Guccis agile supply chain1

Professor Corrado Cerruti, University of Roma Tor Vergata, Italy and Professor Alan Harrison, Cranfield School of Management, UK Case date: 2005

Gucci Group: a brief overview

Gucci Group, with consolidated sales over 3.2bn, is a world-leading, multi-brand company in the fashion business. In addition to the core Gucci brand, the Group incorporated other leading brands such as Yves Saint Laurent, Sergio Rossi, Boucheron, Bottega Veneta and Balenciaga together with designer brands such as Alexander McQueen and Stella McCartney (exhibit 1). Leather goods, and in particular bags and accessories, represented the traditional core business of the group, with a growing presence in ready-to-wear clothing and shoes. The major distribution channel is directly operated stores (DOS), which contributed roughly 50% of Group turnover. Gucci is a global company, with Europe accounting for just over 40% of sales: the USA, Japan and Rest of the World each contribute roughly 20% (exhibit 2). Gucci Group was founded in 1923 by Guccio Gucci, and developed rapidly after World War II to become internationally known as a luxury brand. In the 1970s, arguments and legal disputes within the Gucci family brought about a rapid decline in fortunes. At the end of the 1980s the company - in spite of the entry of the Arab investment group Investcorp was in poor shape financially. The famous brand was also suffering because of the extensive practice of licensing. Starting in 1994 under Domenico De Sole, Gucci underwent a rapid turnaround process. This painful experience not only aimed to cut costs and locations, but also to build a modernised company. Thanks to the cheerful contributions of Creative Director Tom Ford, it also built a renewed brand. Within a five year period, De Sole together with Tom Ford as stylist, Renato Ricci as head of human resources, Bob Singer as chief financial officer and James McArthur as director of strategy and acquisitions managed to increase company sales almost four times (table 2). The turnaround gave Gucci a leading world-wide position, allowing the company to return to positive earnings and then to finance a strong acquisitions campaign and moved towards the present multi-brand configuration. The major acquisition was Sanofi Beaut. This company owned YSL licences and comprised two major divisions: YSL Couture for Yves Saint Laurent ready-to-wear and YSL Beaut for cosmetics and fragrances. The traditional Gucci

The authors would like to thank Vivencio Fernandez de Aragon - General Manager of Gucci Logistica and Karl Heinz Hofer Production Manager - for their support in providing us with essential information for this case: any errors are our responsibility!

fashion and accessories division accounted for the largest part (54%) of group revenues, and of the margins (240%). However, the newly acquired brands allowed the group to nearly treble its sales in the 5 years from 1999 (1174m) to 2004 (2,544m). Following acquisition of Gucci group by Pinault Printemps-Redoute (PPR) in May 2004, a new management team led by CEO Robert Polet was set up. PPR started investing in Gucci in March 1999 in order to help Gucci management to face up to a hostile takeover bid by LVMH, one of its strongest competitors. On September 10th 2001, following a settlement with LVMH, PPR increased its interest in the company to 53%2. In April 2004, following a strategic investment agreement with LVMH, PPR offered to purchase all Gucci public shares. After the acquisition, PPR started de-listing Gucci shares from the New York Stock Exchange and Euronext Amsterdam in July 2004. Gucci Group is now the pillar of PPR Luxury Goods division. While very international in its presence, its management and its ownership, Gucci was still rooted in Florence, and in the craftsmanship strengths of the Tuscany region. All of its traditional leather production (bags and accessories) was carried out in the Florence region by a network of more than 600 small to medium sized firms. While the re-launch of Gucci Group was led by Tom Ford and its successful commercial future depended heavily on the collections designed by the new creative directors3 , part of Guccis success has also been due to its ability to deliver promises made at fashion shows, respecting both strict delivery times and high quality standards. The need for an agile supply chain is crucial in the fashion business because a high variety of articles must be managed within strict time constraints. Most fashion companies renew 60-80% of their range each season, so they must develop several thousands of new articles each year. The selling period is quite short, and requires strict compliance with the fashion show calendar with no possibility of running late in developing a new collection. After an introduction to key business processes in the fashion business, we focus especially on the Gucci supply chain. In addition to a successful marketing effort in repositioning its brands and collections, Gucci has been able to restructure its supply chain to achieve agility, while preserving its traditional craftsmanship.

Key business processes in the fashion business

Fashion activities are centred on seasons and collections. Traditionally, a company in the fashion business presents at least one collection in both of the classical seasons (winter/autumn and spring/summer). Most fashion companies - while keeping the official accounting and legal/fiscal reporting according to the fiscal year - focus management accounting and control mainly on seasons. Seasons are the key reference point for evaluating company competitiveness and profitability. Results each year are in effect the sum of the contributions of the collections for each season.

