MO358 Strategic Supply Chain Management Global Sourcing- Benefits and challenges for H&M Northumbria University, UK Abstract Global sourcing is a technique of strategic sourcing in the global strategy, which is an effective approach as a part of organization’s procurement section. The objective of global sourcing is to develop global efficiencies in the delivery of a product or service for the firms achieving a sustainable competitive advantage and this is an important weapon have been focused in the 21st Century.
The well-known organization, Hennes and Mauritz (H&M) is one of the largest international fashion retail and production house with the great deal of businesses all over the world. In the today’s competitive market and ever-changing environment, what distinguishes an organization that succeeds from others? The article is to explore and focus on the benefits, challenges and requirements of global sourcing for H&M by the means of a literature study, case interview and discussion with the fashion merchandising manager. TABLE OF CONTENTS Page CHAPTER 1 INTRODUCTION | | |INTRODUCTION. …………………………………………………… |4 | | | | |CHAPTER 2 BENEFITS | | |COST REDUCTIONS………………………………………………… |5 | |BETTER QUALITY………………………………………………….. 6 | |AVAILABILITY………………………………………………………. |7 | | | | |CHAPTER 3 REQUIREMENTS | | |3. 1 SUPPORTED BY TOP MANAGEMENT……………………………. |8 | |3. 2 BUILD UP LONG TERM RELATIONSHIPS……………………. …. |9 | |3. 3 KNOWLEDGE OF FOREIGN REGULATIONS…………. ……… |10 | | | | |CHAPTER 4 CHALLENGERS | | |4. 1 POLITICAL ENVIRONMENT………………………………………. |11 | |4. 2 FINDING QUALIFIED SOURCES………………………………….. |11 | |4. 3 QUOTA SYSTEM & EXCHANGE RATE…………………………… |12 | |4. 4 RELATIONSHIPS BETWEEN COMPETITORS……………………. 12 | | | | |CHAPTER 5 RECOMMENDATRIONS ………………………………… |13 | | | | |CHAPTER 6 CONCLUSIONS…………………………………………… |14 | | | | |CHAPTER 7 REFERENCES AND APPENDIXES | | |7. 1 REFERENCE LIST…………………………………………………… |15 | |INVITATION LETTER……………………. . ……………………… |16 | |7. 3 INTERVIEW QUESTIONS…………………………………………… |17 | |7. 4 INTERVIEW TRANSCRIPT………………. ………………………… |18 | CHAPTER 1 Introduction 1. 1 Introduction In the fast changing business environment, firms and enterprises have faced the increasing competition within the industry from all around the world, especially in the recent decade.
The reason of the creating competitive pressure to firms is that which from the enhancing the quality but decreasing the price synchronously. The key of success is that the firms and organizations which treat “Global Sourcing” as a weapon fighting with its competitors. “Global sourcing is defined as sourcing the technology, materials and components from sites and supplies located throughout the world. It also means the integration and coordination of requirements across worldwide business units” (Monczka & Trent, 1991, pp2-7).
Currently, the developing countries of Asian and Eastern is both of the main sourcing regions and production providers to the world, these countries offers a great deal of low cost and skilled labours, relatively low price raw material which creating the ideal business environment to the buyer. H&M is one of the successful multinational fashion houses in the world. This study is to find out the importance and influence of global sourcing for H&M in terms of benefits, challenges and success requirement. CHAPTER 2 Benefits of global sourcing 2. 1 Cost Reduction Cost is one of the key factors determining H&M more successful in the fast changing market. ” stated by the interviewee, this is the most common reason that driven the firm starting sourcing internationally. Especially in the Apparel and Textile, which is the typical industry involving highly labour-intensive production. The labor and production cost account for a large part of the total expenses. As a matter of fact, according to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” by Laura M.
Birou and Stanley E. Fawcett was presented at the 1993 National Association of Purchasing Management that concluded that overwhelming firms began sourcing internationally is to obtain lower priced sources. Currently, the production source of H&M is mainly relying on the developing countries over the world such as China, Turkey, India, Indonesia, Cambodia, Romania and Bangladesh, and the interviewee commented that the advantage of production in the developing countries is to reduce the labor cost, so that enhancing
H&M at the competitive position in the Fast Fashion Industry by maximizing the margin of profit to the business. 2. 2 Better Quality In 1993, Laura M. Birou and Stanley E. Fawcett reported that Quality was that the most important in that research. For H&M, Product Quality was the second important and that believed that will be enhanced in terms of through sourcing better production technologies and new materials internationally.
