Reference no: EM133608002

Problem

CASE STUDY: H&M'S INVENTORY WOES BRING ATTENTION TO RETAILERS' MANAGEMENT OF EXCESS INVENTORY

H&M is one of the largest fashion retailers in the world. Headquartered in Stockholm, Sweden, the multinational company offers fast-fashion clothing, design, and services in more than 70 countries. H&M is globally recognized for its efficient supply chain management. Its supply chain strategy is centered on pursuing new promising markets and cost efficiency by utilizing outsourcing in manufacturing and distribution. Outsourcing practices also allow the retailer to modify supplier relationships and thereby swiftly respond to market changes, which is a critical ability in the apparel industry.

Lately, however, H&M has been experiencing inventory troubles. By the end of 2018, the company's inventory exceeded the $4 billion mark. It is worth noting that H&M has been on a growth path throughout the 2000s, which included significantly expanding its physical footprint in markets such as the United States. It is not surprising that this expansion brought inventory growth. Karl-Johan Persson, the company's chief executive, explained that H&M was opening 220 new stores and expanding its e-commerce operations in 2018, and so the company needed to fill the racks. However, the problem was that inventory accumulated at a higher rate than sales growth, and to move inventory, H&M provided price markdowns, which hurt profits and sales.

H&M's inventory woes were reported by several outlets. These articles were noting that the company had $4.3 billion in "unsold clothes." H&M Group provided an explanation on the composition of this inventory. Experts point out that underlying H&M's inventory troubles are several factors such as poor inventory management, disappointing product offerings, reduced foot traffic due to online shopping, and slow adoption of omnichannel retailing initiatives, all of which are damaging to the company's competitiveness. For example, H&M's lead times are almost double those of Zara, one of the company's main competitors. Clearly, operating a slower supply chain is a major disadvantage in the fast-fashion market. H&M also has inventory visibility issues resulting from outdated back-end systems, and this has delayed the company's implementation of omnichannel initiatives. Omnichannel fulfillment requires inventory visibility and accuracy across the entire supply chain. One way for H&M to tackle this issue is by doing more frequent auditing of inventory in its warehouses and store locations, supported with technology investments. To this end, H&M was reported to have plans for investing in operational and digital technologies such as RFID tags and warehouse automation tools. Overall, the company has been focusing on integrating its online and offline channels through initiatives such as implementing Click and Collect and online returns in store, improving search functions, offering flexible payment options and faster deliveries, and promoting sustainability. Recent announcements show H&M has achieved improvements-costs for markdowns were reduced and pretax profit increased. H&M Group explains the company's future plans, "As long as our customers continue to appreciate our products more and more, together with all the improvements we do in buying, sourcing and logistics, we expect the inventory to continue to improve, both in terms of composition and levels."

While H&M appears to be on track in recovering from its inventory woes, the situation shines a spotlight on how retailers handle their excess inventory. One common solution in the industry, also used by H&M, is to offer price discounts to move the merchandise. However, this practice is not favored by high-end retailers as the reduced prices can damage the brand value or lead to products being sold through unauthorized channels, risking counterfeits. Instead, some of these companies choose to destroy their surplus stocks to protect their brand value and intellectual property. For example, in 2018, Burberry was reported to have destroyed over $30 million of clothes and cosmetics. John Peace, Burberry's outgoing chairman at the time, said destroying stock, which takes place in the form of burning, is "not something we do lightly." The company also claimed it puts efforts to minimize the amount of excess stock by reducing and revaluing waste. Although very few companies openly admit it, several industry reports suggest that it is not uncommon for labels to resort to burning past-season items instead of risking damage to their brand by offering price discounts. As an example of tackling excess inventory sustainably, Kering (owner of Gucci and Balenciaga) and H&M are involved in an initiative in which raw materials are converted into yarn to make fabrics and garments.

From the above case study, Can you include Summary, Critical Analysis of IssuesDemonstrates how course work and lesson material on supply chain management applies to the case, Problems to Be Solved, Assessment and Analysis, and Conclusion /Lessons Learned.