The deal was closed the day before 9/11. The new creative directors are all Tom Ford heirs: Frida Giannini for Gucci womens wear and accessories and John Ray for Gucci mens wear.
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Each season a fashion company needs to re-invent itself by renewing around 60-80% of its range. The manufacturing process cannot be planned in advance in detail, as only a small proportion of production comprises classical articles where sales history has been established. It is therefore risky to plan large lots of new items in advance when sales of lines, colours and finishings can be very different from those originally planned. Supply chain agility is important in order to avoid stock-outs on the one hand, and mark-downs on the other. The season is planned and controlled by 3 key business processes: collection preparation: definition of the prototypes, production of pre-industrialised small quantities (the samples) for use at fashion shows sales campaign order management: collection of orders from the fashion shows, agents, distributors and other sources. production planning: formulation of the production plan based on pre-season sales plans updated as the sales campaign unfolds.

Exhibit 3 shows key stages in collection preparation and production planning, and how they interface with budgeting and control 1. Collection preparation Collection preparation is a key activity for competitiveness both in terms of sales potential and in terms of costs (it involves up to 5-7% of the total collection costs). Collection preparation comprises two major phases with different outputs: prototypes: unique elements aimed to express the fashion/style of the new collection that can be made either by an external or an internal design workshop; samples: small lot productions aimed to transfer the prototype ideas into a preindustrialised product in terms of bills of material and process cycle.

In the prototypes phase, the goal is to prepare new models for the target market. Creativity of the stylist is the key input, but effectiveness of the process has become increasingly important as indicated by a growing use of dedicated CAD systems. These support the design phase while automatically generating the bills of material. The CAD system can also define part of the production cycle - the fabrics cutting phase. In the prototyping phase the goal is to achieve a mixed yet balanced set of offerings for a new collection. The stylist has to look at fashion trends and at the previous parallel season sales statistics in order to select prototypes that match the market target. Moreover the stylist and the product manager have to manage all the elements that determine the standard cost. For example, they have to balance cost of leather, fabrics and accessories with the cost of manufacturing cycle. Where necessary, these costs can be tuned by transferring production to subcontractors in a region with lower costs, or by substituting specified materials with lower priced ones. After an analysis at the level of the single item, the whole collection is revised in order to establish a balanced offer for the sales campaign in terms of target prices, standard costs and gross margins - with the goal of achieving the overall season budget. In the samples phase, the goal is to obtain a small production lot of industrialised products. This helps to develop the new collection to be presented to potential customers, and to define the industrial process for large-scale production. Management of the collection sample orders covers - in a very short time and in very small quantities - the whole business process from bill

of materials definition to production order launch to physical distribution to showrooms and agents. Sample orders are critical because they are made of small orders with a large number of parts to be delivered in a very short time - in spite of their new bill of materials. The bill of materials and the process cycle of the samples are normally different from normal production, because during this phase the emphasis is on shortening the throughput time rather than on reducing costs4. Moreover, preliminary bills of material and process cycles are fine-tuned for reliable production based on samples production, with the support of suppliers and subcontractors. 2. Sales Campaign Order Management Collections presentation at the fashion shows represents completion of the collection preparation phase, and start of the sales campaign. Between the two phases, there is often a two-week overlap where - based on the preliminary collection editing and review - product managers decide modifications to collections and cancellations. The sales campaign normally lasts from 4 to 6 weeks, and involves orders acquisition from the various distributors and Gucciowned shops and from boutiques via agents. Each collection is brought to the sales campaign having been assessed in terms of its potential and accompanying sales target. Incoming orders during the sales campaign create a rolling sales target revision. These ongoing adjustments in turn impact on production planning. The order portfolio is developed during the sale campaign, and after the sales campaign has finished, it is frozen in order to specify the overall production plan, process capacity and materials availability. Because of the short delivery window, many articles cannot be further replenished after closure of the sales campaign, because additional materials cannot be procured within the time available. 3. Production planning Production planning starts with overall goals from the season budget based on characteristics of the collection presented and historical sales trends. Such an overall budget determines initial purchases of inputs (i.e. yarns for the textile manufacturers and fabrics for the clothing companies). Initial purchases are made al buio (in the dark), as they are based on Gucci forecasts with no market input. These purchases can reach up to 30-40% of the overall planned requirements, and mainly address items and colours that are very likely to be ordered and produced. For the most extravagant items and colours, purchasing normally takes place only after order receipt. Once the sales campaign has started and customer orders are coming in, Gucci makes a weekly updated projection of the campaign result (the so called projected results). New purchasing orders are issued, and old ones are modified or cancelled. At the end of a sales campaign, Gucci has a complete view of the order portfolio. This is, however, subject to cancellations and modifications from customers. The orders portfolio is the basis for the final purchase orders to material suppliers and subcontractors. As materials are received (such as yarns for textile companies and fabrics for clothing companies), Gucci launches production orders. These can be either for an internal department or - more frequently - for external subcontractors. All purchasing and production phases in the

