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Case Analysis

Supply Chain Management at World Co., Ltd.

Japanese consumers have a reputation of being highly brand name conscious. Although this trend still remains for some categories of people, especially young women who are sensitive to latest fashion trends, nowadays Japanese consumer are also starting to choose apparel that matches their tastes and life styles.

Japanese apparel manufacturers design and develop their own products, oversee a number of production subcontractors, and manufacture and market products under their own brands. Nearly all of these apparel manufacturers also function as wholesalers, selling products directly to retailers. Larger manufacturers even have their own boutiques within department stores, and some also operate outlet stores.

Japan has a mature apparel market, and simply offering low prices does not guarantee success. Manufacturers have to establish a brand identity. Products that offer what Japanese consumers are looking for in material, technical skill and styling will be accepted and will fare well in competition with others.

The three factors that distinguish Japan from other countries are: Delivery Schedules: Special attention should go to seasonal goods and fashion merchandise, especially when produced in lands without four distinctive seasons. It takes time to assemble raw materials, acquire accessory items and ship the finished merchandise. Sometimes the merchandise ends up getting delivered after the sales season is already over.

Production Lots: Because apparel production in other countries has historically been for export to Europe and the United States, production lots have always been large. This practice does not match up well with the preference of the Japanese market for small-lot orders, multiple product types and short-term production cycles. Quality Control Standards: Many products can pass inspection in their home countries but sometimes fail inspection in Japan. European and American quality standards emphasize external appearance rather than the minute details of workmanship. However, Japanese consumers tend to demand perfection in the products they buy, and they judge products harshly for their flaws even if those flaws in no way take away from their utility.

World Co., Ltd. is a Japanese apparel manufacturer. The Group's principal activity is to operate women's apparel business; handling mainly men's and children's wear specializing in knitted garments. The Group is also involved in developing a nationwide retailing network based on the SPA (Specialty store retailer of Private-label Apparel) business model and pursuing vigorous structural reform of our wholesale business. Operations are carried out through the following divisions: Women's clothing, Men's clothing, Accessories and jewelry, Children's clothing and other.

The traditional fashion industry business model had various problems in terms of sustaining corporate growth. It made it difficult to ensure continuity in a fast changing business in particular, to maintain momentum once a brand or operation expanded rapidly. This is attributed to the fact that creativity, which is essential element of the fashion business, is not universal. The biggest risk in business is change and the rapid

pace of that change. However, risk is synonymous with opportunity. Success depends on whether a company can make an ally out of change.

How does World Co., Ltd. address this issue, maximize customer value and ensure continued growth? Realizing the need to respond flexibly to change and creating a process that can be universally utilized by a variety of different brands, World Co has pursued various structural reforms under the SPARCS (Super, Production, Apparel, Retail and Customer Satisfaction) concept. This concept originates with the customer and unifies the entire process from production to the retail outlet, to convert loss and inefficiency into value. Offering responsiveness to changing needs by constantly maintaining an interface with the consumers, the SPARCS model simultaneously maximizes customer value and improving productivity while integrating the entire management structure with operational platforms at its core, epitomizing World Groups management philosophy.

Since 1992, World has been promoting operational restructuring aimed at maximizing customer value and improving productivity based on SPARCS concept, which provides a concrete form for the realization of a customer-centric business platform that embodies both operational procedures and the decision-making process.

The SPARC model aims to minimize inventory loss and loss of sales opportunities by unifying and integrating the business process. The business model consists of the synthesis of the manufacturing, apparel and retail segments, conventionally separated in the fashion industry, while simultaneously enhancing responsiveness to changing customer demands. World Co believes that SPARCS is the ideal business model for the fashion industry, enabling the realization of customer value.

The SPARC model focuses on the production system, and is aimed at providing flexible and rapid response to customer needs by synchronizing the entire flow of product-related

operations from the development of materials to production, manufacturing of handsewn apparel products and distribution to the outlet to the weekly operational cycle of outlet stores. Therefore, the lead-time is shortened and respective loss of sales opportunities and inventory in the marketing and production process are minimized. As a rapid response and close collaboration are the essence, the producers and suppliers involved are mainly located in Japan.

