The usage of supply and demand chain management in Japanese and European fashion firms

The usage of supply and demand chain management in Japanese and European

fashion firms

Name: P. Bosch

Student number: 1333747

University of Groningen

Faculty of Economics and Business

MSc Business Administration – Strategy & Innovation

Date: 17-06-2008

1st supervisor: Dr. G. Gemser

Abstract

Preface

This thesis about the usage of supply and demand chain management in Japanese and European fashion firms is the final part of the master of Business Administration with a specialization in Strategy and Innovation.

During the research and writing of this thesis, I received considerable support from several people. I would like to thank Dr. Gerda Gemser for giving me helpful feedback and suggestions. Second, I would like to thank Prof. Dr. Wilfred Dolfsma for suggestions as well. Third, I would like to thank Prof. Dr. Dany Jacobs for guiding me through the earlier stages of my research. Last but not least, I would like to thank Prof. Dr. Ben Dankbaar and Dr. Willem Remmelink for making my stay in Tokyo a memorable experience.

Zwolle, June 2008

Content

2.1 Transaction cost economics and the make versus buy decision... 7

2.2 The concept of Supply and Demand Chain Management ... 9

2.2.1 Purchasing and supply management ...11

2.2.2 Physical distribution management...14

2.2.3 Material management ...15

2.3 Supply Chain Improvements ... 15

2.3.1 Forms of cooperation on the supply side...17

2.3.2 Forms of cooperation on the demand side...17

3 Methodology ...22

3.1 Type of research ... 22

3.2 Research approach... 22

3.3 Research strategy ... 22

3.4 Data collection and analysis ... 23

3.5 Quality of the research ... 24

4 Supply and Demand Chain Management in the Japanese apparel industry...26

4.1 Japanese apparel industry... 26

4.2 Figures of the Japanese apparel market ... 26

4.3 Supply and Demand Chain Management within Japan... 30

4.4 Summary and Conclusion ... 32

5 The cases of World and Inditex ...33

5.1 The Case of World ... 33

5.1.1 Introduction of World...33

5.1.2 External relations within the demand- and supply chain...34

5.1.3 Supply- and demand chain concepts at World ...35

5.1.4 Conclusion...39

5.2 The case of Inditex/Zara... 43

5.2.1 Introduction of Inditex/Zara ...43

5.2.2 Supply Chain Management at Zara ...44

5.2.3 Conclusion...47

6 Discussion...50

7 Conclusions ...52

7.1.1 Conclusions ...52

7.1.2 Future research recommendations and limitations ...54

1

Introduction

Japanese designers such as Issey Miyake, Yamamoto, Kenzo and Rei Kawakubo (creative designer of Comme des Garçons) have been world famous for decades. Still, the Japanese fashion industry is having a difficult time to remain competitive on a worldwide scale. It not only faces heavy competition in the luxury segment from countries such as Italy, France and the United Kingdom, but also in the casual wear segment from China and other Pacific Basin countries. As a result, the Japanese clothing market faced an increased import penetration rate (Itami, 2001). The quantity-based import penetration was as high as 89.4 percent in 2002 (Fernie and Azuma, 2004). Therefore, the Japanese fashion industry needs to find ways to compete in this changing market environment (Fernie and Azuma, 2004). In this paper it is argued that the usage of supply- and demand chain management can help Japanese apparel firms to remain competitive. Demand and supply chain management (DSCM) is the management of a network that links customers and suppliers as one single entity with the objective to create value and reduce waste through the voluntary integration and coordination of the objectives of three or more – and ideally, all the- independent parties in the network (Ploos van Amstel and Goor, 2005).

Not only the Japanese fashion industry, but the fashion industry in general consists of a long and multifaceted supply chain that contains multiple labour-intensive and time-consuming processes. The fashion industry is susceptible not only to changing consumer tastes and socio-economic factors but also to market fluctuations in raw material supplies. The endless desire for variety in fashion and styles on the consumption side and the need for it on the supply side makes it a mandate for the participants of a fashion supply chain to establish a networked division of labours which can effectually fulfil such functions with as small as a financial risk as possible on a single firm basis (Fernie and Azuma, 2003).