4 The samples are produced in-house (often the only in-house production) or by selected suppliers, with the goal to guarantee a fast process at the highest standards while keeping tight control on design innovation.

fashion chain need to be managed in an agile way because they are as fragmented and changing as the unfolding season itself. Production planning therefore needs to take into account: launch of production orders through a long production cycle that is distributed across many suppliers (for example, 3-4 months for fabrics and 1-2 months for leather) optimisation of work phases by grouping production batches of different items wherever joint processing can be done flexible rescheduling of work assignments due to cancellations, modifications and new commercial priorities.

Because of these challenges, textile and fashion companies do not generally use an integrated program such as MRP for planning purchasing and production. Instead, they prefer to have programs dedicated to each phase, including manual interventions at different steps of the process. Examples of such manual interventions are purchase orders at the beginning of each season, and decisions on priorities for launching production lots. Flexibility of the nonintegrated planning programme, which allows suppliers to respond quickly to market requests, limits their capability to control the whole process. This makes calculations of order delivery dates more uncertain. Fashion companies have different production planning approaches based on their Customer Order Decoupling Point (CODP, exhibit 4). This represents the point where production is no longer generic, but becomes dedicated to a specific customer order. In a Make to Order (MTO) regime, the CODP is positioned before the beginning of the first transformation process. In Make to Stock (MTS), the CODP is located after the end of the last transformation process. In form postponement (FPp), the CODP is at the semi-finished product stage. Here, the product is in generic form to ensure that final manufacturing is performed to specific customer order. Most companies work with a system that is a hybrid between FPp and MTO. This means that enterprise software needs to be able of supporting alternative CODP configurations. FPp is used for final assembly of products that are only completed after customer order confirmation, including special processing like the customer tag or particular packaging. Production up to the CODP is carried out as if for stock (based on the total volumes) and differentiated only in the final phases. Such an approach is used mainly for classic items, especially when fabrics or knitted items can be colourised after the CODP. MTO is the most popular regime for fashion items because as it is possible to follow customer requirements and trends, thereby limiting the risk of building up stocks that may not sell. This may be specially important if a new model is very innovative. Even in this case, however, part of the purchasing commitment to suppliers is made on the basis of forecasts. This is because the supply lead time for both yarns and fabrics (P time) would be much longer than the required customer order lead time (D time). If production is delayed until customer orders are received, allocation to specific orders can be changed if a quality problem has taken place or commercial priorities have changed. Few fashion companies use MTS, because it requires production of finished items for the warehouse without a link to customers orders. While MTS regimes are feasible for classic, long lifecycle items, they are too risky for most fashion items because unsold stock at the end of season has to be discounted. The order portfolio is frozen at the end of a sales campaign, and an overall production plan defined by considering process capacity and material availability. Normally the processing capacity is not a problem as the company can look for additional subcontractors if necessary.

However, material availability within the requested timing can be a problem. This rough cut plan enables a fashion company to approve production so that it is possible to concentrate on execution without distractions from changes in the order portfolio. Inevitably, there will be day-to-day requests for cancellations and additional orders throughout the season. A further element of complexity is caused by the need to carry out planning and execution for 3 seasons at the same time. For instance in February 2004, operations managers have to: work with the design and product development for the preparation of the Spring/Summer 2005 collection; work with the marketing and commercial on closing the sales campaign for the Autumn/Winter 2004 collection; work with suppliers and distributors for completion of production and shipments of the Spring/Summer 2004 collection.

This often creates difficult trade-offs in resource allocation between urgent tasks (deliveries for the current season) and future tasks (support for the new collections).