The SPARC model incorporates four platforms representing Worlds core operations retail outlets, merchandising, development and production. This operational platform forms the core to which the personnel, management accounting and information support platforms are attached, making up the entirety that is Worldss management platform. The operational platform manages the whole business, from the retail outlets to the production sites, while the personnel, management accounting and information support systems contribute organizational assistance from the management side.

In other words, the SPARCS model represents the essence of World Groups management strategy, and its entire managerial resources are concentrated on promoting the implementation of the SPARC model.

Supply-chain management in World Co. Ltd. is based on strategies of SPARC model. It synchronizes a customer relationship, order fulfillment, and supplier relationship processes with the essential processes of its suppliers and customers in order to match the flow of services, materials, and information with customer demand.

Supply-chain management serves as a key competitive weapon for World Co. as a small reduction in the cost of materials for manufacturing firms can increase profits a lot. The inventory handling system implemented in World differs from those of US manufacturing and retailing firms. Inflow of row materials, which are fabric and supportive goods in apparel business, is controlled by World. Based on highly developed

forecasts, the amount of fabric ordered from suppliers is precise and in most cases very accurate. In addition, 25% of the fabric needed for production of specific SKU stays in supplier location, which carries the risk for those 25%. Work in process inventory, which are goods in factory production process, is also controlled by World. Only one half of the fabric for SKU is consumed during the initial order. Thus, living enough inventory caution in a case of rapid demand change. Finished goods inventory are allocated trough the SPA stores and other distribution channels of World as soon as possible. Each retail location controls the inventory inflow by placing an initial order and than additional or adjusted orders to the factory.

Each firm in a supply chain of World Co. Ltd. depends on other firms for services, such as production and quality control, materials, such as fabric and additional materials, and the information about future demand forecasts and fashion trends. Because firms are owned and managed independently, the actions of downstream members of the supply chain can affect the operations of upstream members. The upstream members of the chain must react to the demands placed on them by downstream members. The demands are a function of the policies for the levels of inventories, the actual levels of those inventories and the demands of their customers. In a case of poorly implemented information and integration systems between the members of the supply chain some negative effects, such as bullwhip effect, can arise. Ordering patterns that experience increasing variance as you proceed upstream in the chain cause an increase of inventory levels and thus total cost of business. To minimize negative effects, firm should concentrate attention on some external and internal causes.

SPARC model focuses on these causes and allows World Co Ltd. achieve minimum disruptions not only to upstream members of the supply chain but also to downstream members.

External causes of fluctuation in supply chain are effectively managed by SPARCS model in World. Volume changes for a specific item are closely followed by the changes in volumes that are ordered by World. In a case of increased demand fabric backup is always available to factories. In the case of decreased demand, suppliers of fabric carry risk for one quarter of material ordered by World. In addition, factories produce only one half of delivered material, with the other half waiting to be processed. Thus, in the case of huge drop in demand, the firm carries the risk only for goods produced from 37.5% of ordered fabric, not for all 100%. Late deliveries and undefiled shipments from suppliers to factories or from factories to retail stores are not likely to happen. First of all, the initial order of row materials placed by World very early and based on future demand forecasts. This approach increases a slack time for factories, and thus decreases the effect of unexpected late deliveries. Second, undefiled shipments effect is not severe for factories, that usually process only a half of initial raw material volume.