As the interviewee pointed out that the one of the purposes of global sourcing is to explore the new suppliers with advanced Garment Production Technology so that it is able to enhance H&M’s productivity and then shorten the lead-time, and secure the product quality in the mass production. Interestingly, it is the surprising reason of global sourcing for H&M that which able to stimulate the inerspecific completion among the existing suppliers by importing new supplies. As the interviewee said “Sometimes, our existing suppliers will contact us actively.
They offer us the attractive conditions with the aim of getting our orders. ” Also, she commented that this is effective method controlling the price and maintain the high product quality. Furthermore, on time delivery is one of the key reasons for H&M that why do they import more suppliers- able to reduce the product development time, and increasing the total productivity. “Aspiring the on-time schedule is vital important for the Fashion Industry. We don’t want to miss any good chance due to the late shipment. ” stated by interviewee.
On the other hand, by using information technology involving Quality Service is also considered by H&M. H&M adopts electronic data interchange (EDI) as a communication interface among H&M and its suppliers. As per the interviewee saying “This programme offers us a consistent communication standard so that both parties enable to acquire and share the most accurate information interactively, and the final objective is to eliminate any errors affecting the product quality and scheduling. ” 2. 3 Availability In 1993, Laura M. Birou and Stanley E.
Fawcett reported that Global Sourcing can provide availability of foreign products at low price, which is exactly same as the interviewee’s comment “For instance, Italy is expertise of Leather Goods because its leather material and finishing is the best in the world; the lingerie technology in Guangdong, China is the best and cheap than Japan. ” Global sourcing can to optimize the range of product category and availability which is not available domestically through the global sourcing, according to the interviewee stated.
CHAPTER 3 Requirement of Global Sourcing 3. 1 Supported by Top Management It refers to have a managerial support from the company. Extensive planning as well as the short-term and long-term development forecasts and contingency plans are involved this process. In this case, H&M have clearly defined the future development plan regarding 2 major aspects of the planning- Global Logistic action plan and the Company Long-term plan.
In the Company Long-term plan, H&M defines to continuously expend its corporate scale and the objective is to have 2 times scale than now, as per the interviewee said “Today H&M sells 2 million pcs/day. In 5 years it will be 4 million pcs/day” Nowadays, the new markets in 2008 include China and Japan, and will be opening the first store in Russia in 2009. In order to comply with the increasing logistic capacity, the comprehensible logistic planning is involved.
In the Global Logistic Action Plan, H&M identifies the logistic group need to enhance and upgrade the work flow in terms of accuracy, flexibility, and efficiency. Thus, H&M is planning to set-up new Distribution Center (DC), and Call-off (CO) in Europe to support the increasing internet and mail orders. 3. 2 Establishing a long-term business relationship and supplier qualification The interviewee agreed with that statement of Laura M. Birou and Stanley E. Fawcett reported in 1993 that “establishing a long-term relationships” with suppliers that is the key success secret operating business.
H&M currently 100% rely on outsources production from over 700 independent suppliers. The interviewee stated that H&M must have a good reputation in maintaining good relationships with suppliers through ordering a large volume, letter of credit and guarantee the on-time payment. H&M regularly take and review the action plan and keep always communication with suppliers. On the other hand, the problem to be involved during the global supplier sourcing is the foreign supplier certification/ qualification.
Corporate Social Responsibility (CSR) is emphasized; the interviewee point out the all suppliers must be acquired a qualification reorganization from H&M auditor. 3. 3 Knowledge of Foreign Regulations According to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” by Laura M. Birou and Stanley E. Fawcett was presented at the 1993 National Association of Purchasing Management that report that “Establishing foreign buying offices” was the last important among the high amount of multinational companies.
On the contrary, the interviewee point out that is important to them; H&M owns the number of buying office allocating in China, Korea, Cambodia, Hong Kong, and Bangladesh with full-time employed staffs and specialist equipped with experts on the local marketplace can compensate for the knowledge in managing the individual supply chain and to manage the regulations in the textile quotas, law regulations and corporation tax respectively, and it can assure the product quality. The top management supports them to provide internal training which allows staffs to know the global network and the operation of the supply chain.