Guccis agile supply chain

Pressures that characterise the fashion business are accentuated in a leading company such as Gucci. Product churning creates particularly difficult challenges. While the average competitor carries over 30% of product lines from one season to the next, Gucci carries over just 10%. In other words, 90% of Gucci products are new each season. Moreover, Gucci presents specific collections to the market on given events. There are roughly thirty events per year for the Group as a whole, including Cruise5, and Mens and Womens fashion shows. Gucci presents targeted creations at each of these events. The company develops 18,000 prototypes/year (including single pieces for public relations purposes), and manages some 4,000 different stock keeping units (skus, which allow distinctions to be made between product ranges, materials and colours). Managing such a wide product portfolio with short product lifecycles to tight collection deadlines is the core operations capability at Gucci. The importance of this capability is recognised by assigning the operations task, excluding worldwide distribution, to a dedicated company - Gucci Logistica. Gucci Logistica employs 320 people and is structured around five major areas: materials research & development, operations, technical management, production and costing6 (exhibit 5). Materials R&D: is a department of 30 people - much larger than the industry norm dedicated to the development of new materials and production processes. The department

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Cruise is a mid-season event aimed to tackle the US market between Thanksgiving and Christmas. Gucci Logistica includes also two additional positions responsible for the technical management of both YSL and emerging brands products. These two positions have not been considered here as for both these areas Gucci Logistica is responsible on for a part of their supply chain management.

has achieved important results in water jet leather cutting, nest optimisation, and specially treated crocodile and buffalo leathers. It is also involved in looking at long term fashion trends to identify future materials and to experiment in collaboration with qualified raw material suppliers. Technical management: is responsible for technical definition of the product. It supports designers from early phases of collection preparation (from initial samples to prototypes and models), and is closely involved in events coordination. On the basis of feedback from stylists and the market, it engineers the collection models and defines the rules for quality assurance of finished products7. Operations: is responsible for raw materials purchasing (including hardware like buckles and buttons), managing suppliers, definition of time and methods for production and internal raw materials cutting8. Production department: is responsible for order fulfilment through planning and controlling production. While most production activities are outsourced, production department plays a key role in monitoring workflow progress across the supply chain. The department is responsible for order handling, procurement9 (on the basis of the confirmed orders), production planning and production follow-up Costing: develops costs for a collection, based on planned material usage from the bill of materials and labour methods

Exhibit 6 summarises the main activities, dates and responsibilities for launching a new collection. Agility in the supply chain begins at the start preparing the prototypes. Technical management is involved from the stylists drawing. Prototypes must be supplied within two weeks from receipt of design. These prototypes are considered both in terms of style and of manufacturing methods and costing. On this basis a limited number of samples is prepared within a week. At the fashion show the company presents the sample items, having defined a cost price list. Once the new collection has been presented, there is usually a week for fine tuning the actual items that will be presented for the sales campaign. During this period, some items are cancelled and others modified, cost adjustments are made and the definitive price list prepared. There is then a two-week sales campaign, where both internal and external purchasers meet to decide their orders. At the end of the sales campaign, orders are collected and consolidated. If an item fails to collect a minimum number of orders, it can be removed from the collection. Some purchase orders will already have been made by Gucci on its supplier network. These orders are based on preliminary bulk orders from Gucci internal merchandising. However it is only after the sales campaign has been closed - and the order portfolio frozen that the detailed production plan is defined. Depending on timing of the order and on the

7 It is important to highlight that, while Gucci products are based on craftmanship, product engineering is carried out in a detailed way in terms of both measures and materials merging. Gucci quality has to be consistently achieved from each of the 600 Gucci suppliers. In order to help suppliers to comply with Gucci standards, there are technical advisors (ispettori tecnici) that support the supplier network in the definition and the start-up of the new collections. In addition to these advisors acting at the beginning of the cycle to prevent defects, there are also QC inspectors that check the quality of the finished products. 8 Supplier management can be quite complex because not all suppliers are allowed to make all products, plus some suppliers have guaranteed quotas from Gucci. 9 All the raw materials (including hardware) are purchased by Gucci and received by Gucci at its own warehouses. Materials are then checked and distributed to the various suppliers according the production order allocated to them, while Gucci retains ownership (conto lavorazione) whereby only purely production activities are outsourced.

destination, a delivery window is fixed for each collection. Customer orders are aggregated into production orders, and operations has to honour the agreed delivery windows by allocating materials and manpower to the different production orders (exhibit 7). Production activities controlled and coordinated by Gucci Logistica - are carried out by a broad and flexible supply network both for materials/components production (from leather tanning to metallic accessories) and for end products preparation and assembly10. All endproduct suppliers of leather bags and accessories that represent the majority of Gucci division turnover are based in the Florence region. The supply network comprises more than 600 firms with an overall employment of roughly 4,000 people. The Gucci supply network is based on two tiers, with 70 first tier suppliers and roughly 500-600 second tier companies. There are three categories of first tier supplier: partners: selected suppliers that work 100% for Gucci with a 3-year contract. Gucci has a commitment for minimum annual turnover and volume levels. Partners are often supported financially for investments in machinery and product development, but Gucci does not acquire shares in any of them. There are 7 major partners that are fully involved in Gucci operations, starting from modelling (modelleria) for sample preparation. integrated suppliers: suppliers who work for Gucci 70-100% of their sales turnover, who have no exclusivity agreement, and who have a contract horizon of 24 months. These suppliers are involved on the basis of target production volumes, with actual orders periodically revised on the basis of sales campaign results11. others: suppliers that work on 6-12 months assignments in order to provide the required supply chain flexibility. Gucci maintains a list of suppliers who are pre-qualified to the necessary level of product complexity and competencies. Such suppliers can support a peak of demand for a given product line/model in a very short time.

