Supply Chain Management

Interim Report Submission

Fast Moving H&M

An Analysis of Supply Chain Management

Submitted By:
Group 8 - Section A
Name Roll No.
Raja P P40035
Rashi Shah P40036
Vijay S P40052
Rajat Roshan P40142
Vipin Yadav P40161
Parth Makwana P40190

TABLE OF CONTENTS
1. Introduction..............................................................................................................................3
2. History and Evolution of H&M supply chain..........................................................................3
3. Agents in H&M supply chain...................................................................................................4
4. Supply chain Framework - SCOR Model................................................................................5
5. Seven Principles of Supply Chain Management......................................................................6
6. Process View............................................................................................................................8
7. Supply chain Macro process.....................................................................................................9
8. Supply chain Surplus..............................................................................................................10
9. Supply Chain Efficiency – Logistic Drivers..........................................................................11
10. Planning for Uncertainties..................................................................................................11
11. Business 4.0 at H&M..........................................................................................................12
12. Conclusion..........................................................................................................................13
 1. Introduction
H&M is world’s second largest clothing retailer. It has large worldwide market coverage with
more than 4900 stores in 96 countries. Its massive annual revenues make one wonder about how
one clothing retailer can perform so efficiently and consistently well. This wouldn’t be possible
their efficient Supply chain. The organization’s reliance on efficient and integrated systems for
retail inventory management in the major components of its supply chain. H&M strongly
believes that “A short lead time is not an end in itself, since it is always a matter of getting the
right balance between price, time and quality.

H&M’s core operation relies on its des igners, creative directors, and pattern makers to stay on
top of the latest trends, it also uses the services of fashion trend forecast companies such
as Worth Global Styles Network (WGSN).

Different Stakeholders in H&M are:

 Customers
 Suppliers
 Industry Peers
 In House Designers
 Non-Governmental Organizations (NGOs)
 Inter-Governmental Organizations (IGOs)
 Policymakers
 Investors

2. History and Evolution of H&M supply chain

First Hennes store was opened in the year 1947 in the Swedish city of Vasteras. Since then H&M
has come a long way as far as making its products available to customer is concerned. Initially, it
depended on meeting the local requirements through locally procuring the raw material needed.
It relied on retail outlets to offer its products. Fast forward to 2000s, H&M expanded in
American market by coming up with flagship store in New York.
It also expanded through online sales in European market and reached far east in Shanghai and
Hongkong in 2007. In 2011, it also expanded in southern hemisphere, and had its stores Europe,
North America, Asia, the Middle East, Africa, South America, and Australia.

Talking about the backward integration of the sourcing the raw material needed, H&M has
invested significant amount of time in modifying its supply chain to make the product available
to its customers when the customer wants the products. It sources its raw materials from Asian
and European markets, and apply them to meet different production needs. Initially the supply
chain of the firm was vertically integrated, but has then been modified to dual supply chain
model to implement its lean and agile combination production system. Pre-expansion phase it
was able to meet its requirements by producing in European countries, specially Sweden. But
looking at the cost advantage and regular availability of raw materials, it has been producing
nearly 60% of its production in Asia. It relies on cheap sources of transportation to keep the cost
down, but has invested heavily on technologies making its forecast, inventory management and
designing of garments to perform best while meeting the customers’ needs. It has incorporated
AI to make products which fit the customers’ needs physically and collaborates to make best
designs available.

Thus, H&M has been successful in integrating its supply network through various locations and
been able to deliver the most desirable products to its customers at most desirable prices.

3. Agents in H&M supply chain

The below picture shows the different agents involved in the supply chain of H&M. Each agent
has different role to be played in their supply chain. These agents play a major role in the success
of the company by forming and efficient supply chain. Each agent role is explained below
Suppliers

From Design to production, H&M has outsourced everything to its suppliers. Based on
forecasted demand, orders are given to these suppliers all around the globe mainly based in Asia
and Europe.

