Operations Management of Benetton - Case Study Example

BENETTON CASE STUDY Name Tutor Class Institution City/state Date of submission Table of Contents Table of Contents 2 Introduction 3 Q1. Bullwhip Effect 3 Q2. Postponement 7 Q3. Setting up production bases in other locations 10 Marketing factors 10 Costs 11 Risks 11 Infrastructural factors 12 Q4. Outsourcing strategies 13 References 14 Introduction This paper provides an analysis of the Benetton case, through answering four questions on the strategies and management operations that the company should embrace. Benetton is an Italian multinational enterprise dealing with apparels. The company was founded in 1965 and now operates in more than 120 nations and has 18 plants, which 12 are in Italy. Benetton has approximately 6,500 retail stores selling high quality clothing at fair prices. Q1. Bullwhip Effect Benetton’s sales and retail strategy reacted to the thought of complete downstream integration, away from the horizontal business model that had been operated from its establishment in the 1960s. Benetton has begun opening its own outlet stores to better collect and manage customer feedback, exhibiting complete collection and ensuring that the corporate image is maintained. The company gathers information about the customer preferences directly from its over 6,500 stores, agents, and franchises across the world. Through this strategy, the blurred effect of information from point-of-sale on upward supply chain is minimized through the bullwhip effect. In the modern times, companies are entangled in complex networks of customers and suppliers in an international scale and outdo their competitors with a sophisticated supply chain management instead of marketing techniques (Steckel et al., 2004). The difficulties of the supply chain dynamics have been thoroughly reviewed by different studies, defining the bullwhip effect as its initial requirement. Order differences increases as orders move up the supply chain and generates cost inefficiencies because of unchanged times of inventory stock-outs and surpluses. According to Lee et al. (1997), the bullwhip effect is caused by issues categorised as: system behaviours, resulting in order inflation; communication problems; order batching impacts, caused by fixed costs; and promotional campaigns and dynamic pricing that complicates order forecasting. By the end of 2000, Benetton changed its supply chain strategy to counter emerging competition without altering the interconnected features of the business model through two major strategies. First, the company increased both downstream and upstream vertical integration. Second, Benetton opted to centralise control of major operations along the supply chain. The company also studied the market for synergies through diversification of their apparel products to sporting ware through the acquisition of major sporting ware brands. While analysing the issues of bullwhip effect on Benetton, it is important to understand the position of the company on the supply chain. The diagram below shows the position of the company in the supply chain. Figure 1 Benetton's supply chain position The position of Benetton as the original equipment manufacturer in the supply chain has enabled the company to increase the level of its vertical integration along the supply network to ensure that all the operations (marketing and promotion and procurement of raw materials) are streamlined. This has been achieved at Benetton through considering the significance of information and knowledge sharing across the chain. Currently, the Castrette controls the entire supply chain. Castrette develops all the design activities, through the company’s product development division. Designers are integrated into the division and market data is accessed from the sales and marketing division of the company. Additionally, Benetton replicated the Castrette’s business model on its stores overseas and other production units in different parts of the world. Technology has a significant role in ensuring that the supply chain network maintains its vertical integration strategy. Through the establishment of the ‘United Web’ website, Benetton fosters the integration of its global business, e-commerce, and ensuring that online services (queries, feedbacks, recommendations, and customer preferences) are properly executed (Slack, Chambers, & Johnston, 2010). Another strategy that Benetton has adopted is the outsourcing business model at near-shore, offshore, and clusters. Approximately 90 percent of Benetton’s contractors are based in Veneto, Italy, which is situated a few miles from the company’s head offices. Overseas contractors are tasked with more labour-intensive work involving the basic collections, while near-shore contractors access collections to ensure that the time to the market is reduced. The final knitting phases of the garments are tasked to specific clusters in ensuring that particular competences are used. The company is, thus, more interested in economies of specialisation than economies of scale, as parts of the knitting work is executed by various small-scale contactors having low economies of scale. These suppliers are also significant to Benetton in spreading the risks, as shown by the franchising model. The connection with the parent company is significant in building trust, for long-term purposes, and ensuring stability to reduce dependence on the company. Initial Benetton partner companies were small and medium enterprises owned by individuals who were at management positions at Benetton and were allowed to operate independently through financial assistance from Benetton to purchase equipment. To ascertain high quality standards and dependability, Benetton contracts such entities with production exclusive tenders. Figure 2 Benetton supply chain outsourcing chart (Kumar & Arbi, 2008) Benetton has devised two major strategies of coping with the bullwhip effect. First the company has focused on integrating its information system. Through this, Benetton has been able to establish a global Electronic Data Interchange network that connects agents with production and the required inventory information. This ensures that order transmissions, connection with logistics, and the manufacturing units are all networked through the EDI. Second, Benetton has adopted coordinated planning, which ensures an integrated distribution model and allows the company to review customer feedback frequently and swift response. Q2. Postponement This is a concept in supply chain management involving a situation where the manufacturer produces generic products that can be developed at a later stage prior to final distribution to consumers. This business strategy