Dive Brief:
- Fashion retailer H&M posted a 9% profit drop last quarter, after a heat wave led to a severe drop in demand and then prices for its autumn and winter collections, the Wall Street Journal reported.
- The company's focus on competitive pricing means 80% of its suppliers are located in Asia, which consequently means multi-month lead times for many of its products, leaving H&M incapable of responding to sudden shifts in weather, the Journal reports.
- By contrast, H&M's competitor Inditex — Zara's parent company — produces 65% of its products in Spain, Portugal, Turkey and North Africa according to the Journal, allowing multi-week lead times and increased agility for the retailer.
Dive Insight:
The incidents highlight the importance of supply chain agility to business performance, particularly in the fast-fashion world, but also for managing volatile consumer demands.
This is not the first time H&M has been burned by sudden shifts in weather. Q3 also saw a 1.1% increase in markdowns compared to sales due to "increased mark-down activities for the spring garments that did not sell as well as planned in Q2 due to the cold spring," as reported in the company's nine-month report.
In an article commenting on H&M's woes for Supply Chain Movement, Carlos Condon writes every company must strike a balance between supply chain speed, efficiency and variability, but companies cannot have all three.
Several tools are available to increase supply chain agility, although few are perfect. Increasing inventory capacity can help hold stock for a few weeks in case of product launch delays or need, improving speed and variability but at a high fixed cost affecting efficiency. Meanwhile, decreasing lead time through closer suppliers would help increase speed and efficiency, but may cost product variability.
H&M's business model focuses on efficiency and variability, as it seeks to provide competitive pricing for a wide variety of brands, while Inditex's Zara preference for speed and efficiency comes at a higher price cost.
