#Lessonsfromthebest : SC Network Optimization

 Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

When the world just came out of recession in 2010, luxury took a hit. But Michael Kors was an outlier.

Kors modeled itself as an affordable luxury: giving recession-struck, cost-conscious American & European consumers a high style option. This was done by greatly overhauling its Retail distribution strategy & taking advantage of Low-cost manufacturing in China. It opened stores in newer countries, cities, malls & Duty-free zones.

This showed in revenue as $ 38Mn (2011) to $109 (2012) to $221 (2013). Soon becoming the best performing & most searched Luxury brand in the world.

However, three problems soon caught up:

• Overdistribution reduced its aspirational value
• Much of the growth was through markdown in the pricing structure that led to a weak P&L
• And finally, Michael Kors became one of the most counterfeited handbags in the world

Between 2013-14, the Inventory-to-Cash Ratio was around 0.5. This ratio being greater than 0.8 indicates a much higher inventory than what current assets can support. By 2016 this ratio sky-rocketed to 1.65, inventory increased by 37%, but cash reduced by 56%

How did they overcome this?

Kors stayed relevant by realigning its forecast and its distribution plans and giving us a good example of the inter-dependencies among Supply chain, Strategy & Finance.

They performed a supply chain network optimization study when they realized their long-term forecasts caused problems in the distribution centers as they couldn’t handle such large projected growth. By the time, they were moving from a high growth business to a mature business model. They started focusing more on how to utilize their retail assets for omnichannel distribution in order to derive maximum advantage for the lead times.

They reduced the number of touchpoints between the manufacturers and the customers. More goods were directly shipped to customers from the ports. Some orders went directly to the de-consolidators bypassing the distribution centers. Thus, by redesigning the supply chain, soon they developed a competitive advantage which over time became their core capability.

 

Reference for the financials from here.