The main research question of this paper is:

What can the Japanese fashion firms learn from fashion organizations that excel in supply and demand chain management?

2

Theoretical framework

In this chapter, the concept of demand and supply chain management will be discussed first in general and then applied to the fashion industry. However, first I will discuss transaction costs economics as this is a theory that focuses on how organizations must organize their activities in order to minimize various costs and therefore is applicable when discussing the usage of supply and demand chain management.

I will also discuss the model of Jacobs (2006), in which linkages between the supply and demand chains are made, to show which demand and supply chain linkages can be fruitful for an organization in order to create a competitive advantage.

2.1 Transaction cost economics and the make versus buy decision

Transaction costs economics focuses on how an organization should organize its boundary spanning activities in order to minimize the sum of its production and transaction costs (Williamson, 1975, 1979, 1985).

As stated by Hobbs (1996), transaction costs are important because they affect the organization of economic activity or vertical coordination. Vertical coordination can be viewed as a continuum, in which two extremes can be found. These two extreme alternatives can be seen as the ‘make’ or ‘buy decision, which each firm must choose for each activity in the vertical chain (Besanko et al, 2000). Besanko et al (2000) state that there are several critical determinants that influence the make-or-buy decision.

The benefits of using the market are:

Market firms can achieve economies of scale that in-house departments producing only for their own needs cannot.

Market firms are subject to the discipline of the market and must be efficient and innovative to survive. Overall corporate success may hide the inefficiencies and lack of innovativeness of in-house departments.

The costs of using the market are:

Coordination of production flows through the vertical chain may be compromised when an activity is purchased from an independent market firm rather than performed in-house

Private information may be leaked when an activity is performed by an independent market firm.

As emphasized by Besanko et al (2000) there are a variety of in-between alternatives that may capture the best of the make and buy decision. These four ways of organizing exchange are tapered integration, joint ventures, close-knit semiformal relationships among buyers and suppliers and long-term implicit contracts that are supported by reputations for honesty, cooperativeness, and trust (Besanko et al, 2000).

The first intermediate way of coordinating economic activity is tapered integration. As stated by Besanko et al (2000) tapered integration represents a mixture of vertical integration and market exchange and is only possible when there are no economies of scale. Hereby the manufacturer can produce some quantities itself because it buys the rest from another independent organization. This accounts for the selling process as well. According to Besanko et al (2000) tapered integration offers three benefits. First, it expands the organizations’ input and/or output channels without requiring the substantial capital outlays. Second, the organization can make use of information about the cost and profitability of its internal channels to help negotiate contracts with independent channels. Third, the organization may also develop internal input supply capabilities to protect itself against hold-up by independent input suppliers. However, there can be downsides to tapered integration as well, because an organization can be forced to share production. Share production may lead to coordination problems because the two production units must agree on product specifications and delivery times (Besanko et al, 2000). Furthermore, the organization may mistakenly establish the performance of an inefficient internal supplier as the standard to be met by external suppliers. Finally, managers may maintain inefficient internal capacity rather than close facilities that had formerly been critical to the firm (Besanko et al, 2000)

The second intermediate ways of coordinating economic activity that Besanko mentions are both strategic alliances and joint ventures. In a strategic alliance, two or more organizations agree to collaborate on a project or to share information or productive resources. A joint venture is a particular type of strategic alliance in which two or more firms create, and jointly own, a new independent organization (Besanko et al, 2000). As stated by Dyer, Kale and Singh (1978) strategic alliances can be a fast and flexible way to access complementary resources and skills that reside in other companies, and therefore can be a way to gain a competitive advantage. However, alliances are fraught with risks and almost half fail. For instance, through alliances the risk of loosing the control over private information can occur. Furthermore, alliances can also suffer from agency and influence costs. Agency costs in alliances can arise because the benefits of the alliance’s efforts are split between two or more organizations. This can lead to a free-rider problem (Besanko et al, 2000).