Warehouse and IT department

These products are then shipped and assembled at its two major warehouses based at hamburg,
Germany. These are the automated warehouses based on successful implementation of Big data
and Artificial intelligence.

Distribution Centre

It has centralized distribution system. It follows both centralized and decentralized inventory
management. It has incorporated tecnological integration in various processes and majorly to
ensure efficient usage of transportation facilities.

Stores/Retail Outlets
Around 2200 stores in 96 countries, receive the standard mass manufactured products from the
central warehouse through H&Ms efficient transportation.

4. Supply chain Framework - SCOR Model

The supply chain operations reference model (SCOR) is a management tool used to address,
improve, and communicate supply chain management decisions within a company and with
suppliers and customers of a company. The model describes the business processes required to
satisfy a customer’s demands. It also helps to explain the processes along the entire supply chain
and provides a basis for how to improve those processes:

 Plan

Demand and supply planning and management are included in this first step. Elements include
balancing resources with requirements and determining communication along the entire chain.
The plan also includes determining business rules to improve and measure supply chain
efficiency. These business rules span inventory, transportation, assets, and regulatory
compliance, among others.

They prepare Code of conduct for their suppliers including following points:

-Legal requirements, Systems Approach, Monitoring & Enforcement

 Source

H&M have prepared code of conduct for their suppliers and all the suppliers must agree to the
COC. H&M doesn’t own any factories. Products are commissioned from around 800 first tier
suppliers.

 Make

As we know H&M doesn’t manufacture any products, it has central buying office in Stockholm,
Sweden. This office communicates with all production offices. It leaves its production to first tier
suppliers.

 Deliver
Purchase departments are responsible for communicating and buying merchandise on behalf of
H&M. Each market having its own distribution centre.

 Return

This includes the CSR initiatives taken by H&M. It includes Better cotton initiative by H&M
reducing waste such as water and hazardous chemicals in its supply chain. Also, it ensures fair
wage network with its suppliers.

5. Seven Principles of Supply Chain Management

Principle 1: Segment customers based on the service needs of distinct groups and adapt the
supply chain to serve these segments profitably

H&M segmented the customers into two groups which includes Fashion sensitive and non-
fashion sensitive. The supply chain for both the products are designed uniquely. The fashion
sensitive clothes are produced through agile method of manufacturing in Europe whereas for the
other group, the products are manufactured through lean method in Asia.

Principle 2: Customize the logistics network to the service requirements and profitability of
customer segments.

H&K utilises its own logistics services and doesn’t rely upon outsider for its coordination. The
products are moved straightaway to the specific area of the country to make certain that it is
made accessible just in time.

Principle 3: Listen to market signals and align demand planning accordingly across the
supply chain, ensuring consistent forecasts and optimal resource allocation.

To forecast the current fashion trend and patterns, H&M utilizing the services of Worth Global
Styles Network (WGSN). H&M utilizes the fundamental focal point of QR which help them to
deal with their inventory easily and productively. A proper balance between the supply and
demand of a product can be maintained. Instead of focusing on orders received, H&M uses end
user demand data for forecasting demand.
Principle 4: Differentiate Products closer to the customer and speed conversion across the
supply chain

Lean Production and Agile Production Process of Manufacturing

In order to get more benefits, H&M coordinates both lean and agile production process of
manufacturing. For the customers with huge volume and low variability, the company uses lean
way of production as it takes lower lead time. This lean production focuses on efficiency, cost
improvement and disposal of wastages and accounts for 60% of the total production. This
process expects to give higher consumer loyalty with higher adaptability and viability. Style
delicate clothes are produced through agile production process as it takes higher lead time. These
products are made accessible at short notification utilizing market information and virtual
enterprise also ensuring high quality and minimum cost of production.

Principle 5: Manage Sources of Supply Chain Strategically to Reduce the Total Cost of
owning materials and services.

H&K follows ‘Dual Integrated Supply Chain’ model where the same products has been produced
by the two company. Through this model, the company can accelerate the on-time delivery and
can able to increase the visibility. The company can also respond to fluctuations in the demand
by predicting the events and have competitive edge over other companies.

