings the required speed to its
supply chain.
Another interesting aspect to note in the case of Zara is how its current
operating model of producing closer to the customer demand may work for
Zara's international business. Zara's clothing may not be able to generate
premium margins because of its relatively cheap to moderate pricing structure.
As a result, air-shipping all of its goods, which are essentially all fashion items
with a short shelf-life, from Asia or Spain to its North-American and other
international store locations, may not be as profitable for the company. In
addition, the process of manufacturing in the United States and being closer to
customer demand will likely involve
higher labor costs in comparison to Spain or Asia.
5 9
VS and Zara's business strategies have their own blends of success elements.
In order to capture best practices from one other, each of the companies will
have to create conditions that will enable them to fit into the same mould as
6 9
strategies.
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