Operations management is defined by (Slack, et al., 2010) as the ‘activity of managing the resources which produce and deliver products and services'. It is important for operations management to be effective within an organization because of the potential it has to ‘improve both efficiency and customer service simultaneously' (Slack, et al., 2010). The organization that will be discussed in this report is H&M because of its operations management being effective as well as having some issues. H&M is a ‘Swedish multinational fashion company' (Shen, 2014), selling fashionable clothes for men, women, teenagers and children. H&M has over 100 in-house designers, buyers and pattern makers creating their clothing ‘centrally in the company's headquarters in Stockholm' (Giertz-Martenson, 2012). H&M's business model is to focus on outsourcing their non-core operations, which enables them to focus on their core business model, to have ‘fashion and quality at the best price' (Raysita, 2015). The key operations management issues are to do with their inventory and supply chain because of H&M being unable to speed up their supply chain to remain competitive. Additionally, H&M have struggled to keep up to date with the current fashion trends, meaning that customers are starting to shop elsewhere.
Outsourcing is most commonly defined as the ‘use of external agents to perform one or more organizational activities' (Lacity & Hirschheim, 2003). Outsourcing has emerged as a significant business strategy for multinational companies, such as H&M, to achieve a competitive advantage (Hasan & Alim, 2010). It can be seen as an effective strategy for companies because of some of the benefits it offers. For example, the supplier having specialised knowledge and more experience, as well as the ability to achieve economies of scale (Slack, et al., 2010). It has also been noted that outsourcing allows potential benefits for companies, such as, improving their flexibility and the ability for the business to focus on their core competencies (Hendry, 1995). These benefits will enable companies to operate more competitively within the market. Therefore, these advantages make outsourcing a strong strategy for businesses to use.
H&M chose an effective strategy to outsource most of the components of their production to more skilled suppliers, such as ‘Liz Fashion Industry Limited, a gold rated manufacturing supplier for H&M in Bangladesh' (Obleski, 2016) in order to operate the most effectively within their market. H&M were able to maintain their high levels of fashion and quality whilst achieving higher profit margins as a result of outsourcing. This is because the external supplier used offered ‘lower labour costs, costs of inputs and cost of energy' (Obleski, 2016). H&M purchases its clothes and other items through an abundance of separate suppliers rather than owning its own factories in order to reduce costs and be more flexible within the competitive environment (Goransson, et al., 2007). A company should understand the benefits gained from outsourcing and more significantly, the importance of forming strong ‘long-term relationships with their outsourced partners' (Kumar & Arbi, 2007). H&M has proven to understand how to maintain good relationships with their external suppliers by basing their relationship on ‘mutual trust and transparency' (H&M, n.d.).
However, outsourcing may not be the most effective strategy for businesses because it has some disadvantages. For example, H&M are heavily dependent on their outside suppliers as they outsource all of their production to 1,058 suppliers across 23 countries (Shen, 2014). The production offices are responsible for important roles such as, ensuring that the products are charged at the right price, are of good quality and are ‘manufactured under the right conditions' (Popat, 2014). Therefore, H&M will be negatively impacted if these suppliers are not effective within their roles.
A key operations management issue that H&M has encountered recently is problems with their inventory. Inventory is defined as the ‘stored accumulation of material resources in a transformation system' (Slack, et al., 2010). As H&M have been struggling to keep up with the latest trends, customers have been shopping at H&M's competitors, ASOS and Zara, to buy the newest designs. Currently, H&M has over $4 billion worth of clothing as a result of ‘imbalances in the assortment for the H&M brand' (Hanbury, 2018). This excess stock has led to H&M frequently having discounted clearance sections in their stores in an attempt to shift stock. However, due the numerous clearance sales H&M have had, there is an increased risk that these continuous promotions will lose their influence to push sales (Hanbury, 2018).
