9-609-029APRIL 27, 2009ANANTH RAMANNICOLE DEHORATIUSZAHRA KANJISupply Chain Optimization at Hugo Boss (A)IntroductionKatja Ruth and Constantine Moros sat facing each other in the empty conference room. Coveringthe table between them were the latest operational and financial figures from the supply chainoptimization pilot Hugo Boss had been running in its global bodywear and hosiery Division.1 Ruth,the director of the division, agreed with Moros, the divisionâs head of operations and procurement,that the pilot had been a successâbetter product availability and lower inventory to sales ratios hadbeen observed for the stock-keeping-units (SKUs) involved in itâbut was not convinced thatexpansion of the initiative beyond those SKUs would enjoy the same success. With Hugo Bossâs chiefoperations officer expecting her assessment in a few days, she and Moros had a lot of work to do.They needed not only to precisely quantify the pilotâs financial impact, but also to determine whetherthe initiative should be rolled out to other products and, if so, which ones.Company HistoryFounded in 1923 in the German town of Metzingen, Hugo Boss became known for its high-qualitymenâs and womenâs fashion apparel, shoes, and accessories. Begun as a brand focused exclusively onmenâs business wear, over time it came to offer a wide variety of lifestyle clothing for both genders(Exhibit 1). Business wear and casual wear accounted for nearly equal proportions of Hugo Bossâs2006 total sales (44% and 46%, respectively; see Exhibit 2). Shoes and accessories accounted for theremaining 10%.Europe was Hugo Bossâs principal consumer market, accounting for 69% of 2006 total sales (theAmericas accounted for 18%, Asia and the rest of the world for 10%).2 The companyâs global brandspanned more than 100 countries with more than 5,500 retail points of sale (Exhibit 3), sufficientreach to assure it a market leadership position in menâs fashion around the world.31 This division is comprised of Bodywear (tanks, t-shirts, long-sleeved shirts, and underwear), Swimwear, Loungewear,Terrywear, Nightwear, and Hosiery (or Legwearâsocks and knee-highs) product categories.2 The remaining 3% of total sales was from royalties.3 Michael Geiger, âHugo Boss,â Credit Suisse, November 12 2007, via Investext, accessed August 2008.________________________________________________________________________________________________________________HBS Professor Ananth Raman, Professor Nicole DeHoratius, University of Portland, and HBS Research Associate Zahra Kanji prepared this case.We gratefully acknowledge the Sloan Industry Studies Program and the Zaragoza Logistics Center for their support of Nicole DeHoratiusâresearch. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primarydata, or illustrations of effective or ineffective management.Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.609-029Supply Chain Optimization at Hugo Boss (A)Product leadership, market intimacy, and operational excellence were believed by Hugo Boss todistinguish its brand from others in the luxury fashion goods market. Unlike luxury goodscompetitors such as Ralph Lauren, Armani, and Prada that relied on a single major designer, a teamof creative managers and designers was responsible for understanding and fulfilling the fashionneeds of Hugo Boss customers. With market intimacy thus assured, Hugo Boss parlayed operationalexcellence into accurate fulfillment of retail orders within 48 hours or less.Industry BackgroundLuxury fashion goods was a $60 billion global market populated by designers and brands such asArmani, Ferre, Christian Dior, Valentino, Gucci, Dolce & Gabbana, Ralph Lauren, Prada, and HugoBoss (Exhibit 4). These companies sought to differentiate their brands through craftsmanship, quality,and design, but success often depended on external factors. Sales boosted by an expanding economycould erode quickly in an economic downturn, leaving distribution centers brimming with inventory.Consumer confidence was the cornerstone of consumer spending and, concomitantly, of theperformance of the apparel and footwear sectors. Europeâs apparel and footwear industry sawcompound annual growth of 2.3% in 2006 and 1.7% in 2005.4 A trend observed in recent years forconsumers to split their spending between high-end luxury goods and value merchandise wasattributed to the availability from chains such as Hennes & Mauritz of increasingly trendy appareland footwear tagged at affordable prices.The perpetually shifting demands and preferences of the public encumbered the apparel sectorwith the need to maintain large-scale inventory systems, the financial burden of failed items, and therisk of stock-outs of popular items. The speed of change together with the lag between productionand retail availability made accurate inventory forecasting a persistent