All relationships between Gucci and first tier suppliers are governed by formal contracts - even if relationships between parties have to comply with the pressures of fashion seasons and the need for informal co-operation. Gucci meets partners and integrated suppliers at least twice a year in order to explain targets for the next season, and to explain the wider context in terms of models and volumes. Gucci has full visibility of second tier suppliers: each sub-supplier has to be evaluated and approved by Gucci for both QA and security reasons12. However, daily management of second tier suppliers is the responsibility of first tier suppliers. Gucci doesnt track order progress, nor

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In-house production activities are limited to selected cuttings on expensive materials, or on difficult models. The difference between the partners and the integrated suppliers relies more on the quality of the relationship than on volume. The partners are involved early in critical phases of the collection development and the trust and reciprocal commitment is very high. In several cases the integrated suppliers are larger companies than the partners and produces larger end-products volumes. 12 Gucci has got an inspection department that monitors suppliers (also with on-side inspection) in other to assess the correct operations and to prevent counterfeit reproduction. Because of the very premium price Gucci brand is able to gain, the production of Gucci items for the parallel market would represent for suppliers a very lucrative business. Gucci inspection starts from the very beginning by excluding from its network companies that have been involved in the past in any kind of counterfeit reproduction.

does it carry out regular QA of second tier suppliers. Sub-suppliers performance is already included in the duties of first tier companies. On average, each first tier supplier has 8 to 10 subsuppliers and their relationship is long-term. Gucci always buys materials, and sends it to suppliers for processing while maintaining ownership (conto lavorazione). The process is optimised by Gucci time and methods engineers, who provide suppliers with precise bills of material and process specifications. Such a strong emphasis on operational issues is important considering the craftsmanship characteristics of the network: sub-suppliers are often family businesses that are manned by the owners relatives. Gucci also employs inspectors who in addition to regular QA visits support suppliers when a new product is launched and who supervise early deliveries13. While such a decentralised network allows Gucci a high level of flexibility, it requires significant coordination efforts. Production planning involves allocation of production activities to the supply network that must allow for capacity constraints and minimum contractual assignments, together with individual competencies and costs. Management of the supply chain is centred on a MRP system that is launched every two weeks. Gucci planning carries out a pre-production simulation so that planners can check availability of components and processing times at suppliers, and then define production quantities. Loading at suppliers can subsequently be changed by up to 15%. By mid 2003, Gucci developed an interorganisational system that links it to its ten top suppliers. A more extensive inter-organisational information system (Cross Information System) will allow full visibility over progress of each production order and is scheduled to be installed by early 2006. Supply chain responsiveness is closely monitored in terms of the ramp-up speed in supplying distributors and shops with the new collection items. Deliveries to worldwide points of sale across the season are monitored by Gucci management not only in terms of schedule completion at the end of the season, but also in terms of monthly progress. Early availability of products in the shops means increased chances of selling the goods. Last year Gucci thanks to tighter management of the supply chain succeeded in improving product availability while increasing sales volumes. Product availability at the end of the season increased by 7-10% on average, with a remarkable increase to an average 40-50% in first month availability (exhibit 8). Agility in the inbound supply chain allows for both accuracy and speed in the distribution process. As soon as they are ready at supplier warehouses, parts are transferred to the consolidation centre in Florence14 the same or the following day. Deliveries are consolidated and then sent to the global distribution warehouse in Bioggio in Switzerland15. Within a week from completion of the production process, goods arrive at locations around the world. In the event that production quantities originally scheduled are not met, or that sales increase in an unforecasted way, a merchandising team decides how to allocate the quantities available between retail stores. Prior to this, Gucci Logistica teams are encouraged to find a way of

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There are certified suppliers that carry-out a self-inspection before the delivery to Gucci warehouse. The emphasis on speed is due also to safety reasons as the value of the goods at the suppliers warehouses can easily end up being several thousands euros. 15 The worldwide hub in Switzerland is also the European Distribution Centre. This DC handles both direct deliveries and deliveries to the American and Japanese Regional DCs.

satisfying market demand. An example of the pressures that arise happened in the spring of 2003 with the success of the chain bag line.