long-term relationships. These relationships involve a much higher degree of collaboration between the manufacturer and the subcontractors and the delegation of a more sophisticated set of responsibilities to the subcontractor (Besanko et al, 2000). Subcontractors typically see their role as not just to fill the buyer’s orders, but more generally, to closely integrate their operations with the buyer, or by working closely with the customers to improve production (Nishiguchi, 1994). Keiretsu are closely related to subcontractor networks, but they involve more formalized institutional linkages. Most of the key elements in the vertical chain are represented in a keiretsu, from banks to production facilities to distribution centres (Besanko et al, 2000). Furthermore, organizations in a keiretsu are also linked by informal personal relationships.

The fourth and last intermediate ways of coordinating economic activity are implicit contracts and long-term relationships. An implicit contract is an unstated understanding between parties in a business relationship, in which parties rely on alternative mechanisms to make the understanding viable. For instance, a powerful mechanism that makes implicit contracts viable is the threat of losing future business if one party breaks the implicit contract for its own gain (Besanko et al, 2000).

2.2 The concept of Supply and Demand Chain Management

Slack et al (2001) state that from the perspective of a single operation in the chain supply chain management can be seen as managing the operations that form its supply side and those that form its demand side. Ploos van Amstel and van Goor (2005) state that Supply Chain Management is associated with the idea that it only deals with managing the relations of suppliers, in which the supplier produces a certain amount of products which can be bought by the customer. This indicates that there is some kind of ‘push system’ that leverages (large) amounts of products. However, this situation is not applicable in any given situation, because the demand of the customers plays an important role within the value chain as well. Because ‘push systems’, as described earlier, cannot deal with the demand of the customers it is replaced by a ‘pull system’ in which the demand of the customer plays a key role. A purchase of a customer is noticed and if a certain product is doing well, this implies that producers need to make more of this certain good. This leads to a network that is a combination of ‘pull and push systems’, which we can identify as supply chains and demand chains (van der Veen, 2000). Therefore the term supply chain management is too narrow and therefore I will make use of the term supply and demand chain management.

Figure 1: Supply- and demand-oriented links in a value system

Source: Hoover, 2001

Within this figure, the demand side is represented by the retailers, who have to decide what to sell (assortment planning), how much is needed at a certain moment (inventory management), and where to buy this (purchasing). The supply side is represented by the manufacturers, who assemble the inputs for manufacturing (the sourcing), organize manufacturing and then have to package and distribute the products (Jacobs, 2006). On the basis of this distinction, Jacobs (2006) discusses how supply and demand chain management try to establish improved connections between both perspectives. These connections and how this leads to improvements within the supply and demand chain will be discussed in paragraph 2.3.

Now the various supply- and demand-oriented links have been described, it is of interest to see what the component activities of supply and demand chain management are. Slack et al (2001) name three component activities of supply and demand chain management. First, purchasing and supply and demand management deals with the operation’s interface with its supply and demand markets. Second, physical distribution management deals with managing the activity of supplying customers. Last, material management refers to the management of the flow of materials and information through the immediate value chain, including purchasing, inventory management, stores management, operations planning and control and physical distribution management.

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2.2.1 Purchasing and supply management