challenge.The Bodywear and Hosiery DivisionHugo Bossâs two distinct brands, Hugo and Boss, were divided into five subsidiary linesâHUGO,Boss Black, Boss Green, Boss Orange, and Boss Selection (see Exhibit 5)âdesigned to meet the needsof specific menâs and womenâs fashion segments. The bodywear and hosiery division producedbodywear, hosiery, terrywear, and swimwear products for Boss Black, Boss Orange, and HUGO, andloungewear and nightwear products for Boss Black. Bodywear accounted for 53%, hosiery 32%,swimwear 7%, loungewear 5%, and terrywear 3% of the divisionâs 2006 net sales of ⬠33,040,259 (seeExhibit 6)5.The division was further segmented by replenishment type (Exhibit 7). The divisionâs 711 productstock keeping units (SKUs) included a wide selection of menâs underwear variously classified asSelection, News, Athletic, Basic, and Packs styles (Exhibit 8). Styles differed in terms of raw materialcomposition, cut, elastic type, and color, each style being sufficiently different that an averagecustomer would be unlikely to substitute one style for another. The majority of the 513 SKUs of BossBlack bodywear and hosiery products were classified as Never Out of Stock (NOS) products todiscourage customers from substituting similar product offerings from competitors such as CalvinKlein, Polo Ralph Lauren, Dolce & Gabbana, Tommy Hilfiger, Triumph International, Lacoste, Bjorn4 DataMonitor, âApparel Retail in Europe,â August 2007.5 Nightwearâs contribution to the divisionâs 2006 net sales was negligible.2Supply Chain Optimization at Hugo Boss (A)609-029Borg, DKNY, 2 X-ist, and Armani.6 NOS products differed from the majority of the 198 otherbodywear and hosiery SKUs in the Boss Orange and HUGO collections in that they did not changeseasonally in style, color, or fabric each season, remaining consistent year to year for a period ofapproximately three years. Products that did change from season to season, such as loungewear,terrywear, and swimwear products in the Boss Black, Orange, and HUGO collections, were classifiedas fashion items. These items were rarely repeated once featured in a specific collection. Fashionitems for which inventory was depleted were permanently stocked out.Fashion items needed to be designed, prototyped, sampled, and presented to buyers associatedwith the more than 200 Hugo Boss bodywear and hosiery retail accounts (Exhibit 9 delineates the keysteps involved in bringing a collection of fashion items to market). The divisionâs procurement andproduction management team negotiated production capacity and established production scheduleswith contract manufacturers and assisted them with raw material procurement and workforcescheduling (Exhibit 10). The design, prototyping, and preproduction steps were skipped for NOSitems, for which the division needed only to plan production, perform quality checks, and arrange forshipment from the factory, warehouse storage, and delivery to retail accounts7.Impetus for Choosing NOS Items for the SCO PilotIn 2004, Moros had been thinking hard about what changes could be made to improve theefficiency and responsiveness of the divisionâs supply chain. Operational performance metrics for thelast half of the year revealed average availability for NOS items to be 97.9%, not bad, but still shy ofthe 100% product availability guarantee.8 Moros was concerned that retail partners such as OyStockmann would threaten to take their buying dollars elsewhere if the division was unable to fillunexpected NOS orders promptly and in full. But filling unexpected NOS orders, Moros knew, oftentaxed the capacity of Hugo Bossâs production partners.Knowing that retail customers, like consumers, might substitute for or delay the purchase of anout-of-stock product, or take an entire order elsewhere, Moros had set out to quantify the impact ofwarehouse stockouts on sales. He observed (1) that stockouts often occurred during key retailreplenishment periods like the month of December, and (2) that stockout patterns differed acrossproduct styles. He calculated that stockouts among NOS items during 2004 resulted in lost revenue of1.1% of net sales.9It was with these figures in hand that Moros had approached Ruth, believing that she would beextremely interested in the performance impact of poor product availability in NOS items. It was she,moreover, who would have to approve his next proposed step, a detailed process mapping exercisethat would track orders from the time they were placed through fulfillment. Having learned inbusiness school about the complex interrelationship between inventory, availability, and sales (seeExhibit 11), Moros was convinced that doing so would enable him not only to identify opportunities6 NOS products, staple items including underwear, tank tops, and hosiery that a consumer would wear and replace on a semi-regular