In order to stay competitive in the fast-fashion industry, H&M opened 220 new stores and expanded its e-commerce operations, resulting in them needing to increase their inventory levels to have enough stock. However, this led to H&M having excess stock which they have been unable to sell. As a result, their operating profit fell 62% in the first quarter of 2018, ‘sending its shares to their lowest closing price since 2005' (Paton, 2018). H&M stated that their response to this poor performance was to cut prices to reduce their stockpile and slow its expansion in stores (Paton, 2018). H&M have been increasing markdowns in an attempt to move their unsold inventory, but this has led to lower profits and sales (Kondracki, 2018). A key factor behind H&M's struggle has been their difficulty in managing their inventory so that it efficiently meets customers' expectations. For example, H&M's lead times are almost double in comparison to one of their main competitors, Zara (Kondracki, 2018). This is because H&M outsource all of their production and as a result, have significantly longer lead times (Bruce & Daly, 2006). It is important for H&M to have a shorter lead time as it means their products can be sold much faster (Melanie, 2017). Therefore, H&M have not been managing their resources effectively and as a result have had operational issues.
However, H&M's lead times depend on the nature of the products being sold, meaning that their lead times vary. ‘H&M's average supply lead times vary from three weeks up to six months' (Slack, et al., 2010). The trendier items that H&M stock require considerably shorter lead times, whereas their fashion basic items can be ordered far in advance (Slack, et al., 2010). This means that it is not always necessary for fashion-fast companies to have the shortest lead times.
Supply Chain Issues
Another operations issue that H&M has faced is their supply chain management. Supply chain management is defined by (Slack, et al., 2010) as the ‘management of the interconnection of organizations that relate to each other through upstream and downstream linkages between the processes that produce value to the ultimate consumer in the form of products and services'. The most common supply chain management objective is to ‘satisfy the end-customer' (Slack, et al., 2010). H&M have faced some issues with regard to their supply chain because they have not increased its efficiency to stay competitive in the fast-fashion industry.
H&M's competitors, ASOS and Boohoo, have been able to speed up their design and manufacturing process by making their supply chain more efficient and moving their ‘production closer to key markets' (Hanbury, 2017). It takes ASOS between two and eight weeks to get a product from ‘concept to sale', and Boohoo only two weeks. Whereas, it can take H&M up to six months, which has become an operations issue for them (Weinswig, 2017). This infers that it may take longer for H&M to make a profit as their products are not available for sale until much later than their competitors. By H&M's competitors speeding up their supply chain has allowed them to keep up to date with trends, compared to H&M who has struggled to speed up their supply chain. It is beneficial for a fashion company to have a fast supply chain because if products move quickly down the supply chain, the company's inventory-related costs will reduce because these products will spend little time as inventory (Slack, et al., 2010).
H&M has become well known for adopting a strategy of constantly renewing their product ranges with fashion-led styles (Barnes & Lea-Greenwood, 2006). However, they have struggled to increase the efficiency of their supply chain to stay competitive by not managing their resources effectively and not adopting an agile supply chain. An agile supply chain involves initial designs being made in small batches to test demand, and if they're popular, more goods are produced. This strategy allows these companies to match supply with changing demand (Weinswig, 2017). A key characteristic of an agile organization is flexibility. Agile supply chains are sufficiently flexible to cope with changes, either in the nature of customer demand or in the supply capabilities of operations within the chain (Christopher, 2000). H&M announced a 3% decrease in their net profits in their most recent quarterly results. The CEO of H&M, Karl-Johan Persson, stated that he would be ‘investing significantly in making their supply chain faster and more adaptable to keep up with the pace of changing demands' (Hanbury, 2017). If H&M is successful in doing this, then they are likely to become more competitive in the fast-fashion industry.
Quality has many different definitions as it has different meanings to each person. Quality is defined by H&M as anything from ‘safety and reliability to the feeling a customer gets when wearing a new piece of clothing' (H&M, n.d.). (Slack, et al., 2010) defines quality as ‘consistent conformance to customers' expectations'. The customers' expectations are shaped by past experiences and their individual knowledge, hence why quality means something different to each consumer. Total Quality Management (TQM) is an aspect of quality management, which is defined as an ‘effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in an organization so as to enable production and service at the most economical levels which allow for full customer satisfaction' (Slack, et al., 2010). TQM strives for continuous improvement in all functions of the organization and was one of the first approaches to highlight the importance of everyone's impact on quality (Slack, et al., 2010).
