{"id":21759,"date":"2017-11-13T00:24:56","date_gmt":"2017-11-13T05:24:56","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/hm-adapting-to-the-digitalization-of-retail\/"},"modified":"2017-11-13T00:24:56","modified_gmt":"2017-11-13T05:24:56","slug":"hm-adapting-to-the-digitalization-of-retail","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/hm-adapting-to-the-digitalization-of-retail\/","title":{"rendered":"H&amp;M adapting to the digitalization of retail"},"content":{"rendered":"<p>Retail is an industry that has been heavily impacted from growing digitalization. \u00a0The development of digital technology has led customer preferences and behavior to change rapidly, and this has direct implications on how retailers need to manage their supply chains to stay competitive.<\/p>\n<p>H&amp;M, a global retailer headquartered in Sweden, is a company currently grappling with the complexities of changing their supply chains due to digitalization. Its CEO Karl-Johan Persson conceded in 2017 that the company has not changed its supply chain despite the evolving digital landscape, and hence was not able to respond as rapidly as the change in customer preferences.\u00a0 This has resulted in high inventory and huge markdowns to clear inventory. \u00a0In the past 3 years, inventories have doubled and days in inventory have increased from 100 to 130. [1]\u00a0 H&amp;M\u2019s supply chain lead times, measured by time taken for apparel from design to being available to purchase in store or online, are currently double those of Zara\u2019s, one of its \u201cfast-fashion\u201d competitors. [2]\u00a0 These have negative implications on both top-line (slow adaptation of customer tastes which results in lower revenue) as well as bottom-line (higher inventory cost and mark-downs leading to lower gross margins). \u00a0As a result, H&amp;M shares have lost a third of their value since two years ago.<\/p>\n<p>To improve its lead times and decrease inventory to be able to respond more rapidly to customers\u2019 evolving preferences, H&amp;M has begun taking actions across the entire supply chain in both its internally made apparel as well as third-party supplied apparel, from product development, procurement, production and distribution. \u00a0There is no single action that will dramatically improve the supply chain; H&amp;M will have to invest in a host of initiatives to achieve its goals. [3]<\/p>\n<p>Short-term actions (effects seen in next 2 years):<\/p>\n<ul>\n<li><strong>Greater flexibility with suppliers<\/strong>: H&amp;M is working closely with its suppliers and evaluating its internal buying processes to allow for just-in-time purchasing and leaner inventory levels. [4]<\/li>\n<li><strong>Move procurement \/ production closer to end-markets<\/strong>: While this will decrease lead time, moving procurement or production from Asia to Europe will result in higher cost (wages, etc.).\u00a0 Given H&amp;M is primarily a discount chain competing on price, it will need to balance profitability when executing this strategy. [5]<\/li>\n<\/ul>\n<p>Medium-term actions (effects seen in 3-10 years):<\/p>\n<ul>\n<li><strong>Build digital infrastructure<\/strong>: H&amp;M has begun investing heavily in infrastructure in the past few years, a costly but necessary effort to build the foundations of a flexible and scalable supply chain.\u00a0 This will lead to more efficient sourcing, allocation and distribution and an overall increased speed of the supply chain.\u00a0 Key components include automatization of warehouses and logistics hubs, RFID tagging, delivery solutions, and advanced analytics. [6]<\/li>\n<li><strong>Omni-channel strategy<\/strong>: In established markets, H&amp;M\u2019s online sales already account for 25-30% of sales, and are projected to grow by 25% a year in the near future. As such, H&amp;M has a clear omni-channel strategy to integrate the digital and physical worlds to offer customers a more seamless shopping experience, including click and collect, scan and buy, online returns in stores. [7]<\/li>\n<\/ul>\n<p>In addition to the above, I believe management should also focus on the following:<\/p>\n<ul>\n<li><strong>Data analytics<\/strong>: H&amp;M has stressed that they are incorporating algorithms into supply chain operations, but they should also take advantage of the wealth of internal and external data sources to inform various business decisions.\u00a0 Internal data is helpful for improving the algorithms to optimize supply chain, and external data is helpful in demand forecasting (being able to see consumer trends industry-wide) as well as in markets where H&amp;M has just entered and is still a small player with limited data.<\/li>\n<li><strong>Organizational culture<\/strong>: Management has repeatedly mentioned that adapting to digitalization is a huge transformation for the company.\u00a0 They stress change in processes and investment in technologies, but a key aspect of change is also the \u2018softer\u2019 aspect i.e., culture.\u00a0 With \u2018speed\u2019 as the new motto, communicating the vision, transforming the culture and mindset of employees, and attracting and retaining the right people are also essential to success.<\/li>\n<\/ul>\n<p>As digitalization increases and advanced analytics play an increasingly larger role in product development, I wonder how much of a role \u2018creatives\u2019 will play in the future, particularly in a fast-fashion company like H&amp;M.\u00a0 Can we sum up an apparel development process in an algorithm?\u00a0 Also, with the increasing transparency of supply and demand in the network and the move towards automation and just-in-time inventory, would it be possible for H&amp;M to ultimately customize apparel to the specifications of each customer?<\/p>\n<p>&nbsp;<\/p>\n<p><strong><u>Citations:<\/u><\/strong><\/p>\n<p>[1] H&amp;M 1H 2017 Earnings Call Transcript, <em>CapitalIQ<\/em>, June 29, 2017.<\/p>\n<p>[2] Anna Ringstrom, \u201cH&amp;M invests in supply chain as fashion rivalry intensifies\u201d, <em>Reuters<\/em>, March 30, 2017, https:\/\/www.reuters.com\/article\/us-h-m-results\/hm-invests-in-supply-chain-as-fashion-rivalry-intensifies-idUSKBN1710PM.<\/p>\n<p>[3] H&amp;M 1H 2017 Earnings Call Transcript, <em>CapitalIQ<\/em>, June 29, 2017.<\/p>\n<p>[4] H&amp;M 9M 2017 Earnings Call Transcript, <em>CapitalIQ<\/em>, September 28, 2017.<\/p>\n<p>[5] H&amp;M 1H 2017 Earnings Call Transcript, <em>CapitalIQ<\/em>, June 29, 2017.<\/p>\n<p>[6] H&amp;M Year End 2016 Earnings Call Transcript, <em>CapitalIQ<\/em>, January 31, 2017.<\/p>\n<p>[7] Ibid.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>How the global retailer H&amp;M is changing its supply chain in order to adapt to rapidly changing customer preferences due to digitalization<\/p>\n","protected":false},"author":10062,"featured_media":21760,"comment_status":"open","ping_status":"closed","template":"","categories":[43,471,2123,49,16,17],"class_list":["post-21759","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-analytics","category-automation","category-digitalization","category-e-commerce","category-retail","category-supply-chain","hck-taxonomy-organization-hm","hck-taxonomy-industry-retail","hck-taxonomy-country-sweden"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - 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