basis, were guaranteed to be in stock 365 days a year.7 The design, prototyping, and pre-production steps were conducted the first season a specific NOS item was introduced.However, these steps were skipped in subsequent seasons.8 Availability was measured weekly by dividing the total number of NOS SKUs with positive inventory by the total number ofNOS SKUs.9 This number was derived by observing the number of out-of-stock days for a given NOS SKU. Moros estimated what HugoBoss would have sold on those days, assuming sales were lost (and not backlogged), by calculating the average daily sales perSKU conditional on the SKU being in stock and multiplying this number by the total number of stocked-out days.3609-029Supply Chain Optimization at Hugo Boss (A)to lower current inventory levels and thereby reduce costs, but also to improve NOS productavailability and improve sales.Although she agreed that taking a closer look at the numerous steps in the NOS replenishmentprocess might yield beneficial insights, Ruth asked Moros to begin by reviewing the companyâsupstream processes, in particular, how the division ordered NOS items from suppliers.Morosâs team forecasted demand for NOS items six months in advance to help contractmanufacturers with raw material procurement,10 workforce scheduling, and capacity planning.Forecasts were customer neutral and made on a style-color basis.Firm production orders were placed with contract manufacturers monthly. Hugo Bossâsproduction planners sought to keep on-hand inventory levels equal to 3.5 months of forecasteddemand. Production lead time for NOS items was eight weeks: one week for material cutting, sixweeks for sewing, and one week for packaging and quality inspection. Transportation lead time, bysea, was two and a half weeks including the generation of customs paperwork at the port, whichcould not begin until an entire order had been assembled. Orders thus arrived at Hugo Bossâs 18,400qm warehouse in Wendlingen ten and a half weeks after being placed by production planners.Approximately 2,500 qm of warehouse space was dedicated to the NOS items that were sorted,tagged, and stored until pulled from inventory by retail orders (see Exhibit 12). The cost of holdinginventory, according to warehouse department estimates, ranged from 9% to 12% and includedvarious warehouse expenses such as handling, shelf space rental, etc.Retail customers like Oy Stockmann, El Corte Ingles, and Peek & Cloppenburg could order fromthe division in two ways: pre-order and replenishment. Pre-ordered items were made well advanceof delivery. Fashion items were usually pre-ordered. Fulfillment of replenishment orders waspromised within a short period of time (typically less than a week). Orders for NOS items werefrequently replenishment based with a guaranteed 48-hour delivery window.11 Orders could beplaced either electronically or by fax, and retail buyers and the Hugo Boss sales team interactedfrequently to discuss availability, delivery deadlines, and general fashion trends.The SCO ProposalUpon reviewing the flow of product through the supply chain, Moros identified a number ofopportunities for improvement. Among the most promising was to change the frequency with whichinventory planners ordered from the contract manufacturers. Why did they order only monthly?Would ordering more frequently afford greater flexibility, enough to offset the attendant costs?Moros proposed a pilot project to answer some of these questions. His specific proposal to Ruthwas to change order frequency for a subset of bodywear NOS SKUs from monthly to weekly. Thesubset he suggested, 45 similar SKUs within the Black Brand known as Packs, was produced in asingle factory owned by Delta Galil and accounted for 16% of the divisionâs 2004 unit sales. Hemaintained that the proposed change could improve product availability and planning flexibility,reduce lost sales and inventory levels, and lower transportation and ordering costs. NOS productsnot selected for the pilot constituted a control group of SKUs.10 Procurement of raw materials such as fabrics, elastics, and packaging took one to two months and was the responsibility ofHugo Bossâs contract manufacturers.11 Actual delivery time differed across retail partners and depended on the retailerâs proximity to Wendlingen.4Supply Chain Optimization at Hugo Boss (A)609-029Project StakeholdersThe strategic production partner with which Morosâs team worked to test the SCO initiative, DeltaGalil Industries Ltd., was an Israeli textile production company with approximately 13,000 employeesknown for its strong position as the global provider of ladiesâ intimate apparel and menâs underwearand hosiery. Delta Galil had production facilities for clothing, undergarments, and textiles around theworld and partnered with companies such as Victoriaâs