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Posts Tagged ‘Luxury goods’

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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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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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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Few things would be more luxurious than a truly custom-made product that is tailored to your every desire. That, of course, is expensive but there is a medium ground between a truly custom product and something that is merely off the rack. Mass customization promises customers a sort of unique offering. I say “sort of unique” because mass customization programs usually are built off a modular product architecture so they inherently constrained customers to not mess with the interfaces between modules. On the other hand, they usually offer a wide range of choice for each module. The wonders of combinatorics then quick in and the customer can choose from possibly millions of alternatives. Another customer may be able to make the exact same choices, but the chances of that happening are ultimately very slim.

And that gets us to Burberry Bespoke, the mass customization program that the British trench coat maker recently launched. Here is how the Wall Street Journal (Mink or Fox? The Trench Gets Complicated, Nov 3) described the program.

Called Burberry Bespoke, the program is a full-scale attempt at “mass customization,” a long-time goal of retailers and unusual for a designer fashion house. Customers select the cut of their trench coat, the fabric, the color, and then navigate through options such as bronze-studded sleeves, bridle leather cuff straps, mink linings and shearling collars.

Bit by bit, the screen assembles the virtual trench coat as specified. The real-life version arrives in four to eight weeks, in a box the size of a human torso, from Burberry’s factory in Yorkshire, England (leather trenches are dispatched from Italy). The tag displays a special limited-edition number, plus a clear designation in block letters: “Bespoke.”

The company estimates that there are about 12 million different combinations that can be ordered. The graphic above shows one possibility and the video below includes some screen shots of the web site.

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A few weeks ago, we posted on the steps apparel companies were taking to reduce costs, and in particular what let them make cheap pants. Today, the Wall Street Journal has a story about the other end of the market, asking “How Can Jeans Cost $300?” (Jul 7).The short answer is “Lots of reasons.” (more…)

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The Wall Street Journal had an interesting article on how Louis Vuitton is relying on operations to support its growth (At Vuitton, Growth in Small Batches, Jun 27). The brand has grown significantly and is now significantly bigger than rivals such as Gucci. That raises some interesting challenges as it tries to keep up its growth while maintaining its exclusivity. Part of the way it is meeting that challenging is opening a new factory in Marsaz, France, and trying to optimize all of its operations.

The site is part of a strategy to eke out small quantities of growth throughout its operations, starting with the factory floor. Vuitton’s size means it has fewer unexplored avenues to tap for growth than competitors. …

Vuitton’s growth over the years means it is constantly bumping up against its full production capacity. The company owns 17 factories that manufacture bags and accessories. Marsaz is the twelfth in France; in addition, there are three factories in Spain and two in California. Last year, Vuitton was running so low on inventory that it closed its French stores early in the day. The company only manufactures components such as zippers in Asia.

How is Vuitton getting more out of its existing factories? Lean operations. (more…)

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The opening case in our Operations Strategy MBA class is “The Swiss Watch Industry,” (p. 32 in my Operations Strategy textbook, sneaking in some marketing).  That case is used to contrast the business strategy of Swiss and Japanese watch manufacturers in the 1980s and to explain the drastic change suggested by then-consulting firm Hayek Engineering.

In a worldwide market and consumer psychology study, Hayek Engineering discovered that the same watch model would sell substantially better if it carried the “Made in Switzerland” label.  For a Swiss watch, between 75% and 95% of all European consumers were willing to pay a 7%-10% premium over one made in Japan and 20% over one made in Hong Kong. (The comparable numbers for the U.S., were between 51% and 75%, depending on the region. In Japan, the majority of consumers prefer the Japanese watch.)

The general consensus in Switzerland was that low cost production was impossible in Western Europe, and even if possible, not desirable, because it would hurt sales of high-end watches.

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How long would you wait to get exactly the car you wanted?  Some luxury car makers are trying to convince Americans that good things come to those who wait and they should opt to order a custom vehicle instead of taking one off the lot (Lean (Inventory) Times for Luxury Cars, Wall Street Journal, Dec 8).