Managing a shortage in chain bags

The chain bag line has been a success story in the Gucci leather goods range. Chain accessories used for the chiusura (the bag fastner), together with the GG logo, have made them a sales hit (exhibit 9)16. According to the different collections, the chain bag family can comprise 15 to 20 basic models. But each basic model can be offered in different shapes (such as top handle, mini bag, evening, hobo), different materials (for example leather, python, silk, velvet and shammy), and different colours (such as black, beige, flame red, palm green and African violet). In the 2005 collection, the chain bag family was made of 17 basic models, with 166 variants in total (table 10)17. In September 2005 Vivencio Fernandez de Aragon (Gucci Logistica general manager) and Karl Hofer (Gucci Production Manager) had to come to terms with the strong commercial success of the new line. The final forecast - based on actual sales - was almost twice the original. Continuing hot sales meant that market demand was still higher than the additional re-order. To avoid missing such an opportunity, Vivencio and Karl had to react quickly in order to produce and distribute more product. To proceed effectively they had to look at the sales trend and the stock levels of each SKU, taking into the account the following data: sell-out: actual sales in the shops since the beginning of the season campaign; in DOS and warehouse: stock immediately available for sale, either in the stores or in warehouses nearby; in transit: quantities that within 5 days will become stock available in the shops; on order: quantities that will be delivered to the DOS/warehouses within 45 days.

The data for four of the ten models in the chain bag line are analysed in exhibit 1118. Considering that logistics and production lead times are on average 10 days and 55 days respectively, and that there are 130 days left of the sales campaign (50 days of the 180 days have already passed), Vivencio and Karl have to decide the re-order strategy for the current season19.

The chain bag line was originally launched in the fall/winter 2003 collection with initial deliveries to the distribution network scheduled starting from May 2003. Forecasted quantities for the line were 65,000 pieces, but the chain bag showed an unexpected success from the start and Gucci had to immediately reorder an additional 35.000 pieces! Since then the success of the chain bag line has continued, reaching high sales levels also in the following seasons . 17 The breadth of the Chain bag line varies according to the collection and its models are almost always redesigned (at least slightly) or modified as to colours and materials. 18 Data have been simplified and disguised, but represent a classic example of a successful start-up. 19 The actual decisions are in fact more complex than presented here, as Gucci Logistica had to take into account many additional details. For examples product allocation to current suppliers often cannot be increased more than 1520% and the eventual assignment of the additional product to suppliers that had not been included in the original production plan required set-ups and training (with additional expenses and additional lead time). Moreover the whole rescheduling process is made even more difficult by a potential lack of raw materials (for example, aluminium

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They issued a production order 20 days ago, as shown in the exhibit. Now that they have received all the requested materials from the leather suppliers, they are going to send them to the production suppliers. In doing so, they could modify the model mix partially with respect to their original order. While modifying the model mix, they have to consider: - that they have to maintain the total volumes of the different types of leather, as these quantities are already in house - that they have a constraint on the accessories/finishing and that they cannot increase the original on order quantities by more than 15%. Moreover - in order to avoid a high stock of accessories and finishing - the company has a rule not to go beyond a 15% change in order quantities. In order to simplify the calculation of different model mixes, we assume that: - all these bags have roughly the same shape and that the quantity of leather required by each model is roughly the same; - all these bags have roughly the same retail value and therefore there are no priorities in regular replenishment of any model20. Moreover Vivencio and Karl have to decide whether to issue the new order for additional production immediately, or whether to postpone such a decision for 5, 10 or 20 days to obtain better visibility on the market trend and actual sales. They know that it takes 65 days in total before the new ordered items will be available in the shops and that because of the supply contracts they will have only one re-order opportunity (this one, either today or delayed in the future). They are also considering that 20 days after their new order, they will be able to modify the model mix with the same constraints they are facing today on the on order items. Vivencio and Karl will have to start thinking about how to proceed with the new season - which partially overlaps this one - in terms of initial quantities and optimum stock levels. They face two scenarios in regard to the next season: the chain bag will be a lasting success with the same or even higher sales; the chain bag will behave according to the more usual short life cycle that characterises the fashion business. After a rapid start-up phase, sales will stabilise in the second half of the season and start declining in the next, as new models prove to be more popular.

In order to proceed with their decision, they start from marketing department forecasts. They must also consult with marketing on issues such as feedback on product assortment strategy and the possibility of recovering stock-outs.

components have a very long lead-time), and by the need for replenishment product to reach the distribution network within given dates to be successfully presented in shops. 20 In any case, there are further considerations than retail value alone, as it is important to consider commercial priorities for customers and regions as well. Its also important to decide when and how much to refill the various regions.