According to Slack et al (2001) the purchasing function forms contracts with suppliers to buy in services and materials. These materials can be used directly in the production of the goods or services, but can also be used to help run the business. According to Slack et al (2001) there are several events in the management of a typical supplier-operation interaction which the purchasing function must facilitate. First, the operation requests products or services. Hereby, purchasing should keep extensive information about potential suppliers and might be able to suggest alternative materials or services for consideration. The purchasing function prepares a formal request which can be sent to potential suppliers so that they can prepare quotations for the business. These requests might be sent to several suppliers if the products or services are either novel or have not been purchased for some time. The various quotations submitted by suppliers may be examined, and after negotiation, a preferred supplier may be selected (Slack et al, 2001). Second, the preparation of the purchase order. The purchase order is important because it often forms the legal basis of the contractual relationship between the operation and its supplier. Again, the purchasing function needs to coordinate with the operation over the technical details of the purchase order. When the supplier receives the purchase order, it produces and delivers the products or services, usually directly to the operation (Slack et al, 2001). Another decision that needs to be taken within the purchasing and supply management is the decision about whether to source each individual product or service from one or more than one supplier, known as single-sourcing or multi-single-sourcing (Slack et al, 2001). The various advantages and disadvantages of single- and multi-sourcing are listed below in Table 1.

Single-sourcing Multi-sourcing

Advantages Potentially better quality because more supplier quality assurance possibilities

Purchaser can drive price down by competitive tendering

Strong relationships which are more durable

Can switch sources in case of supply failure

Greater dependency encourages more commitment and effort

Wide sources of knowledge and expertise to tap

Better communication Easier to cooperate on new product/service development More scale economies Higher confidentiality

Disadvantages More vulnerable to disruption if a failure to supply occurs

Difficult to encourage commitment by supplier

volume fluctuations supplier quality assurances Supplier might exert upward

pressure on prices if no alternative supplier is available

More effort needed to communicate

Suppliers less likely to invest in new processes

More difficult to obtain scale economies

Table 1: Advantages and disadvantages of single- and multi-sourcing (Slack et al, 2001)

Teece (1986) introduces a framework in which he tries to explain why innovating firms often fail to obtain significant economic returns from an innovation, while other participants benefit. He describes various complementary capabilities or assets that will be needed for a successful commercialization of the innovative process or product as can be seen in Figure 2:

Figure 2: Complementary assets needed to commercialize an innovation (Teece, 1986)

Figure 3: Complementary assets: generic, specialized, and cospecialized (Teece, 1986)

Access to the complementary assets is important if an innovator wants to benefit from the innovation, especially when the innovator is dependant on cospecialized or specialized complementary assets. Therefore, a variety of possible channels of figure 2 can be chosen. One might choose for full

integration of the complementary assets, or just a few, such as distribution for instance. In other words, an organization makes a choice whether to make or to buy. As stated by Teece (1986), an organization might choose to integrate all the aspects, which can be a costly operation. On the other hand, the innovator could attempt to access these assets through straightforward contractual relationships. These contracts may work, although it can expose the innovator to dependencies that it may wish to avoid. As stated in paragraph 2.1, there are also intermediate forms available for organizations.

Furthermore, Kraljic (1983) introduces a portfolio approach for the determination of a set of different purchasing strategies and a policy for the more fundamental restructuring of the portfolio as a whole. Kraljic (1983) proposes a four-stage approach as a framework for analyzing the purchasing portfolio of organizations.

1. Classify all the purchased materials or components in terms of profit impact and supply risk. 2. Analyze the supply market for these materials.

The matrix engages a classification of products on the basis of two dimensions: profit impact and supply risk. Each variable has two possible values: ‘low’ and ‘high’.

The result is a two by two matrix and four product categories as presented in Figure 4.

Figure 4: Purchasing Portfolio Management

High ↑ Profit Impact ↓ Low

Low ←Supply Risk→ High

Source: Kraljic (1983)