Quality can be argued as an important factor in relation to the inventory management issue identified at H&M. This is because of how H&M manages their inventory can have a direct impact on their overall profits, both short-term and long-term (Benge, n.d.). By H&M combining inventory control and quality control, they will have the ability to create an efficient, profitable business (Melanie, 2018). This highlights the importance of the need for H&M to manage their quality control system effectively in order to improve customer satisfaction. As H&M has inventory issues because of their excess stock from opening new stores and being unable to keep up with trends, the importance of managing their quality is therefore highlighted. Implementing effective quality control systems will enable H&M to ensure that they are able to meet the correct levels of quality and output.
Quality can also be argued as being a significant factor for some of the supply chain issues at H&M. This is because supplier quality management can be seen as an ‘important component of TQM, directly and positively affecting product/service design and process management' (Kaynak, 2003). Supply chain management seek improvements in production processes, by integrating development and production processes throughout the supply chain. (Nakamura, et al., 1997) claimed that TQM is necessary to improve the performance of manufacturing because of its focus on continuous improvement of processes in order to meet customers' expectations. Supply chains compete on the basis of time and quality, highlighting the importance for H&M to have a fast supply chain with high quality products to stay competitive (Mentzer, et al., 2011). Therefore, the importance of quality is emphasised in order to improve H&M's supply chain because if the quality improves, then H&M may be able to increase the speed of their supply chain to keep up with their competitors.
A recommendation for H&M to improve their operations performance in relation to their supply chain issues would be to source their products from countries much closer to their main markets. For example, H&M's rival Zara source around half of their products from countries near their main markets, giving them the advantage to react quickly to sales trends. This is an advantage that H&M does not have due to one of their main supply chain issues being unable to keep up with customer trends. If H&M were to have their clothes ordered, produced and delivered on demand, like Zara does, they will greatly benefit from being able to take advantage of the constantly changing trends within the market. Rather than sourcing the majority of their products from Bangladesh, H&M should focus on obtaining their products from factories in countries such as, Spain and Portugal, similar to Zara. However, it could be a logistical problem to alter H&M's supply chain to imitate that of Zara's. This is because it may be incompatible with H&M's lower prices due to productions costs being more expensive in Europe than in Asia (Times, 2017).
Another recommendation for H&M to improve their operations performance to aid their inventory issues is to invest in new technology to shorten their lead times. As H&M source about ‘35% of their total outsourcing from Bangladesh', they encounter many problems with reducing their ‘longer lead time due to lack of proper technological development' (Alim & Hasan, 2010). Therefore, it may be beneficial for these suppliers to test fabrics abroad where there could be an opportunity to have access to modern technology. However, investing in new technology may not necessarily improve H&M's operations performance because their struggle to keep up to date with trends has been a significant factor in their inventory issues. It might therefore be beneficial for H&M to focus heavily on meeting customers' demands in order to increase sales by listening to and understanding the wants and needs of their customers.
In conclusion, H&M's operation management activities are effective, due to outsourcing the majority of their operations being an effective strategy to utilise suppliers with more knowledge and experience and lower their costs. This enables H&M to achieve higher profits, making them the second largest retailer in the world (Balch, 2013). Despite H&M having a strong strategy of outsourcing, they have encountered operations issues with their supply chain and inventory. This has meant that H&M has lost their competitive edge due to not adopting a fast supply chain with short lead times and not being able to keep up to date with the latest trends. Therefore, the recommendations made for H&M to outsource their production closer to their main market to speed up their supply chain and to listen to their customers' needs will be beneficial for H&M to increase their competitiveness within the fast-fashion industry. Overall, H&M's operations performance has been successful until more recently, where they have struggled to keep up with the changing environment.
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