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Archive for the ‘Luxury goods’ Category

Three weeks ago, I had the pleasure to visit one branch of my extended family and BMW Welt (BMW World), the “multi-functional customer experience and exhibition facility of the BMW AG, located in Munich, Germany.” Supposedly, BMW Welt is the second most popular tourist destination around Munich, after Neuschwanstein Castle which inspired Disneylands’ Sleeping Beauty Castle. If you like architecture or cars, you should visit BMW Welt.

OK, but this is the Operations Room, so what else is worth knowing? It turns out that this month, BMW starts selling in Germany its long-awaited i3 (the USA will have to wait until 2014) and here’s some personal pictures to highlight three aspects:

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Fancy, luxury handbags start off looking like this:

BN-AH311_117TAN_M_20131106140207

Not exactly the image of exclusivity and sexiness that the likes of Hermes and Longchamp want to project when trying to convince customers to pony up for a bag but leather starts with hides and hides don’t start off in fancy colors.

The image comes from a Wall Street Journal article on Tanneries Haas, an old-school Alsatian tannery (French Tannery in Demand as Source of Top-Notch Leather, Nov 6). The article walks through the production process (quick: name a use for chromium!) but the interesting part of the story is how the industry of supplying high-end hides has changed. Tanneries Haas remains independent but luxury houses are buying up tanneries.

Until just a few years ago, the tanning business was the least glamorous cog in the designer-handbag industry. But recently Tanneries Haas and other French tanneries have found themselves the object of attention from famous luxury labels jockeying for secure sources of top-notch leather. “When they saw a certain number of tanneries disappear, they had to think about protecting their suppliers,” says Jean-Christophe Muller Haas, a sixth-generation French tanner. …

By acquiring suppliers, luxury goods purveyors hope to get more control over raw material costs. Prices of calf hides have soared in recent years due to Europe’s falling veal consumption. Calves are slaughtered primarily as a source of veal and skins are a byproduct. With fewer calves slaughtered to meet shrinking demand for veal, the supply of skins available for luxury leather goods is also diminished.

This move is not just limited to European calf leather. Businessweek reports that luxury firms are also buying up crocodile farms (A Crocodile’s Bumpy Road From Farm to Handbag, Oct 24).

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“We live in a world of speed and cheapness,” says Roger W. Smith, who makes every component of a watch from scratch and by his own hand.  It is the ultimate opposite of that other Smith (Adam)’s division and specialization of labor.  I believe there is room for both in our world.  It takes one watchmaker about 6 months to produce one watch.  The result is a masterpiece…

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The New York Times Magazine has a long article on how Inditex and its main brand Zara have grown to be one of the world’s most influential fashion players (How Zara Grew Into the World’s Largest Fashion Retailer, Nov 11). They even have a spiffy video.

Not surprisingly, both play up the role of operations in the firm’s success.

A traditional ready-to-wear fashion company in the West sends the designs for its clothes to independent factories in countries like China and India, where the labor to make them is cheap. These clothes are then shipped back and stocked in stores in spring and fall, with smaller shipments throughout the year.

But a brand at Inditex will make a fall collection, for example, and then ship only three or four dresses or shirts or jackets in each style to a store. There’s very little leftover stock, few extra-smalls or mediums hiding in the back. But store managers can request more if there’s demand. They also monitor customers’ reactions, on the basis of what they buy and don’t buy, and what they say to a sales clerk: “I like this scooped collar” or “I hate zippers at the ankles.” Inditex says its sales staff is trained to draw out these sorts of comments from their customers. Every day, store managers report this information to headquarters, where it is then transmitted to a vast team of in-house designers, who quickly develop new designs and send them to factories to be turned into clothes.

More than half of Inditex’s manufacturing takes place either in the factories it owns or within proximity to company headquarters, which is to say in Europe or Northern Africa. Inditex owns factories in Spain and outsources production to factories in Portugal, Morocco and Turkey — considered costly labor markets, typically. The rest of its clothes are produced in China, Bangladesh, Vietnam and Brazil, among other countries. The trendiest items are made closest to home, however, so that the production process, from start to finish, takes only two to three weeks. Inditex’s higher labor costs are offset by greater flexibility — no extra inventory lying around — and on faster turnaround speed.