2.2.2 Physical distribution management

On the demand side of the organisation, products and services need to be communicated or moved to the customer. In the case of manufacturing this will involve physical distribution of the goods from manufacturing operations to the customer. However, not every product will reach the customer in an immediate way. There can be inventory systems in which various materials that flow through the system can be stored. Most inventories of any significant size are managed by computerized systems, because the data that is captured is been made more convenient through the use of bar-code readers and the point-of-sale (POS) recording of sales transactions (Slack et al, 2001). First, inventory information systems gather the information of any stock record. This means that every time a transaction takes place (sale of an item or distribution of an item) the position, status and value is recorded, so the manager can determine their current inventory status at any time (Slack et al, 2001). Second, inventory information systems can make decisions on how much and when to order. Hereby these systems can automatically generate whatever documentation is required, or even transmit the re-ordering information electronically through an electronic data interchange (EDI) system. Third, inventory control systems generate regular reports of stock value for different items stores. These reports can help management monitor its inventory control performance. Furthermore, the number of stock-outs or the number of incomplete orders can be regularly monitored. Last, inventory decisions are based on forecast future demands. Therefore, inventory control systems can compare actual demand against forecast and adjust the forecast in the light of actual levels of demand (Slack et al, 2001). Leverage Items Cost reduction Exploitation of purchasing power Strategic Items

Stable long-term relations and partnerships or verticalization

Non-critical Items

Standardization Efficient processing

Bottleneck Items

2.2.3 Material management

As stated by Slack et al (2001) material management includes the functions of purchasing, expediting, inventory management, stores management, production planning and control and physical distribution. This can be integrated by various firms or can be done separately, thereby focusing on optimizing these parts of the total materials flow system.

2.3 Supply Chain Improvements

Now that the three basic components of supply chain management are discussed it is interesting to see how improvements can be made in order to create competitive advantages.

Lee, Padmanabhan and Whang (1997) describe three ways for supply chain improvement, namely information-sharing, channel alignment and operational. These activities are concerned with coordinating the activities of the operations in the chain.

First, Lee, Padmanabhan and Whang (1997) describe that the disruptive nature of the supply chain may lead to a lack of overview of what is happening throughout the chain. This is because no information has been made available and shared throughout the chain. Therefore, it is necessary to try to transmit information throughout the chain in a way that all the operations can monitor true demand, which is free of distortions. Therefore, usage of electronic point-of-sale systems (EPOS) in which information on current demand downstream in the supply chain is made available to the operations upstream can be beneficial. Hereby, sales data from checkouts or cash registers is consolidated and transmitted to the warehouses, transportation companies and supplier manufacturing operations (Slack et al, 2001). Furthermore, electronic data interchange (EDI) can help in sharing information. It affects the quantities shipped between operations in the supply chain as well. Hence, this will reduce batch sizes and therefore deliveries will become more frequent (Ploos van Amstel and van Goor, 2005). Furthermore it reduces the bullwhip effect. The bullwhip effect can be described as a series of events that leads to supplier demand variability up the supply chain. Trigger events include the frequency of orders, varying quantities ordered, or the combination of both events by downstream partners in a supply chain. As the orders make their way upstream, the perceived demand is amplified and produces what is known as the bullwhip effect1. When re-ordering becomes an important part of the business model, flexibilization of the pipelines is the main issue to be addressed. Then the objective is to manufacture products in precise quantities and varieties, related to the development of sales (Jacobs, 2006).

As stated by Jacobs (2006) trust in the field of information and knowledge sharing is necessary in demand chain management in order to know what is happening throughout the chain. Hansen and Barney and Hansen (1994) researched the role of trust within interfirm linkages as well. They argue that strong form trust is a source of competitive advantage when two or more strong trustworthy

1

individuals or firms engage in an exchange, when strong form trustworthiness is relatively rare among a set of competitors, and when the individual and organizational attributes that lead to strong form trustworthiness are immune from low-cost imitation. Thorelli (1986) has defined trust as an assumption or reliance on the part of A that if either A or B encounters a problem in the fulfilment of his implicit or explicit transactional obligations, B may be counted on to do what A would do if B’s resources were at A’s disposal. Uzzi (1997) states that trust is developed when extra effort was voluntarily given and reciprocated and such efforts (or favours) cannot be obtained in arm’s length relationships. Therefore, emphasis should lie on long-term relationships, because this is essential to the development of trust. This makes it clear that the relationship is considered valuable and therefore opportunistic behaviour will not likely to occur (Jarillo, 1988).