Secret, J. Crew, GAP, and Abercrombie &Fitch as well as Hugo Boss. For 2004, Delta Galil reported operating revenue of approximately $654million with Delta Galilâs European operations accounting for almost 30% of this total and a netincome of $12.8 million.The bodywear and hosiery division sourced a variety of NOS items from Delta Galilâs Egyptbased production facilities. Recognizing the need for the active involvement and commitment of oneof the most important producers of the divisionâs products, Ruth and Moros began negotiating to getDelta Galil on board a year before the initiative was launched. Delta Galil management was initiallyconcerned that changing the frequency with which the division placed orders might negatively affectproduction planning and procurement processes and potentially erode the economies of scaleachieved under the current supply chain set up. Morosâs analysis suggested otherwise, and afterseveral months Delta Galil management accepted his and Ruthâs assurances that the project wouldyield a more predictable and flexible production schedule without any loss of economies of scale, andagreed to the SCO pilot.Delta Galil was to produce all NOS products including the subset involved in the SCO pilot in asingle factory located within a tax-free zone in Cairo. Both parties would extend their supply chainmanagement know how and continue with a monthly production commitment based on a six-monthforecast. Delta Galil then allocated production capacity based on these six-month forecasts. This longterm horizon forecast was initially specified on a style-color basis, with detailed (SKU-based) ordersplaced weekly for Packs products and monthly for other NOS products, and continually comparedagainst monthly production commitments. Weekly orders were an opportunity to fine-tuneproduction to demand patterns while working with Delta Galil to meet unofficially agreed uponproduction levels. If production volume fell short during one six-month period, Delta Galilmanagement trusted the divisionâs planners to make up for lost capacity in the following six-monthforecast. If, on the other hand, production volume exceeded what was anticipated, Delta Galil woulddo everything but compromise production lines dedicated to other companies to provide it. Save forproducts destined for North American distribution, which were delivered to central warehouses inNorth America, all merchandise produced by Delta Galilâs Egyptian factory was delivered to theWenldingen distribution center.SCO ResultsRuth and Moros expected the change in order frequency implemented in week 31 of 2005 wouldresult in lower on-hand inventory levels as well as improved product availability for the NOS itemsinvolved. The change in order frequency was accompanied by a four week reduction in total leadtime because production needed only half a week for material cutting, three weeks for sewing, andanother half week for packaging and quality inspection. Moreover, the change in order frequencyallowed Morosâs production planners to readjust their forecasts on a weekly basis ensuring thatcurrent production schedules accurately reflected observed changes in demand. With the pilot inprogress for the past year, it was time to take stock.Comparing divisional performance one year before the pilot to the past year, figures showed a16% increase, from 41,697 to 48,372 units, in the average weekly on-hand inventory held for all 455609-029Supply Chain Optimization at Hugo Boss (A)piloted NOS SKUs. Moros wondered whether he should reduce the targeted on-hand inventory levelused by his production planners even further. In anticipation of an upcoming SAP implementation,Moros had chosen to play it safe for the duration of the pilot by asking his team to maintain on-handinventory levels close to two months of forecasted demand. Product availability, as expected,increased from a weekly average of 97.9% prior to the pilot to 99.9% after the pilot. See Exhibit 13 fora plot of inventory levels and product availability levels over time for both the piloted and controlSKUs.The division also managed to reduce inbound transportation costs by 9% to â¬0.29 per itemshipped. More frequent ordering meant smaller shipment quantities which, in turn, allowed thedivision to utilize a single, twenty foot shipping container. This was a more efficient alternative thanthe shipping method used prior to the pilot. With sales growing by nearly 31% during this last yearfrom a weekly average of 3,107 units sold before the pilot to a weekly average of 4,065 units after thepilot (see Exhibit 14), any increase in transportation or handling costs was a concern.The pilot was receiving praise from warehouse managers who reported fewer instances ofinventory obsolescence and a reduction in billable hours for warehouse staff due to the smaller, morefrequent