Reference no: EM133152076

Q: Using the concept of the bullwhip effect explore how Zara and H&M can tackle harmful effects during the pandemic and post-pandemic period

Guidance note:

Supply chain integration and collaborations are key when managing a global operation. Understanding the bullwhip effect brings further understanding on what can happen with the supply chain operations when for example a factory or a retail shop is being closed. As indicated in the case from Donaldson (2020) retailers such as H&M and Zara had to face several of these challenges.

The other 9 marks will be awarded on the basis of your discussion using appropriate content that characterises the bullwhip effect (also present in the literature as the amplification effect).

To continue the answer to this question, explore what can happen to H&M and Zara's supply chain when disturbances such as the one generated by the pandemic occurs. The answer to this question can be approach for each retailer independently as there are some differences in their supply chain structure. Sixteen marks will be awarded on the discussion of the bullwhip effect in the context of the two retailers (eight marks each).

Study case:

Global demand for H&M and Zara during the COVID-19 pandemic

In 2008, Tokatli has mentioned that there is a "race between a significant number of 'fast fashion' retailers to increase the number of their stores while maximizing the speed, synchronicity and responsiveness of their supply chains" (Tokatli, 2008, p.23). For fast fashion retailers such as Zara and H&M, to maximize the speed, synchronicity and responsiveness requires great supply chain integration, that has a direct impact on all flows in their supply chain (from physical, financial to the information flow) operating in a global context.

H&M Group (Hennes & Mauritz AB) is a fast fashion clothing retail company that operates globally and was first established in 1974 in Sweden as a fashion chain for women. Currently, H&M group includes brands such as H&M, COS, Weekday, Cheap Monday, Monki, H&M Home, Arket, Afound and &other Stories and has over 5000 stores around the world. H&M Group have over 700 commercial product suppliers who manufacture products in over 1600 tier 1 factories in Europe, Asia and Africa with China and Bangladesh being the largest production markets for clothing (H&M Group a, 2021). Their sustainability commitment is to consider responsible purchasing practices that support the textile and garment industry (H&M Group b, 2021).

Customer demand in the fashion industry is primarily seasonal, and this in turn creates fluctuation in production and buying pattens. Without establishing good relationships with suppliers and careful planning of production and distribution capacity, it could result in excessive overtime or downtime for factory workers and transport operators. This factor is further amplified when there are other unpredictable disturbances in the supply chain such as the global pandemic.

Zara, another fast fashion retail company, (established in 1975 in Spain), operates globally with over 7400 stores across 96 countries worldwide. From an operational point of view, traceability is key to maintaining Zara's relation with their suppliers, where information from suppliers can be traced and compared with production capacity, transportation and time required to fulfil an order.

There is a particular emphasis on the way Zara advertises their stores; Tokatli (2008, p.28) also mentions that "there is a visible difference between the stores of H&M and Zara, with Zara's stores actually resembling the upper scale stores of Esprit (Germany) and Club Monaco (owned by the US-based Polo Ralph Lauren)".

Since early 2020, fast fashion retailers like H&M and Zara are having to reorganise the way they manage their supply chain due to the COVID-19 global pandemic. In particular, they are rethinking the way they operate their physical stores, handle their inventory, and maintain their relationship with their current suppliers. One of these hardships is presented in the article by Donaldson (2020). Both retailers are faced with the challenge to close some of their stores temporarily and hold back on previously planned orders. This has a huge impact on their supply chain, and it is envisaged to have great consequences in the future.

H&M, Zara Halt Production as COVID-19 Sinks Global Demand

As the world shuts down, so are fashion's fragile supply chains. Retailers' sales are plummeting with stores closures in place to slow the rapid spread of COVID-19, manufacturers are fielding daily cancellations from those retailers, and the calamity is forcing contingency measures that could see supply chains unable to successfully resurface once global order is restored. In short, the distress surrounding fashion's sprawling supply chains is outsize. H&M, Zara, Mango, Primark, Macy's and J.C. Penney are just some of the apparel players that have reportedly halted production, leaving vendors at a loss for next steps-and others in the supply chain at risk of losing their jobs as the evaporating orders will see some factories hard pressed to pay their workers. When a company of H&M's scale pauses production, the reverberations will likely be felt industry wide.