According to Lee, Padmanabhan and Whang (1997), next to information transfer throughout the value chain, adjustment of scheduling, material movements, stock levels, pricing and other sales strategies are needed so as to bring all the operations in the chain into line with each other. Thus, not only the information should be provided, but it means that the systems and methods of planning and control decision-making should be harmonized through the chain. Slack et al (2001) state that when different actors use the same information, differences in forecasting methods or purchasing practices can lead to fluctuations in orders. This can be avoided by allowing an upstream supplier to manage the inventories of its downstream customer, for instance by making usage of vendor-managed inventory (VMI) or continuous replenishment programme (CRP) (van der Veen and Robben, 2000). According to Waller et al (1999) both programmes are similar, because in a VMI partnership, the supplier, usually the manufacturer but sometimes a reseller or distributor makes the main inventory replenishment decisions for the consuming organisation. This term (VMI) can also be called supplier-managed inventory or continuous replenishment. Another problem that can occur between the various channels is that there is a mismatch between the volume-variety of the supplier (high volume, low variety) and those of the customer (low volume, high variety). Therefore, customer-supplier agreements should attempt to ensure that every truckload of products that is delivered contains a mix of products from the supplier (Slack et al, 2001).

2.3.1 Forms of cooperation on the supply side

On the basis of the distinction made in Figure 2, Jacobs (2006) discusses how supply and demand chain management try to establish improved connections between both perspectives and how these perspectives can lead to the improvements discussed above. In order to grasp the different forms of cooperation, Jacobs (2006) makes connections between the different functions of the supply side with the purchasing function of the demand side, as can be seen in figure 5:

Figure 5: Moving the ‘order penetration point’ upstream in the supply chain

Source: Jacobs, 2006

First, a connection can be made between purchasing and distribution. This will lead to a more rapid delivery, where the supplier must invest in larger inventory, which is not very interesting for the supplier, because this is very costly. The second possibility is the connection between purchasing and packaging in which the finishing of goods is related to precise customer requirements (mass customisation). This leads to a longer delivery time of the goods. The last possibility is the linkage between purchasing and manufacturing in which the goods are manufactured to order. In this case there is even a higher delay for the customer, because the goods are made for an individual customer. The forms, as discussed above, will not lead to a win-win situation for the demand side and the supply side, because in most cases the supply-side will have to bear most of the risks (Jacobs, 2006).

2.3.2 Forms of cooperation on the demand side

On the other hand, opportunities for the supply side to link with the various stages in the demand chain can be made as well. Hereby, Jacobs (2006) shifts the value offering point downstream in the demand chain, as can be seen in figure 6:

Figure 6: Shifting the ‘value offering point’ downstream in the demand chain

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2.3.2.1 Quick Response

The first possibility that Jacobs (2006) describes is the connection between distribution and purchasing, as it was described earlier, which resembles the more simple forms of quick response. The Kurt Salmon Association (KSA) found out that there were inefficiencies in the supply chain in general, because of various factors. First, they identified that there was an excess of inventory throughout the supply chain. Second, long lead times that led to unwanted goods resulting in markdowns. Third, it also could be that forecasted sales were not correct, which resulted in stockouts. Therefore, the term quick response was introduced in the USA when suppliers and retailers recognised that a new strategy had to be implemented to compete with off-shore manufacturers in the fashion supply chain (Birtwistle et al, 2003.). Quick Response can be best described as a consumer driven business strategy of cooperative planning supply chain partners using IT and flexible manufacturing to eliminate inefficiencies from the entire supply chain (McMichael et al, 2000). This means that production is demand driven by the retailer, rather than based on forecasts. Therefore retailers and suppliers need to share information about sales data based on stock keeping units (SKU). However, suppliers feel that because of the fact that they have to invest in large inventories, they bear the costs and the retailers gain the financial benefits (Hunter and Valentino, 1995).