In the old auto industry business model, dealers stocked a lot of different cars and trucks in a wide array of colors and option combinations to serve customers who wanted to drive in, find a new vehicle, make the trade, and drive out more or less on the same day.

After the economic crisis left dealer lots full of unsold inventory, luxury-car makers and dealers now are doing things differently. They want to keep the dealers’ supplies of cars and crossovers as lean as possible, and persuade more customers to custom order their vehicles—or work with dealers to find a vehicle with the color and option combinations they want in the “pipeline” that extends all the way to BMW’s factories in Germany (or South Carolina).

“They want us to sell vehicles before they arrive,” says Frank Ursomarso, chairman of Union Park Automotive Group, which owns a collection of dealerships in Wilmington, Del. To encourage customers to order, BMW offers certain colors and option combinations only on vehicles that are ordered for a customer—not on vehicles a dealer orders to sit on the lot.

BMW isn’t at a 100% built-to-order system, but about half of the BMW X5 models sold now are spoken for before they hit the showroom floor, a company spokesman says.

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Here’s  few quick items we didn’t get around to writing full posts on. To begin it’s hard to say too much about Toyota this week.

  • The Wall Street Journal had an interesting story today (Feb 6) on Toyota’s response to the crisis (A Crisis Made in Japan ).  The gist of its argument is that Toyota’s reaction is pretty much standard for how Japanese corporations handle these kinds of crises:

It is not surprising that Toyota’s response has been dilatory and inept, because crisis management in Japan is grossly undeveloped. Over the past two decades, I cannot think of one instance where a Japanese company has done a good job managing a crisis. The pattern is all too familiar, typically involving slow initial response, minimizing the problem, foot dragging on the product recall, poor communication with the public about the problem and too little compassion and concern for consumers adversely affected by the product. Whether it’s exploding televisions, fire-prone appliances, tainted milk or false labeling, in case after case companies have shortchanged their customers by shirking responsibility until the accumulated evidence forces belated disclosure and recognition of culpability. The costs of such negligence are low in Japan where compensation for product liability claims is mostly derisory or non-existent.

  • NPR had an interesting report on how this is all playing in Japan (Recall Shakes Japan’s Confidence In Toyota, Feb 5).  It mentions in passing that some in Japan seem awfully suspicious that this happening to Toyota after teh US government acquired an interest in GM’s long term success.  I am not sufficiently into conspiracy theories to chalk this all up to a government plot but I do think it is fair to say that Ray LaHood would not be shooting off his mouth telling everyone to stop driving their Chevy or Ford. (more…)

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Time for another seasonal post. Marketplace reports that there is a fairly serious champagne glut (Champagne’s bubble bursts, Dec 29) leading to some curious inventory management:

I invited wine writer and blogger Alice Feiring down to a Manhattan restaurant called Balthazar. We started by talking about the way things used to be. The year was 2007. The stock market was up. Unemployment was down. And there were a lot of corks-a-popping.

ALICE FEIRING: The Champagne industry finally had arrived. They were complaining there wasn’t enough Champagne for the world.

Then, as you can you can probably guess, the bottom fell out of the Champagne market. These days, Feiring says, some Champagne is going back to France, where it came from.

Hobson: They actually had to send some back?

Feiring: Send some back because they were taking up too much room in the warehouses.

The Times (of London, not New York) adds a little more detail (Has champagne lost its sparkle? Dec 17):

Most analysts agree that grand old champagne houses brought this disaster on themselves. They cashed in on the supposed champagne drought of 2007, raising prices outrageously while quality slipped. Shipments to the biggest overseas markets showed double-digit drops in 2008, but the winemakers shilly-shallied over reducing volumes: the houses had arrogantly decided, as one eminent vigneron told the wine writer Michael Edwards, that champagne was “recession-proof”. The result is an historic glut: reportedly there are now 1.2 billion bottles, equivalent to four years of sales, languishing in French caves and warehouses

(more…)

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