and more predictable deliveries. Members of the sales team, although unaware of the pilot,noted how easy these products were to sell. One retail partner went so far as to label these items asâsafeâ not just because they were basic in color and good value for money but also because the NOSservice level of 99.9% almost guaranteed that these products would be in stock and available topurchase when needed. Because most clothing companies could not guarantee such a high servicelevel, retailers generally had in place a contingency plan known as insurance brands (a white CalvinKlein boxer might, for example, be an insurance brand for the equivalent Hugo Boss boxer), butimplementing and maintaining insurance brands was resource intensive and costly to monitor.Reaching a DecisionGlimpsing the blazing evening sun through the venetian blinds, Ruth suddenly realized theafternoon had flown by. She had been consumed by thoughts of what to make of the SCO pilotâsresults. Although the SCO pilot, being restricted to select NOS products, did not deal with typicalshort-run fashion items, the division had still had the challenge of balancing production cycles,inventory levels, and accurate demand forecasting. Ruth turned to look at the organization chart onthe wall (Exhibit 15) as the question âwhat next?â kept crossing her mind. Could the SCO initiativebe successfully applied in the current corporate framework of division-centered performance? Couldthe project realistically be extended to other product groups, or were the results for the NOSBodywear Packs product an anomaly?Hugo Boss prided itself on its uniqueness in the domain of high fashion combined withoperational excellence and unparalleled design. Could the SCO initiative broadly applied enableHugo Boss to improve its already excellent operational performance and further differentiate itwithin the echelons of high fashion? Or, did the increased costs outstrip any benefits? How much, ifany, credit could operations take for the observed change in sales?Ruth and Moros continued to linger over the figures, tossing around ideas about how to interpretthe results and brainstorming possible extensions of the pilot. It was a tough call. The numberspainted one picture, but Ruth and Moros understood the capriciousness of the apparel industry, theproduction cycle, and the retail buyer. Hugo Boss stood apart on its operational excellence, productleadership, and market know-how. Which of these might be further improved, and in what ways, bya broader application of the SCO initiative?6Supply Chain Optimization at Hugo Boss (A)Exhibit 1609-029Milestones in Hugo Boss Company Historyâ¢1923: Founded by Hugo Boss, a tailor born in Vienna, Austria who lived in Metzingen, Germany,the company started as a manufacturer of work clothes such as overalls, raincoats, and uniforms.â¢1948: Founding of Hugo Boss GmbH in Germany.â¢1954: Production of the first menâs suit by Hugo Boss.â¢1970: Launch of the BOSS brand.â¢1980: Shirts introduced as an extension of the product line, initially given to Della Croce, a smallsupplier in Ticino, Switzerland.â¢1984: Launch of the first Hugo Boss perfumes, produced as licensed products.â¢1985: Hugo Boss listed as a joint stock company on the German stock exchange.â¢1989: Eyewear introduced as an accessory product.â¢1991: Italian Marzotto Group, one of the best-established textile companies in Europe, acquires amajority stake (50.4%) in Hugo Boss.â¢1993: Umbrella-strategy is presented introducing two new brands and philosophiesâBALDESSARINI and HUGOâto Hugo Boss and successful BOSS Product World.â¢1995: BOSS shoes are introduced as a licensed product.â¢1996: Former licensed producer Della Croce is purchased by Hugo Boss AG to become Hugo BossIndustries (Switzerland) Ltd., the strategic business unit responsible for overall shirt production.Watches bearing the BOSS label are offered as a licensed product, initially given to TempusConcept in Switzerland.â¢1997: Launch of the first BOSS Hugo Boss Golf collection, today known as the BOSS Hugo Bossgreen label.â¢1998: HUGO BOSS introduces a new sportswear concept, BOSS SPORT, under the BOSS corebrand, now renamed to BOSS Hugo Boss with an orange label.â¢2000: HUGO BOSS Industries (Switzerland) Ltd. takes over tie production from licensed partner.thHugo Boss Group increases sales by 23% to 0.923 billion Euro, marking the 5 consecutive year ofdouble-digit growth. BOSS woman is launched in Düsseldorf, Germany.â¢2001: The BOSS HUGO BOSS shop strategy is extended as a key marketing and distributionactivity designed to maximize market share and increase brand awareness. Development ofcompany vision at HUGO BOSS Industries (Switzerland) Ltd. supporting the companyâsmanagement philosophy: âWe Master Fashion Flow.ââ¢2002: B…
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