2.3.2.2 Efficient Consumer Replenishment

The second possibility is the connection between manufacturing, packaging or distribution with inventory management. Inventory planning involves deciding when and how much to order, or how much to produce, of various raw materials, components, and finished goods (Fisher et al, 2000). Here the manufacturer may offer to monitor carefully the customer’s inventory levels in order to be able to fulfil future demand more efficiently. For instance, monitoring can be done by looking at the customer’s point-of-sale data. This may help these customers to reduce their inventory costs, and therefore is called efficient consumer response (ECR). Coopers and Lybrand (1997) state that within

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ECR there is a need for cooperation between the various actors in order to fulfil customer demands at minimal cost for the whole value chain. This implies that the customers can be seen as the most important actor within the value chain. Ploos and van Amstel (2005) state that the manufacturer and the retailer need to formulate a (shared) strategy that is directed towards the customer. This must lead to an intensive and effective cooperation which will lead to greater success of the product category. Furthermore, it must lead to greater effectiveness of shop formulas, promotions and product introductions. However, the problem is that many retailers do not track stockouts and the resulting lost sales (Fisher et al, 2000). Especially for products with short life cycles this is of course very problematic. Tracking stockouts could help retailers set optimal inventory levels and could help them see the value in improving supply chain responsiveness (Fisher et al 2000). Fisher et al (2000) state that one of the reasons that stockouts are not studied is that it is hard to know how much of a product would have sold if supply had been plentiful. The figure can be estimated using sophisticated statistical techniques, but retailers generally cannot find such capabilities in commercial software, especially in the case of short-life-cycle products.

The difference between Quick Response and efficient consumer response is that the main purpose of Quick Response is to reduce inventory levels and lead time for the retailers, and increase the accuracy in forecasting. The main aim for efficient consumer response is to provide efficient replenishments by reducing ordering cycles and reducing stock holding; efficient stock ranges by deciding the depth and breadth of goods and improving space allocation; and efficient new product introductions (Birtwistle et al, 2003)

2.3.2.3 Collaborative Planning, Forecasting and Replenishment

The third possibility is the connection between manufacturing and assortment planning, in which the supplier and retailer look together at consumer demand categories that the supplier’s products serve and is called CPFR: Collaborative Planning, Forecasting and Replenishment.

According to VICS Association, which is a Voluntary Inter-industry Commerce Solutions Association that works to improve the efficiency and effectiveness of the entire supply chain, CPFR provides templates for supply chain collaboration in four stages (VICS, 2004):

1. Planning. At this stage, the relationship between buyers and sellers is planned and

updated. It leads to front-end agreement and joint business plan, Variances, whether plan-to-plan or plan-to-actual, are also addressed

2. Forecasting of demand and supply. At this stage, sales/order forecast is created;

predictions based on early sales data, tracking the accuracy of their forecasts, getting product testing, right, and using a variety of forecasting approaches (Fisher et al, 2000). 3. Execution. At this stage, the order is generated, shipments are prepared and delivered,

products are received and stocked on retail shelves, sales transactions are recorded and payments are made.

4. Analysis. At this stage, monitor planning and execution activities for exceptional situations

are shared. If a discrepancy occurs, the two trading partners can get together and share insights and adjust plans to resolve such discrepancies.

The difference between ECR and CPFR is that within ECR information exchange is only limited to short term information, such as the Point of Sale (POS) data, because CPFR tries to coordinate long term information and planning activities with production capabilities on the short term.

However, Jacobs (2006) state that joint conversations in a systematic way between independent producers and retailers about consumer understanding, leading to cooperation in the field of assortment planning and manufacturing (CPFR) is rare.