"This is an extraordinary and rapidly changing situation. H&M Group is working extensively across business functions to manage the situation in the best possible way," H&M told Sourcing Journal Wednesday. "As a consequence of the substantial drop in global demand, we are now carefully scrutinizing and evaluating how to adjust and mitigate negative effects, both from a cost and risk perspective."

On Tuesday, H&M announced that it would temporarily close all of its stores in the U.S. and Germany, two of its key markets, as well as all stores in Canada, Portugal and Belgium. These closures follow the retailer's Monday announcement that all stores in Switzerland, Greece, Slovakia, Lithuania, Peru, Ukraine, the Philippines, Malaysia and Cyprus are now closed, too.

With all of those stores out of commission indefinitely, sales will suffer despite the nominal offset from ongoing digital sales. It also means a dramatically reduced need for product, which is why H&M says "great emphasis is being placed on adjusting buying and inventory levels going forward, among other things."

And those adjustments have already fuelled production cutbacks-indefinitely.

"At this point, it is therefore necessary to temporarily hold back on previously planned orders. We need to act responsibly from a social and environmental perspective," H&M told Sourcing Journal. "Our long-term commitment to suppliers will remain intact, but in this extreme situation we need to respond fast, together with our business partners, and take decisions that can be difficult in the short-term, but necessary in the long-term. We will start placing orders again as soon as the situation allows."

According to supply chain sources close to the matter, Ascena Retail Group has also cancelled orders from some of its Ann Taylor suppliers. American Eagle and Uniqlo have reportedly made similar moves, though none of the retailers could be reached for comment on the matter. Zara, according to Ritesh Nair, co-founder of Iipi Sourcing, has "told vendors to hold all production."

On Wednesday, Zara said the group has temporarily closed 3,785 stores in 39 markets. In the first two weeks of March alone, the group's store and online sales in local currencies took a 24.2 percent dive. As such, Zara has already set aside a 287 million pound ($313.3 million) inventory provision, assuming what it has on hand won't all be sold at market value. However, group executive chairman Pablo Isla maintains that things are in order for Zara.

"Our supply chain is similarly operating normally, thanks to our business model's hallmark flexibility," he said.

"Although it is too soon to quantify the future impact of the pandemic on our operations in 2020, Zara is monitoring developments very closely. We have the utmost confidence in our business model and its long-term perspective. The current situation, caused by external and temporary factors, does not change our long-term vision for our business model, its fundamentals and its growth potential."

From the vendor side, circumstances seem bleaker.

"The thing with almost every brand of Zara is all orders are 60 days out, so the orders they were putting on hold they'd have in stores in June. So it's basically high summer business," said Nair, who heads the India-based sustainable sourcing company. "The word is that they have inventory, and they're not sure how soon the situation will become normal."

If there's any light at the end of the supply chain's present tunnel, it will take a quick turnaround of events and a lockdown lift in the next couple of weeks that would see spending and production start to pick back up. Both situations, however, may be unlikely to unfold in short order.

Ever the supply chain to emulate, Zara may still have the model that keeps it out of COVID-19's death grip. While Nair believes Macy's, J.C. Penney and Target have already begun to cancel some styles, he thinks Zara may be nimble enough to work with what it has on hand.

"They don't pick up complicated fabrics; it's basic cottons, rayons and linens and things. If they switch a style-and they do it regularly-they pick a fabric and put it in use in another style. They have a small percentage of fabrics that are complicated or unique," he said. "It's very easy for them to switch it around based on a new style."

Beyond stalled production, the worry now is whether manufacturers will get paid-and whether brands and retailers bleeding sales will be able (or willing) to lend ahead to keep these companies afloat amid a stormy sea of challenges.

"Zara has payment terms of 90 days but they give credit facility wherein almost everyone gets paid in 30 days at a discount [depending on the interest rate to get payment in 30 days]. A lot of the big retailers do this," Nair explained.

"But with smaller EU retailers, there's a sense of growing panic amongst Indian manufacturers," he added. "A lot of retailers don't have the bonafides to stand behind payments. So, there's an increasing trend of people asking for advance payment or a letter of credit."

Source: Donaldson, T (2020)