That means that if Inditex stores in London, Tokyo and São Paulo all have customers responding enthusiastically to, let’s say, sequined cranberry-colored hot pants, Inditex can deliver more of these, or a variation on hot pants, sequins or that cranberry color, to stores within three weeks. The company tries to keep the stock fresh; one promise its stores make is that you will always be buying something nearly unique. Merchandise moves incredibly quickly, even by fast-fashion standards. All those thousands of Inditex stores receive deliveries of new clothes twice a week.

So is there really much new here? (more…)

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A few days ago, Henry Blodget wrote :

We love our iPhones and iPads.

We love the prices of our iPhones and iPads.

We love the super-high profit margins of Apple, Inc., the maker of our iPhones and iPads.

And that’s why it’s disconcerting to remember that the low prices of our iPhones and iPads–and the super-high profit margins of Apple–are only possible because our iPhones and iPads are made with labor practices that would be illegal in the United States.

The article summarizes a recent episode of NPR’s This American Life which did a special on Apple’s manufacturing.  Foxconn, one of the companies that builds iPhones and iPads (and products for many other electronics companies), has a factory in Shenzhen that employs 430,000 people. Apparently, an estimated 5% of them are kids (12 to 14 years) old; the standard shift is 12 hours and can extend to 14 – 16 hours; while the reporter is in Shenzhen, a Foxcon worker dies after working a 34-hour shift; the hands of workers who are using the neuro-toxin Hexane (which evaporates faster than other cleaners) to clean iPhone screens are shaking uncontrollably; etc.  All this for a wage of less than $1 an hour.

Henry concludes:

The bottom line is that iPhones and iPads cost what they do because they are built using labor practices that would be illegal in this country–because people in this country consider those practices grossly unfair.

That’s not a value judgment. It’s a fact.

So, next time you pick up your iPhone or iPad, ask yourself how you feel about that.

A good question indeed and you should ask how you feel. (Interestingly, respondents to this story span the entire spectrum.)  But let me ask whether Apple should care about this?  The answer is an emphatic “but off course.” Anyone familiar with “non-market strategies” knows that even a small fraction of the population can provide sufficient activism to bring a company to its senses.  (If you are not familiar, read “Reputation Rules” by my colleauge Daniel Diermeier.)  The momentum is already building: this weekend Forbes asked whether this is Apple’s Nike moment? Of course we hold big, successful companies to a higher standard; tall trees catch much wind.

So what will Apple do?  Well, it seems it already mounted campaigns–recently it disclosed for the first time its list of suppliers (without any addresses we should add–they still don’t want to make it easy, but it’s a first step). More interestingly, however, is the question how they will deal with the Foxcon issue: even Apple may not (nor want to) be in a position to control a company that runs a factory with 430,000 people.  Indeed, in a follow-up blog my colleague Marty will write about another key reason (besides cost) that Foxcon is so attractive: fast response at massive scale.

But this is not the first time Foxcon suicides are in the news (see May 2010 article) and Foxcon isn’t know for respect of its employees (recently the CEO called its employees “animals“). So Apple likely has been working on addressing this for a while.  Could the amazing $8 billion in announced capital investment at suppliers (see this earlier blog entry) include automation to reduce the human stress and risk factor? It surely would be in line with Apple’s strategic quest for high quality (i.e., consistency, low tolerances, etc.) while retaining high scale.  However, it would imply a faster-than-expected transition in China from low-level assembly by hand to higher job requirement for much fewer people.  Starts sounding like our job quandary?

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When we started this blog, I would not have expected that we would end up so many posts on luxury Swiss watches. But I like fancy watches, and the interesting stories keep coming. The most recent story comes from the New York Times (Swatch, Supplier to Rivals, Now Aims to Cut Them Off, Dec 10) and concerns a theme we have hit before, Swatch’s decision to stop supplying movements and components to other watch brands. Unless a series of lawsuits against the action stops them, the hammer drops on January 1st and Swatch can begin cutting back its supply.

Reading the article got me thinking about when it makes sense to supply competitors with components. Clearly, if the other firm’s product is a complete substitute to one’s own, one could cut off the supplier, increase one’s own volume and have the same volume with more margin. At the other extreme, if the other firm’s product is not at all a substitute, then one might as well sell to the firm. You are not directly competing so it’s just found money. So substitutability has got to matter.

This can be formalized with a simple model. (more…)

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I love to see how things are made and VW makes that especially joyful in their novel “transparent factory.” This is a completely new approach to factory design and architecture with several noteworthy innovations that make this a perfect fit-in for a center location in beautiful downtown Dresden:

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