CHAPTER 4 Challenges of Global Sourcing 4. 1 Political Environment Understanding the political environment is the last important among the high amount of multinational companies. According to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” However, interestingly, the interviewee stated that is the first challenge for H&M. “Political stability is essential to economic prosperity, and it is a key element for operation business. stated by the interviewee, can reflect the Political Environment is very important factory conducting business activities in these countries. Recently in Thailand, the anti-government demonstration caused the Bangkok city in turmoil. The interviewee believe that this political threat is also a typical challenges that H&M is currently encountering and preventing the development and implementation of international sourcing strategies. 4. 2 Finding Qualified Sources Another strategic concern is finding and identifying qualified foreign sources which are the great challenge for H&M.
Besides the understanding of the foreign business practices, Corporate Social Responsibility (CSR) is one of the curial regulations that all suppliers must follow and qualify the audit by H&M. CSR is a standard of responsibility for the degree of influence of people and the environment are affected by the corporate activities, such as child labour, illegal pay, and unsafe working environment and discrimination and abuse, these behaviors and factory environment set-up are all against Code of Conduct of CSR regulation which have been highly focused and emphasized among the multinational company today. H&M annual report, 2007) Apparel industry is one of the most highly labor-intensive industries; unfortunately, work against CSR’s regulation is quite common in the industry. H&M is encountering the challenge that to have some difficulties in the sourcing the qualified suppliers. The interviewee point out an example that Gap had experienced on employing child labor to produce its garments. 4. 3 Quota System and Exchange Rate Quotas and Tariffs and various kinds of international trade fee are the most directly influential trade regulation affecting the firms including H&M.
The interviewee stated that Quota and Tariffs system is most strategic regulation established by there local government, which is threaten the foreign company doing business and it is also a factor affecting the firms consider to that place as a sourcing country. Exchange rate is one of the key factors to H&M, according to the interviewee “US dollars is H&M standard currency, when the US dollars increase, the purchasing cost will be increase. ” 4. 4 Relationships between Competitors
Fighting sources with competitors is also the challenge to H&M. As H&M share some factories’ capacity with other Fashion House, such as Esprit, Zara, and Walmart etc. so H&M should build up a good relation with the suppliers to make sure sufficient providing source. CHAPTER 5 Recommendations In the fast changing business climate, firms and enterprises have faced the increasing competition, and global challenge within the industry from all around the world.
To become a success winner in the cruel marketplace, H&M needs to continuously maintain good reputation is crucial which is the determining factor increases its competitive power so that it can win/ attract the existing or the potential suppliers as our partners. For instance, no late payment is a successful action kidnapping the supplier’s heart. Moreover, maintaining the long-term relationship with the current business partners is also important to H&M. These key determining factors is concerning whether the enterprise successful, so gaining the top management support is irresistible.
H&M need to have a short-term and long-term strategic action plan regarding above points. Furthermore, finding a stable business environment with qualified suppliers to meet the Code of Code of H&M is very critical it is the necessary policy to take responsible for the people and the environment. Finally, securing the product characteristic, quality and price is the key elements determining the company being successful. The suggestion is H&M must set-up a buying office in the target sourcing regions and engage the local product specialist to increasing the company competitive power.
CHAPTER 6 Conclusions Global sourcing is undoubtedly true that is a key weapon winning it competitors by offering a great deal of benefits including price, widening product category and improving product quality. On the other hand, the challenges of global sourcing are some factors need to be managed and considered in selecting the suppliers from different country, e. g. political environment, country’s textile quotas and exchange rate. To manage those risks, the top management requires long term perspective in defining the company’s goal and strategy.