increases possible benefits and reduces the risks through delay of investment into products until the final periods. In Benetton, the process of garment dyeing was delayed to a time when the customers’ demand uncertainty reduced. In the apparel sector, dyeing and colouring of products starts with the manufacturer and purchaser purchasing pre-dyed fabrics. With the pre-dyed fabric, the remaining stages are manufacturing, assembly, and distribution (Christopher, 2010). The fact that Benetton realised, nonetheless, was that if the process were transferred to the extreme end of the manufacturing process, once the product was finalised without dye, the company was more flexible in meeting up the consumer demands, thus having a significant reduction in the inventory. With the introduction of postponement in the company’s logistic system, Benetton acquired additional competitive advantages in the apparel industry. Rather than manufacturing whole product line, and having a large stock, Benetton produced smaller batch stocks to the existent stock stores in different parts of the world and have the ability to adjust to the customers’ needs throughout the time. In the old manufacturing model, the low volume colours would have a significant reduction in prices with the aim of clearing inventory. In this postponement model, the inventory is manufactured in low numbers that allows the company to determine the low volume product is bought off, there is a bigger retail store shelf for products with high demand and the company is able to produce the needed colours. Generally, the company would use about 10 percent of sales in a season to convert this prediction into the postponement model for subsequent manufacturing. Benetton also started to utilise 10 percent of its production for what was later referred to as the ‘flash collection’. This included approximately 50 products that are designed according to the customer demands, which are identified at the beginning of the manufacturing season. The company has opted to limit the production of the highly desired styles and colours, but with the existent of the postponement model, the products can be manufactured, designed, and distributed within a period of one month. Manufacturing and logistics are accorded a period of 1 week, and thus enable the customers to order and ensure that the products are delivered on time. The improvement of the process has been instrumental in ensuring an increase customer satisfaction and increasing the lead-time for the introduction of new products to the market (Simchi-Levi & Kaminsky, et al., 2008). The postponement strategy is also crucial in ensuring that the risks of products failing and that such failures affecting the products. Benetton’s decision to invest on adding dyeing machines into the manufacturing system was important in lowering the costs of the inventory cumulatively across all the stores and outlets. Currently, the retail outlets ensure a higher level of selling the spaces, and have the capability to get other shipment, which are directed to the store shelves. The implementation of the postponement strategy enables Benetton to benefit from the aspects of value chain flexibility, efficient performance in delivery, and asset productivity. To further expound on this, Davila (2007); Krajewski, Wei, & Tang (2005) indicate that the use of the postponement strategy is critical in spreading risks and reduction of uncertainties. Flexibility of a company is its ability to re-strategize and reconfigure the operations into dealing with these uncertainties. Therefore, postponement and flexibility are concepts that are closely connected in dealing with the supply chain operations. The two aspects are behaviours that react to adapt with uncertainty and the connection between postponement and supply chain flexibility is that it results in various types of flexibility. This is in form of product development flexibility through postponement of product development: it is product flexibility through postponement of production. According to Jarillo (2001), Benetton introduced the postponement strategy to ensure that the customers’ latest preferences were addressed. This modified the ‘dye-first-knit-after’ manufacturing to ‘knit-first-dye-later’ model. Figure 3 Lee & Tang (1998) model of the operational changes at Benetton showing products with single style and having different colour options By implementing this, the company levelled the aspect of timely production from the supplies to assembly and reoriented it to the manufacturer to retailer method. Nonetheless, Lee and Tang have argued that the benefits of this model in comparison to the initial one are concerning increased types of products and specifications and the reduction of the time taken while knitting vis-à-vis the modern improvements in technology. Similarly, the postponement model at Benetton reduced the time taken during decoupling and improved the efficiency of Benetton’s supply chain. Regardless of a minimum obsolete stock, the company put orders on an eight-month notice to ensure that the new stocks will not interrupt the existent trends. Therefore, it is only the improvement if the dual supply-chain that would have played an important role in solving the existent disadvantages. Q3. Setting up production bases in other locations In addition to the Castrette production pole, there are significant factors that should be considered while setting up additional production units in various locations across the world. Some of the factors to be considered by the new management: Marketing factors The market factor, being one of the factors to be considered in the location strategy, can be grouped into two categories: export market and the recipient market connected to the recipient. The export market indicates that the product demands are outside of the recipient country of the production unit. The recipient market indicates the company’s products demand is within the locality where Benetton plans to open a production unit (Chopra & Meindl, 2009). When Benetton opens a production pole in a foreign country or different locations within Italy, or regionally, it is important that the management consider the prevailing market factors. If the production of apparels in the new production unit fails to meet the requirements, the management can close it down and open it in another viable market. Costs The cost factors to consider before opening a production unit in another location include distribution and production costs. Production costs include the expenses Benetton has to consider including the material expenses, operations, and labour. The distributions costs the management has to consider will include the expenses that will involve