H&K classified the suppliers strategically into three different categories based on their
performance and the relationship with the company.

1. Platinum & Gold – nearly 60% of the company’s products are produced by suppliers of
this category. Suppliers who have high focus on sustainability factor and giving best
performance will be categorised under this category.
2. Silver – the suppliers who worked for a long time for the company and have close
relationship with them will come under this category. The company also giving
assistance in terms of training for these suppliers to push them into Platinum and gold
category.
 3. Others – The new suppliers, the suppliers for whom the company gave test order and
those who are in the initial stages of production will come under this category.

Principle 6: Developing a supply chain-wide technology strategy that supports multiple

levels of decision making and gives a clear view of the flow of products, services, and
information

The major aspects of customer’s demand such as affordability, latest trend pattern, personalised
products and quick delivery are satisfied effectively through technological integration and
digitalisation in H&M.

6. Process View
H&M manufactures 80% of its retail inventory in advance and introduces the remaining 20%
based on the most current market trends. The retail giant's ability to offer affordably priced
apparel is largely due to its strong supplier relationships and its manufacturing strategies to
reduce lead times.

The most admirable characteristic of H&M is its ability to collaborate efficiently with its
partners. Not having any factories of its own, it utilizes over 700 partner companies in more than
20 countries, relying on a network of external suppliers to manage its buying and production.
H&M purchases garments from around 750 suppliers, with 60% of production taking place in
Asia and the remainder mainly in Europe.

H&M fosters close and effective engagement with its partners by strategically locating 30
production oversight offices as a mediating function and to enable easier contact with the partner
companies on the latest fashion trends and the internal matters of the company. This helps to
ensure the goods are produced at the accurate quality and price and that the suppliers abide to the
company's code of conduct. These production offices play a significant role in checking and
testing sample garments.
 7. Supply chain Macro process
The company relies on IT integration between the central national office and the production
offices. Communication between the various departments takes place electronically, especially in
regards to design and product development. This is crucial especially because the fashion giant
does not own factories and does not secure fabrics in advance. Instead, its partners secure fabrics
on behalf of H&M. With an efficient IT communication infrastructure in place, the company
simply has to place an order with one of its partner companies in the region that already have the
necessary fabrics.

With these manufacturing operations in their supply chain, H&M has managed to reduce the
average lead time by 15-20% through their continuous developments in the buying process.
Flexibility and short lead times have reduced the risk of buying the wrong items and allowed
H&M stores to restock quickly with the best-selling products at affordable prices.

8. Supply chain Surplus

The main objective for any supply chain is to maximize the supply chain surplus. The supply
chain surplus is the net value generated of the value that the final product serves to the customer
and total costs incurred by supply chain to fulfil the customer’s request. The difference between
the value for the customer and the price the customer has to pay determines the consumer
surplus. So, it becomes the motive of the agents of the supply chain to maximize supply chain
surplus while consumer tries to maximize consumer surplus.

Supply Chain Surplus=Customer Value-Supply Chain Cost

To maximize the supply chain surplus all the agents must try to work in synchronization and
maximize overall customer value while minimizing supply chain cost. If any agent tries to
maximize personal profits while compromising the supply chain surplus, the supply chain
becomes highly unstable and is very likely to collapse.

Looking at the agents in the supply chain of H&M, we can easily identify following prominent
ones:

 More than 800 suppliers: Asian suppliers responsible for lean production and European
suppliers responsible for agile production. It is quite clear that H&M follows dual supply
chain to meet the quality demands and achieve flexibility to cater to volatile requirements
of fast-fashion industry.
 Transportation: H&M relies mainly on railways, waterways and roadways to transport
its products from manufacturing centres to main warehouse located in Hamburg,
Germany. From Hamburg the products are sent to Pozan, Poland and Boras, Sweden
distribution centre for quality checking. And then it is made available in the stores
depending upon demands forecasts.
 Inventory Management: H&M follows both centralized and decentralized inventory
management. In 2018, it reported to have an excess inventory of $4.3 billion. However, it
asserted that with technological advancement, it can manage its inventory in much
efficient manner. Thus, H&M has introduced automated warehousing in most of its
warehouses.

