Sunday, September 21, 2014

H&M's secret to cheap, afforadable and fashionable clothing: Outsourcing

H&M opened its first store in Vasteras, Sweden in the year 1947. Today H&M has expanded to over 3300 stores in 54 countries and has a pool of over 116,000 employees. H&M offers clothes, accessories to women, men, teenagers and children. This is made possible by a design and purchasing department which manufactures all the clothes. New clothes and accessories arrive to the stores every day and H&M is capable of moving apparels from design to hanger in mere 20 days.
  Map showing H&M's global presence

Buying and Production:
H&M does not own any of their factories, it outsources all its production. Despite this, H&M maintains good control over their outsourced production phases. H&M has 22 production offices in Asia, Europe Africa and Central America. H&M purchases garments from over 800 suppliers and 60% of production takes place in Asia and the remainder in Europe. H&M has 22 production offices in Asia, Europe Africa and Central America.

The role of these production offices:
  •  Ensure that the products have the right price, good quality and they are manufactured under the right conditions.
  • Conduct checking and testing which plays a role in reducing Lead Times.
  • Minimize risk by buying raw-materials on an ongoing basis throughout the year.
  • Apart from this, auditors regularly inspect work conditions and monitor environmental effects of manufacturing activities.

To offer the consumers high fashion and quality at the best price, H&M works with few middlemen. The company buys right items in large volume from the right markets. The firm has a well-established and efficient distribution channel and relies heavily on its IT system to work efficiently.

Clothing Industry Supply chain

Green supply chain:
Logistics is challenging for every fashion industry and H&M places a big emphasis on the green transportation. Goods sent from producers in Asia are transported almost exclusively by ocean. Within Europe, H&M strives to increase the share of movements by rail over road. More than 90 percent of all transports are done via ocean, rail or road. Air is used only in exceptional cases when faster deliveries are required.

Apparels arrive at one of the several distributions channels located in different sales markets. After unpacking and allocating, the garments are sent to the stores. These centres are in some cases supporting the stores in a geographic region consisting of several sales countries. The individual stores do not have backup stocks and they are replenished as required from central stockrooms as and when need arises. As soon as a product is sold a request is sent for replenishment.

Drivers for Outsourcing:
 Cost reduction: The Company is saving money on initial start-up costs of plant, equipment and building. H&M enjoys advantage of labor arbitrage and cheap raw-materials.

Flexibility: Since the fashion industry is ever changing, the company can modify production patterns which will result in higher profit margins. Clothes that are have higher demand can be re-ordered whereas those that have lesser demand can have lower re-orders.

Specialization: Through outsourcing activities H&M can focus more time and effort on designing as this is their core competency.

Is outsourcing the best way to maintain lower prices and keep up with ever changing consumer demands and should all retailers outsource their clothing to cheaper markets to maintain cost advantage?



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