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With these data on the table, Vivencio and Karl will decide this afternoon the re-orders they are going to request for the different items, and will also start to consider the next seasons collection. They are only too familiar with how difficult it is to forecast in the fashion business - and conversely, how agility across the whole supply chain is key to their plans.

Study Questions:
1. Discuss the purchasing & logistic implications of managing the launch of a new fashion collection. 2. Identify the key trade-offs the logistic manager have to face in a fashion company such as Gucci. 3. Propose what steps Vivencio and Karl might follow to make their decision on how to manage the shortage in chain bags. 4. Identify the key trade-offs at work in arriving at their decision.

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Revenues Gucci Division Yves Saint Laurent YSL Beaut Other Total

2004 59.2% 6.1% 22.9% 11.8% 3,210.1

2003 60.2% 6.0% 23.7% 10.1% 2,587.4

in Euro Millions 2002 2001 60.4% 66.3% 5.8% 3.9% 21.6% 20.2% 12.2% 9.6% 2,544.3 2,565.1

2000 66.2% 4.3% 23.7% 5.8% 2,461.3

1999 96,0% 0.6% 2.6% 0.8% 1,173.8

1999 96.0% 0.6% 2.6% 0.8% 1,236.0

In Dollar Millions 1998 1997 1996 1995 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1,042.0 975.0 881.0 500.0

Earnings data Revenues Gross profit Operating profit Net incombe

2004 3,201.1 n.a. n.a. 295.1

2003 2,587.4 1,735.4 119.8 174.2

in Euro Millions 2002 2001 2,544.3 2,565.1 1,742.2 1,791.7 179.4 268.4 226.8 312.5

2000 2,461.3 1,709.5 354.4 366.9

1999 1,173.8 789.1 250.4 313.7

1999 1,236.0 831.0 270.0 330.0

in Dollar Millions 1998 1997 1996 1,042.0 975.0 881.0 693.0 611.0 568.0 240.0 237.0 239.0 195.0 189.0 168.0

1995 500.0 329.0 121.0 83.0

Exhibit 1: Gucci Group key financial data: 1995 2004 (Source: Gucci company reports; 2004 data are taken from PPR company report)

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Gucci Group
by product category Other 5,9% Skincare products 1,5% Cosmetics 5,0% Watches 7,1% Leather goods 35,4% Europe 41,1% Fragrances 16,4% Japan 20,5% Other 4,4% Asia-Pacific exc. Japan 13,1% by geographical area

Jewellery 5,1% Ready-to-wear 12,5%

Shoes 11,1% North America 20,9%

Gucci brand
by product category Other 6,5% Watches 11,2% Fragrances 0,9% Jewellery 6,5% Ready-to-wear 13,0% Leather goods 49,8% Japan 24,9% by geographical area Other 3,2% Asia-Pacific exc. Japan 17,7% Europe 32,3%

Shoes 12,1%

North America 21,9%

Exhibit 2: Gucci Group key data FY 2004 (source:PPR company report)

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Production planning

Collection preparation
1. Prototyping 2. Bill of materials definition

Budgeting and control

3. Sales budget by collection/season 4. Standard costs 5. Economic result budget 6. Orders for samples production 7. Samples production 8. Samples control and delivery 9. Initial purchases based on budget

Order management
10. Sales campaign 11. Estimation on sales progress 12. Completion of sales campaign

13. Eventual additional purchases 14. Eventual preorders to subcontr. 15. Completion of purchase orders 16. Control on purchase costs 17. Order confirmation 18. Order cancellations (customers) 19. Yarn/fabrics receival/control 20. Production orders 21. Orders to subcontractors 22. End product receival/control 23. Control on production cost 24. Assignment to customer orders 25. Order modification (producer) 26. Eventual dedicated operations 27. Picking list to warehouse 28. Delivery to customer 29. Invoicing 30. Collection/season results eval.