In order to implement global sourcing successfully, it also requires the experience and commitment of the management in managing the risks and understanding the foreign regulations. In addition, H&M outsources all the production to over 700 suppliers, H&M needs to maintain the good and long-term relationships with all the existing suppliers. Despite it is rich in challenges and difficulties when conducting sourcing globally. Social Responsibility is one of indispensable factors to be considered. Balancing Social Responsibility and Business Benefits is the real challenges for H&M. . 1 Reference List Laura M. Birou and Stanley E. Fawcett (1993), “International Purchasing Benefits, Requirements, and Challenges”, “National association of Purchasing, Inc” pp28 Jinsook Cho and Jikyeong Kang (2000), “Benefits and challenges of global sourcing: perceptiomns of US apparel retail firms, “International Marketing Review” pp544, Laura M. Birou and Stanley E. Fawcett (1993), “International Purchasing Benefits, Requirements, and Challenges”, “National association of Purchasing, Inc” pp33-35 R. M. Monczka and R. J.
Trent (1991), “Global sourcing: a development approach”, International Journal of Purchasing and Materials Management, pp. 2-7. Laura M. Birou and Stanley E. Fawcett (1993), “International Purchasing Benefits, Requirements, and Challenges”, “National association of Purchasing, Inc” pp36 See J. C. Crawford, “The Worldmindedness of US. Purchasing Professionals, “Journal of Purchasing and Materials Management, Fall 1984, 9923-26; J. N. Carter and J. Gagne, “The Dos and Don’ts of International Countertrade, “Sloan Management Review, Spring 1988, pp. 31-37; R. E.
Speckman, “U. S. Buyer’s Relationship with Pacific Rim Sellers, “International Journal of Purchasing asd Materials Management, Winter 1991, pp. 2-10 H&M Annual Report 2007. Retrieved November 10, 2008, from http://www. hm. com 7. 2Invitation Letter Dear Miss Chiang, Interview of Global Sourcing Study for H&M I am a student of an undergraduate degree course major Business Management organized by Northumbria University in the United Kingdom and in collaboration with The Hong Kong Polytechnic University, School of Professional Education and Executive Development (SPEED).
I am currently conducting a research project on a study of Global Sourcing for H&M. The objective of this research project is to find the various benefits and challenges that H&M perceives in global sourcing, and how those benefits and challenges differ in terms of demographic and managerial characteristics. The responses you give will be treated in strict confidence and for academic purpose only. I would like this interview to be scheduled at 19:00 on 7 November.
The questionnaire has been attached for your kind perusal and will be discussing with you during the interview. Thank you for your great support and arrangement for this interview. Should there be any enquires regarding the questions on the interview, please do not hesitate to contact me. Yours Faithfully, Chin Wing Hang, Christopher 7. 3 Interview Question Northumbria University at Newcastle, UK Newcastle Business School Strategic Supply Chain Management Global Sourcing Study for H&M Questionnaire |1. Kind of Industry: Apparel/ Textiles | |Part 1: Experience | |2. |How long have “Global Sourcing” been conducted by H&M? | | | | |Part 2: Regions Sourced From | |3. |Which regions does H&M source from? | |4. |Where is/are the sourcing market(s) for H&M? | | | |Part 3: Factors among Benefits/ Requirements/ Challenges affecting Global Sourcing Consideration | |5. |Why does H&M need “Global Sourcing”? | |6. |What is the importance of factors used in international sourcing decision? | |7. |What is the importance of below factors of benefits/ Requirements/ Challenges of global sourcing? Why? | |8. |What challenge(s) are H&M currently facing in conducting Global Sourcing? | |9. |How does H&M solve the above problem? | |10. What is the key factor(s) of Global Sourcing is/are influencing H&M being successful? | | | | | | | | | 7. 4 Interview Transcript Northumbria University at Newcastle, UK Newcastle Business School Strategic Supply Chain Management Global Sourcing Study for H&M Questionnaire |1. Kind of Industry: | | | | | |H&M is a well-known international fashion retail house, so it is a kind Apparel/ Textiles industry | |Part 1: Experience | |2. |How long have “Global Sourcing” been conducted by H&M? | | | | | |Global Sourcing is a useful strategic approach, that have been adopted by H&M over 30 years. |Part 2: Regions Sourced From | |3. |Which regions does H&M source from? | | | | | |Our company does not have manufacturing units. We 100% rely on our over 700 suppliers across the world to produce | | |inexpensive but quality merchandises. Our sources are approximately 61% from Far East, and 37% within Europe (Mainly | | |Eastern Europe), and 2% from the middle. | | |. | |4. Where is/are the sourcing market(s) for H&M? | | | | | |China is the main sourcing market for H&M, which accounts for 16% of total. Turkey and India is the second and the | | |third share 14% and 12% respectively. | | | | | |Furthermore, the other sourcing countries are Bangladesh (11%), Romania (8%), Cambodia (6%), Bulgaria (6%), Indonesia| | |(6%), Pakistan (5%), South Korea (5%), Portugal (5%), Italy (4%) and Lithuania (2%). | | | |Part 3: Factors among Benefits/ Requirements/ Challenges affecting Global Sourcing Consideration | |5. |Why does H&M need “Global Sourcing”? | | | | | |Company Growth: to comply with H&M business goal, we have stated and planned our business development map which is | | |intending to expand 2 times than now within 5 years. For example, speak easily, “Today H&M sells 2 million pcs/day; | | |In 5 years it will be 4 million pcs/ day. | | |Better Capacity and shorten Lead time: “Fashion and quality at the best price” is our business concept. H&M is one of| | |“Fast Fashion” company in the industry, for catching the right Fashion trend, we aim is achieving “Late order placed”| | |but able to enjoy the “early merchandise in-shop”. That means, we target is to control the whole production process | | |(from raw material to the finished goods) can be finished a month.