Internal causes of possible fluctuation are controlled by World very effectively. Engineering changes, such as the different production process are controlled by both headquarters and factories. Measurement and patterns were sent from headquarters to factories, where technical designers and pattern makers developed detailed instructions for the line workers to avoid manufacturing problems when the garments actually ran on the production lines. Technical designers encountered the operations in the pattern that would be difficult or impossible to reproduce for the line workers, and communicate about changes with pattern makers. Thus, engineering changes even thought frequent due to new product introductions, did not affect the overall flow of inventories. Internally generated shortages were rare in World supply chain. Line workers were very versatile and able to perform many different operations. In addition, labor shortages, such as strikes and high turnover, had a very low possibility as Japanese people are usually very conservative and in our case highly awarded for their job. Product promotions did not affect overall inventory flow. Sales were scheduled at the end of season and included only items that were not sold during regular season. Thus, sale promotions served as the

cleaning tool from old-fashion items. World Co Ltd. implemented a highly developed, several-staged demand forecast system. Before the season starts, the initial forecast that was developed with respect to the customer needs and age group was ready, thus giving some overall picture of real future demand. The forecasts made for each location separately during the season were used in future order placements of SPA stores. Errors in a physical count of items in stock were very small and didnt cause shortages or too much inventory in the store.

The performance of any supply chain is weakened by external and internal disruptions. SPARCS model focuses on these disruptions and makes their impact on overall World supply chain performance the least effective.

Design of the customer relationship process in World Co identifies, attracts, and builds relationships with customers. World separated merchandising activities including product development and inventory control from marketing activities including store openings and closings, as well as sales promotions and advertising. About 40 different brands are managed separately. Each of them has specific target segment of overall Japanese market of clothes. The marketing process of World Co focuses on such issues as determining the customers to target, how to target them, what products to offer and how price them, and how to manage promotional campaign. High number of brands gives World the opportunity to develop products that will satisfy customers with specific tastes and to be one of a kind for its customers.

World Co Ltd. supplier relationship process focuses on the interaction of the firm and upstream suppliers, such as suppliers of fabric and factories that produce finished goods. Supplier selection decisions of the company are based mostly on three factors. SPARCS model identifies delivery factor as the most valuable one. Shorter lead times and on time delivery help the buying firm maintain great customer service with less inventory on hand. Quality of the supplied materials is also very important factor to World Co. Under

SPARC, all raw materials are checked in the factories before processed further. This strategy decreases quality costs that may occur in case of poor quality products in the market. Finding suppliers that charge low price, of course, for some firms is a key objective. But in a fast changing Japanese fashion industry, World found a balance: all the suppliers should be located in Japan, among them it finds the most cost efficient ones. With its cooperative orientation to supplier relationships, World Co and its suppliers are partners. They help each other as much as possible. Information on future buying intentions is shared with seller. SPARC model allows suppliers to make better forecasts of future demand and schedule production process accordingly. A cooperative relationship builds long-term commitment, joint work on quality and support by the World of the suppliers managerial, technological, and capacity development. World Co Ltd. understands its suppliers and their capacity. It helps to put orders that can be handled in a timely manner and to adjust product development accordingly. For example, if company faces unexpected demand for particular SKU and have not ordered enough fabric, it doesnt change a supplier firm it develops a product with similar qualities, but that uses fabric, which is available. In addition, the suppliers are guaranteed a certain volume of units each year to reduce their risk in a venture. Thus, SPARC model helps to develop a supply chain where the supplier becomes an extension of World.

World Co Ltd. supply chain is highly integrated. The extended internal supply chain includes linkages between the firm and its suppliers and customers. The supplier relationship, which include purchasing; order fulfillment, which includes production and distribution; and customer relationship process, as well as their internal and external linkages, are integrated into normal business routine. World takes on a customer orientation and follow customers needs.

Measures of supply chain performance of World Co Ltd. are the great example of SPARCS model efficiency. SPARCS model contributed to Worlds very short lead times in its supply chain.

Worlds private label SPA brands which used the SPARC system to coordinate the supply chain, turned 8.5 times a year with a gross margin of 47.8%. Supply chain performance of World Co can be tracked with inventory measures, such as aggregate inventory level, weeks of supply, and inventory turnover; and supply process measures, such as production and material costs, percent defects and lead times. When comparing the results with the US or European companies, it becomes clear that World Co Ltd. could be considered as a benchmark for overall retail business.