Crocs: Building Flexible Supply Chains

Last week’s article from The McKinsey Quarterly focused on the importance of a flexible supply chain in uncertain economic times. Because of the drop in demand and output, several companies have had to cut prices by almost 50%.[1] Challenges associated with forecasting customer demand have reinforced the importance of flexible supply chains. One such company that revolutionized the footwear supply chain is Crocs. Over the years, they have developed a flexible supply chain model with a focus on customer needs.

The founders of Crocs first purchased the external manufacturing company (formerly called as Foam Creations) that was in-charge of production. This ensured that Crocs owned the trademarked croslite resin manufacturing facility—this also gave Crocs he ability to alter volume produces based on customer needs. Crocs maintained their raw material supply chain, which was based in different countries. Raw materials from these suppliers were compounded (put-together) by an Italian company. In order to ensure a smooth transition after acquiring the manufacturing facility, Crocs maintained their dealings with this third-party Italian company. Raw materials compounded in this Italian company were then shipped to Crocs’ manufacturing unit in Canada—shoes were assembled here. The final products were then shipped to a third-party distributor (in-charge of the warehouse) who was responsible for delivering consignments to retailers.[2]

After a few years of functioning as a single manufacturing unit, in early 2005, Crocs expanded to China by collaborating with a large contract manufacturer. Raw materials compounded in Italy were now being sent to two manufacturing locations: China and Canada. By the end of 2005, Crocs had entered both Asian and European markets, and were slowly expanding worldwide. In countries where companies were unable to conform to Crocs’ supply chain model, new Crocs owned manufacturing operations were built to meet the needs of customers in that region. Crocs use of contract manufacturers was a key component of its flexible supply chain. Contract manufacturers were very sensitive to customer demand and could start or stop production based on customer needs. Having these manufacturers in their supply chain helped Crocs’ bring in flexibility in the volume of products being manufactured.[3]

Once the manufacturing was set up, in 2006, Crocs shifted its focus on compounding raw materials. It created three compounding facilities in three of its major markets: Canada, China and Mexico. Now, instead of depending on one Italian compounder for raw materials, Crocs had three options to fall back on. Also, the proximity of the compounding facilities to production units enabled Crocs to delay the colorizing decision—this ensured that raw materials were colorized based on the current customer need for a product. This helped Crocs to address customer demand and decrease the chances of retailers having to deal with left-over/unsold product. [4]

Lastly, Crocs changed its warehousing model to increase supply chain flexibility. Crocs original supply chain model had one distributor. All products from different manufacturing units were collected and processed in one facility in Colorado. To make this process more efficient, Crocs added warehouses to each manufacturing facility. Products were shipped to retailers directly from these warehouses and were depended on the warehouse’s distance from these manufacturing units. This cut the time involved in shipping and delivering products to retailers and other customers.

Despite having built a flexible supply chain, in 2009 Crocs reported a net loss of almost $22 million.[5] Crocs’ flexible supply chain model, was not robust enough to handle large downswings in product demand, which happened after the economic collapse. This leads to a question: Is an “optimized” supply chain network, for cost or responsiveness, robust enough?

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[1] Glatzel, C., Helmcke, S., & Wine, J., Building a flexible supply chain for uncertain times, The McKinsey Quarterly, March 2009.

[2] Stanford Graduate School of Business, Crocs: Revolutionizing a company’s supply chain model for competitive advantage, June 2007,  p.6, https://mail-attachment.googleusercontent.com/attachment/u/0/?ui=2&ik=638c68d379&view=att&th=13ca7df1da3ebecc&attid=0.1&disp=inline&realattid=1426090767883960320-1&safe=1&zw&saduie=AG9B_P9LGl-zrL7RnIR8-lygvaT8&sadet=1360031659485&sads=R0za_7XW47sNdHICc2PHnjv0KbY&sadssc=1.

[3] Stanford Graduate School of Business, p7.

[4] Stanford Graduate School of Business, p. 8.

[5] Gonzales, Adrian., Crocs: From Revolutionary Supply Chain to Almost Bankrupt, Logistics Viewepoints, June 22, 2009, http://logisticsviewpoints.com/2009/06/22/crocs-from-revolutionary-supply-chain-to-almost-bankrupt/.