The current average lead time is 14 weeks and also| | |the current productivity may not fulfill our future needs and demand. Global Sourcing technique helps us to solve | | |this problem, share and shift the capacity and workload to the suppliers worldwide. Eventually, we can enjoy the high| | |productivity at the short lead time. | | |Exploring future Sourcing Business: Our competitiveness may affect by there local/ micro-economic status, such as | | |operation cost, regulation policy, or politic environment.
We are still looking for the better business environment | | |for conducting production with the better cost, and simpler regulation policy than now. | | |Getting the Quality product at the low cost: For instance, we are facing the threat to increasing production cost in | | |China so that there may not be attractive to us in the future. Looking for the new opportunity in other developing | | |counties is our big focus as well. Of cause, we don’t affect our quality in reducing cost! | | |Wider Product Category so that better quality: Global sourcing enlarge us the Product Category or product type.
For | | |instance, we can find the nice craft from India and Indonesia, and good Cotton quality in Turkey. It is impossible to| | |source in the domestic country. | |6. |What is the importance of factors used in international sourcing decision? | | |Cost problem- Control margin of profit on suppliers: Cost is one of the key factors determining H&M more successful | | |in the fast changing market. We are currently suffering from the increasing cost with the limited sources of | | |suppliers.
Thus, our existing suppliers can gain better profit from the incontrollable mark-up without competitors. | | |After importing and sourcing new suppliers, it can produce the “internal competition” with them. Thus, by squeezing | | |the low cost in production, H&M and our customer enable to enjoy our quality products at the best price we offered. | | |Shorten Lead-time: Aspiring the on-time schedule is vital important for the Fashion Industry. We don’t want to miss | | |any good chance due to the late shipment. | | | | |However, unfortunately, lack of enough suppliers is our current problem. It not only affects our productivity but | | |also is a threat to cause the delay shipment. | | | | | |Global Sourcing can settle above these problems down and increase our capacity so that to shorten lead time. | |7. What is the importance of below factors of benefits/ Requirements/ Challenges of global sourcing? Why? | | | | | |Benefits | | |Cost Reduction: Production plays as an importation role of the whole fashion activity and it also share an enormous | | |proportion of the total expenses. Our production units of H&M are mainly from the developing countries such as China,| | |Turkey, Indonesia, Cambodia, Romania and Bangladesh.
It can substantially cut down the labor expenses, comply with | | |the bulk production so that enhancing H&M at the competitive position in the Fast Fashion Industry by maximizing the | | |margin of profit to the business. | | |Better Quality: Besides reducing cost, I think another benefit of global sourcing is to learn from the latest | | |information about the advanced production machines and materials from sourcing suppliers which can minimize the long | | |lead time. | | | | |On the other hand, by increasing the number of suppliers, it can increase its interspecific competition with each | | |others. Sometimes, our existing suppliers will contact us actively. They offer us the attractive conditions with the | | |aim of getting our orders. That’s true, the method good means to control in terms of price and product quality. | | | | | |Moreover, service quality is also to be considered.