storage, transportation, unloading/loading, packaging, and other logistic activities. In order to reduce these costs, Benetton has to start production units in locations where labour and the costs of raw material are comparably cheaper to Italy. Nonetheless, the company should always be ready to withdraw from the location when these factors are more expensive than in Italy. Reducing the costs of production is a major objective of Benetton management and a motivation to establish production poles in different areas. Nevertheless, Benetton should not ignore the costs of distribution, particularly the costs of transportation. Risks The risks factors that Benetton management should consider prior to setting up a production unit in a foreign location are economic, political, and social risks. The political risks that the management should focus on are the possibility of labour strikes or political unrests, sparked by political dynamics. The economic risks that the management should consider are the possibility of economic downturns, including the forex fluctuations that might cause unwanted disruption to investments in a location. The social risks that the management should consider are the possibilities of social issues, including accidents, diseases, calamities, and vandalism. Most likely, the Benetton’s management would not consider starting a production unit in a location with high possibility of risks occurrence, for instance violence or politically instigated wars. Benetton should close down the production unit in the location in cases of occurrence of unbearable risks in the location. While it is important for Benetton to open production units in other locations to ensure reduction of the time and costs of production, the possibility of economic risks should not be ignored. Infrastructural factors These factors include the hardware and software that support apparel production in the identified location. These include facility, institutional, and technological infrastructure that affect apparel production. Institutional infrastructure includes the laws and regulations, such as the legal requirements of opening an apparel production unit within the identified jurisdiction. Business laws, system of taxation, pricing, and contract laws are factors to be considered in the legal system. For policies involving the identified location, Benetton’s management should consider issues dealing with importation, funding, exportation rules, and the jurisdiction’s policy on production. Facility infrastructure involves the transportation of the products and connects to the hardware infrastructure required and operational and control needs. Lastly, technological infrastructure is the degree of handling automation and skills including IT, logistics, and human labour. Logistic technologies to be considered will include unit-load system and multiple-mode systems that will significantly reduce the costs of transportation. Q4. Outsourcing strategies Despite the fact that most of Benetton’s competitors, for instance Gap and Hennes and Mauritz (H&M), use complete outsourcing, the company still operates through partial outsourcing. However, it should be noted that the outsourcing strategies are significant in different business models for the company. According to the case of Benetton, the company has partially outsourced its production – with major focus on exploiting the expertise of the agents – to ensure that the costs and time of production and distribution and improved. As discussed earlier, Benetton adopted the outsourcing business model at near-shore, off-shore, and clusters. Approximately 90 percent of Benetton’s contractors are based in Veneto, Italy, which is situated a few miles from the company’s head offices. Overseas contractors are tasked with more labour-intensive work involving the basic collections, while near-shore contractors access collections to ensure that the time to the market is reduced. The company is interested in economies of specialisation than economies of scale. The section also added that partial outsourcing is important to Benetton in spreading the risks, as shown by the franchising model. The connection with the parent company is significant in building trust, for long-term purposes, and ensuring stability to reduce dependence on the company. Initial Benetton partner companies were small and medium enterprises owned by individuals who were at management positions at Benetton and were allowed to operate independently through financial assistance from Benetton to purchase equipment. To ascertain high quality standards and dependability, Benetton contracts such entities with production exclusive tenders. Complete outsourcing, as with the case with Benetton’s competitors, has its significance in various situations. Just like partial outsourcing, complete outsourcing is important spreading the risks, but on a wider scale. However, there are higher risks involved in instances where the mother company is detached from the outsourced operations. For instance, it becomes difficult to synchronise the deliverables when the company fails to choose an appropriate company for outsourcing. There are common difficulties such as sub-standard product quality, lengthened delivery time, and improper allocation of roles. In most cases, such issues are easily manageable in partial outsourcing. Another factor that can complicate complete outsourcing is that the outsourced entities often lose focus on the customer requirements. This is caused by factors such as handling other companies’ products and reducing the desired expertise. References Chopra, S. and Meindl, P. (2009) Supply Chain Management: Strategy, Planning and Operation, 4th Ed, New York: Prentice Hall. Christopher, M. (2010). Logistics and Supply Chain Management. 6th ed., Prentice-Hall, Hemel Hempstead. Davila, T. and Wouters, M. (2007).An Empirical Test of Inventory, Service and Cost Benefits from a Postponement Strategy. International Journal of Production Research, 45(10), 2245 – 2267. Gary, A. and Tang, C.S. (1997).On postponement strategies for product families with multiple points of differentiation, IIE Transactions, Vol. 29 No. 8, pp. 641-50 Krajewski, L., Wei, J.C., Tang, L.L. (2005).Responding to schedule changes in build to order supply chains. Journal of Operations Management, 23,452-69. Lee, H.L. (2002). Aligning supply chain strategies with product uncertainties. California Management Review, 44(3), 105-19. Simchi-Levi, D., P. Kaminsky, et al. (2008). Designing and Managing the Supply Chain: Concept, Strategies and Case Studies, 3rd Ed. New York: McGraw-Hill. Slack, N. Chambers, S. and Johnston, R. (2010), Operations Management, 6th Edition. New York. Pearson Education. Read More