Exhibit 3 - Key business processes

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FORM POSTPONEMENT
Forecast-driven Order-driven

CODP
GENERIC PRODUCT BASIC FINAL STOCK MANUFACTURING MANUFACTURING Generic Generic Finished product product product DISTRIBUTION

MAKE-TO-STOCK
Forecast-driven Order-driven

CODP
FINISHED GOODS BASIC FINAL STOCK MANUFACTURING MANUFACTURING Finished Finished Generic product product product

DISTRIBUTION

CODP is the Customer Order Decoupling Point

Exhibit 4: Form Postponement and Make to Stock (source: H. Skipworth and A. Harrison, International Journal of Production Research, Vol 42 No 10, 2004, pp 2063-2082)

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Production & Industrial Logistics Vivencio Fernandez de Aragon

Materials Research & Dvpmt Michele Guidi

Technical Mgmt Gucci Alessandro Poggiolini

Operations Marco Sani

Production Karl Heinz Hofer

Costing Stefano Greco

Exhibit 5: Gucci Logistica organisational chart (source: company internal documentation)

FORECASTED DATES ACTIVITIES DELIVERY OF DESIGN PREPARE PROTOTYPES FINAL REVISION OF PROTOTYPES LAUNCH THE COLLECTION (DESIGN TEAM) ORDER ALL MATERIALS FOR SAMPLES TECHNICAL DATA FOR SAMPLES SEND MATERIALS TO SUPPLIERS DELIVERY OF SAMPLES DELIVER SAMPLES TO SHOWROOMS FIRST COST PRICE LIST FASHION SHOW EDITING/MODIFICATIONS MODIFIED FIRST COST PRICE LIST SALES CAMPAIGN FROM 01/09 03/09 17/09 18/09 22/09 TO 10/09 16/09 18/09 19/09 23/09 RESPONSIBILITY DESIGN TEAM/PROD. DEV./MODELLISTS MODELLISTS DESIGN TEAM/PROD. DEV./MODELLISTS DESIGN TEAM PROD. DEV. TECHNICAL DEPT. RAW MATERIALS WAREHOUSE EVENTS DEPT./SUPPLIERS FINISHED PRODUCTS WAREHOUSE TECHNICAL DEPT. DESIGN TEAM TECHNICAL DEPT./COSTING

16/09

23/09 26/09 26/09 27/09 29/09 02/10 03/10 03/10 09/10 07/10

Exhibit 6: Examples of collection launch and sales campaign timing (source: company internal documentation)

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Leathergoods

Footwear

Order passed within July 9th within July 18th after July 18th within July 21st within July 28th after July 28th

Ex warehouse delivery Dec 10th April 5th Jan 15th April 29th Not accepted Jan 15th March 31st Feb 1st April 15th Not accepted

Exhibit 7: Examples of fixed ordering dates and delivery windows (source: company internal documentation).

Season
S.31

Sept. 4

Oct. 27

Nov. 65 6

Dec. 90 18 0

Jan. 100 42 7

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Cruise Main WFS

65 32

90 75 5 25 48 8 75 60 80 76 95 96

S.33

Cruise Main

S.41

Cruise Main WFS

45

70 10

90 30 0

100 60 0 82 35 95 96 15 30 50 10 75 62 80 76 97 98

S.43

Cruise Main

Exhibit 8: Delivery progress (cumulated monthly percentage on seasonal volumes) (source: company internal documentation)

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Exhibit 9: Pictures of the Chain bag line (source: company internal documentation)

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131471 shoulder bag/flap/medium is offered in the following variants: As to materials As to colours Java soft Black Praline Palm green Flame red Ostrich-niagara lux Black African violet Cocco millennium Anthracite pearl Egg-plant pearl Cocco plong Black Palm green Flame red Original GG Velvet GG Black Palm green/snow black

131470 mini bag/flap is offered in the following variants: As to materials As to colours Java soft Black Praline Palm green Flame red Ostrich-niagara lux Black African violet

131464 evening is offered in the following variants: As to materials As to colours

Cocco plong

Original GG Velvet GG

Black Palm green Flame red Praline Black Palm green/snow black

Cocco plong

Black Palm green Flame red Palm green/snow

Original GG

Exhibit 10: Example of model variety within the Gucci Chain Bag line reference to articles 13147, 131470 and 131464 (source: company internal documentation)

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Article Model 1 Model 1 Model 1 Model 2 Model 2 Model 2 Model 3 Model 3 Model 3 Model 4

Material Leather Leather Leather Leather Leather Leather Leather Leather Leather Leather

Colour Beige Bronze Black Beige Bronze Black Beige Bronze Black Black

Sell Out 281 211 350 498 723 1.082 817 292 561 292

In DOS & warehouse 188 116 218 422 599 664 317 196 179 196

In transit 0 32 6 800 94 181 18 5 7 5

On Order 17 5 262 41 361 1.647 838 380 20 380

These are disguised and simplified data. The whole chain bag collection involves 10 or 11 articles (depending on the season) that can be made of various materials and colours. Exhibit 11: Trend and stock data for the chain bag line autumn/winter 2003 collection (source: company internal documentation disguised and simplified data)

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