We use electronic data interchange (EDI) as a communication media| | |between H&M and supplier, namely ‘Order Follow Up System” and “Product Life Cycle System”. This programme offers us a| | |consistent communication standard so that both parties enable to acquire and share the most accurate information | | |interactively, and the final objective is to eliminate any errors affecting the product quality and scheduling. | |Wider product category Availability: For instance, Italy is expertise of Leather Goods because its leather material | | |and finishing is the best in the world; the lingerie technology in Guangdong, China is the best and cheap. Of course | | |Japan owns the most advanced technology in the world but the price the relatively horrible; India is the large | | |production market for us, because there is the labour-intensive country and under the special cultural background. We| | |enable to acquire low price with quality crafts and woven products. | | | | |Furthermore, Organic Cotton will be the big focus for H&M, so that Turkey will be the large export market for us, | | |where account for the largest share in the world. | | |Requirements | | |Support by top management: the management level must define the clear development map and planning for future. The | | |future plan of logistic is to increase the accuracy, flexibility and efficiency within the department by set-up new | | |DC. CO in Japan, and enlarge DC in Poland, which is to support the increasing Mailorder sales. | | | | | |Building a long-term relationship and supplier qualification: We are now cooperating with over 700 suppliers, so | | |maintaining the good relationship with them is the art of philosophy. H&M needs to keeping a good reputation to them…| | |hum… clearly, ordering a large volume, letter of credit and guarantee in payment time are the good means to create | | |good reputation.
Also we need to state a action plan to review and keep strong communication. | | | | | |On the other hand, we are keeping looking for new suppliers as well. Under our serious company standard and | | |requirement to suppliers, so our auditor will check and evaluate the supplier including price, lead time, quality, | | |capacity and especially the standard of Corporate Social Responsibility (CSR) as well. | | | | |Knowledge of foreign regulations: Understanding of the local circumstances and trade conditions influence the H&M’s | | |business performance. We have established around 20 production offices among the production countries I mentioned | | |before. The function of the production office is as a coordinator/ middleman role controlling any matters in terms of| | |textile quotas/ law regularions and suppliers.
So these productions offices must be equipped with comprehensible | | |knowledge about the local country. | | | | | |Challenges | | |Political Environment: Political stability is essential to economic prosperity, and it is a key element for operation| | |business. Recently, the political circumstances is not stable in
Thailand, the anti-government demonstration caused | | |the Bangkok city in turmoil. | | |Finding qualified sources: Another point is that it is hardly to find external source and supplier which can | | |qualified our requirement especially Corporate Social Responsibility. CSR is a standard of responsibility for how | | |people and the environment are affected by our activities. For instance, Child labor, illegal pay and unsafe working | | |environment and discrimination and abuse are all against Code of Conduct of CSR regulation.
Unfortunately, our | | |difficulty is that we always discovered many suppliers with above problems when seeking for suppliers and that kind | | |of problem was occasionally occurred on other company. For instance, Gap was the good example that it had employed | | |child labors producing garments that log of garments eventually destroyed. | | | | | |Another example is Zara, poor working conditions was exposed from news, which reported that some workers had | | |experienced verbal and physical abuse, and that factory was enforced to close. | | | | |Quota system and exchange rate: Quota and Exchange rate are also affecting the company alive in the competitive | | |market. For example, US dollars is H&M standard currency, when the US dollars increase, the purchasing cost will be | | |increase. | | |Relationships between competitors: Finally, our company is facing the threat is need competitive with other Fashion | | |House such as Esprit, Zara, and Walmart. | |8. What challenge(s) are H&M currently facing in conducting Global Sourcing? | | | | | |Well… it must be not enough suppliers on hand because of the above challenge. | |9. |How does H&M solve the above problem? | | |We need to identify the strength, product category, and company goals for starting Sourcing in the specified country. | | |Set up local Sourcing office can assist us share and solve the problem in terms of tax, and order follow-up. | |work with there local trading or import & export companies instead of factory directly, as the trading companies are | | |more familiar w/the local regulations/networks/culture etc | |10. |What is the key factor(s) of Global Sourcing is/are influencing H&M being successful? | | |Hum… I think the key point should be: | | |Standardize working procedures/ flow/ requirement with the supplier. | | |Coat and Quality. | | |The category of product, wider product range, we can earn more money. |