9. Supply Chain Efficiency – Logistic Drivers

To determine the efficiency of H&M supply chain, let us have a look at certain parameters
showcasing that.

Accounts receivable turnover for H&M for past five years:

 Year 2015 2016 2017 2018 2019
ART 30.8 25.93 20.95 22.42 25.38
2
While we can also look at the ART trend for its rival Zara, which is

Year 2015 2016 2017 2018 2019

AR 8.56 7.49 14.0 13.42 14.11
T 2
Source: https://www.wsj.com

We can clearly see that ART for H&M has been always higher than that of ZARA. However, the
ART for H&M is much higher than industry average of 10 for the year 2019.It show that firm is
efficient enough in recollecting its money owned by clients. And its importance further
magnifies by the fact that it operates in nearly 61 countries through 4600 plus outlets.

Inventory turnover ratio of H&M stand at 2.52 against the industry average of 3.55 and asset
turnover ratio stands at 1.32 against the industry average 2.15. Higher inventory turnover ratio
shows that firm has been successful in replenishing its inventory at a healthy rate given the
volume and scale it operates in. However, asset turnover ratio needs to improve and it can be
seen with huge assets firm has acquired over the year.

10. Planning for Uncertainties

H&M handles various uncertainties by thoroughly studying the end user demand data instead of
forecasting demand based on orders received. They always have buffer inventory ready
considering some uncertain events in mind. Buffer is determined by the unforeseen events in
market demand and services. H&M believes that if they share a company’s forecasting data
through all levels in Supply Chains from POS (Point of Sales), it will lead to a longer way in
reduction of uncertainty extensively

H&M uses QR as integrated focus to manage their inventory efficiently. They use data from their
Point of Sales for better forecasting results fulfilling the customer need and demand.

11. Business 4.0 at H&M

In 2018, H&M created its own Artificial Intelligence department with the goal of helping the
company with more sustainable business decision. They have more 270 people working to apply
AI in different segments of the company. H&M has integrated AI technologies and advanced
data analytics that helps them in Demand forecasting, less lead time, better inventory
management, improving connection with customers, adjusting themselves with the latest trends
in fashion industries to be at top of the game.

Some of the Technologies used in their supply chain are

 Blockchain

They are planning to test some product with block chain so that they can trace data from history
and also can make sure it will not go out. They are trying to integrate block chain with their
supply chain in order eliminate forgery and errors which can reduce lead time by making it as
advanced inventory management system.

 Big data and Artificial intelligence

AI technologies and Advanced data analytics helps H&M to Forecast the demand, reducing the
lead time, improve the connection with the customers, manage inventory in a better way and can
be updated to the market latest trend easily. Through AI and Big data, H&M also presented
Loyalty card data and analysed returns.

 Automated warehouses

Electronic item code as RFID has been used to identify the information and location of any
product which is placed in the warehouse. It also helps to find the previous 2-year stocks weekly
or even daily stock as well.

 Data Matrix

Supply chain data using data matrix helps to track the products.

 Coded couture app

Customer can use this app to find out the suitable dress that one needs to wear for any event.

 Home stylist
Customers are given the option of getting in touch with the stylist through Home stylist which is
the voice application app introduced first in the fashion industry by H&M.

Through these technologies, the cost of production, lead time has been reduced and able to know
the customer preferences clearly.

12. Conclusion
Thus, we have tried to link various topics from the chapters one to four with the supply of H&M
case. We could relate to many concepts in a real time case which helped us to understand the
class concepts more clearly and effectively. Since it is the interim report submission, we covered
only few aspects of supply chain which is taught so far and we will try to relate more concepts in
our final submission.