2.3.2.4 Vertical integration

The last possibility is to serve the end costumer directly from the manufacturing, which is the path of verticalization (Jacobs, 2006). As can be seen in the model, Jacobs states that vertical integration can be seen as a form of cooperation between the various actors. Other authors however question whether this can be seen as supply- and demand chain management. As stated earlier, Ploos van Amstel and van Goor (2005) state that demand and supply chain management (DSCM) is the management of a network that links customers and suppliers as one single entity with the objective to create value and reduce waste through the voluntary integration and coordination of the objectives of three or more – and ideally, all the- independent parties in the network. If we apply this to vertical integration we can see that there are no independent parties in the network and therefore cooperation and supply- and demand chain management are not present in this situation. Therefore, vertical integration cannot be adapted as a form of cooperation and therefore can be seen as an extreme way of coordinating economic activities.

Slack et al (2001) describe various effects of vertical integration, which are described below.

Vertical integration affects quality.

Vertical integration affects speed

Vertically integrated operations can mean a closer synchronization of schedules which speeds up the throughput of materials and information along the network. This also counts for the fact that being close to suppliers and customers it can help reducing the risks of creating products or services in which there is no demand for (Slack et al, 2001).

Vertical integration affects dependability

As stated by Slack et al (2001) improved communications along a vertically integrated network can also result in more dependable delivery promises. Even when internal hold-ups mean that deliveries will be missed in-house suppliers might be more likely to give notice of the problem so that it can be communicated to the customer. This leads to the assumption that the relationship between the vertically integrated links will receive a high priority rather than being overlooked in favour of the customer.

Vertical integration affects flexibility

Forward vertical integration gives the flexibility potential for products and services to be developed for a specific customer need. For volume and delivery flexibility, ownership of suppliers can give the potential to dictate volume changes to match downstream fluctuations as well as helping to expedite specific orders through the network.

Vertical integration affects costs

As stated by Slack et al (2001) vertically integrated operations can provide the potential for sharing some costs, such as research and development or logistics. Over the longer term vertical integration can also allow capacity to be balances. Therefore, if margins are high in supplier operations, it allows integrated companies to capture the profits which would other wise be lost, and to reduce the costs of bought-in parts or services.

3

Methodology

The following methodology chapter explains how and under what conditions this research is done. This is done in order to enable the reader to trace how the author went about when conducting the research.

3.1 Type of research

According to Yin (1994) there are three different categories of research: exploratory, descriptive and explanatory. Exploratory research is used when there is little or restricted research available on the topic. Exploratory research is most commonly used in the initial stages of a study when the researcher aims at finding a research problem or developing his research problem and making it more explicit. It is especially useful when a clear understanding of a problem is desired. Descriptive research includes a complete description of a phenomenon within its context. Explanatory research explains causal relations between cause and effect, thus it aims at explaining why one event leads to the other. The purpose of the paper was to describe supply and demand chain management of two firms that excel in this area and how Japanese apparel makers can learn from this. Therefore it can be best typified as a descriptive research.

3.2 Research approach

According to Merriam (1998) there are two types of research approaches, qualitative and quantitative. The purpose of a qualitative approach is to gain a deeper understanding and description of a problem through gathering and analysis of detailed data of ideas, feelings and attitudes. The empirical data received is not easy to transform into numbers, and is best described in words. On the other hand, the purpose of a quantitative approach is to gather, analyze and measure statistical data. The findings can be presented in the form of numbers. On the basis of the research question of this research, a qualitative approach was selected. I wanted to gain a deeper understanding of the usage of supply and demand chain management within firms that excel in this area. Furthermore, in order to use these insights to provide recommendations to the Japanese apparel makers a description of the Japanese fashion industry was necessary as well.

3.3 Research strategy

way of collecting data and analyzing the empirical findings. The selection of which research strategy should be used, depends on three conditions: 1) the type of research question asked 2) the extent of control the investigator has over actual behavioural events 3) the degree of focus the research questions have on contemporary or historical events.

The use of case studies was considered the most appropriate strategy. I wanted to describe the usage of supply- and demand chain management within two cases that excel in this specific aspect.

Therefore I made use of a survey from Fisher, Raman and McClelland (2001) in which they selected mostly retailers of innovative, short-life products. They analysed the supply and demand chain practices in these companies and according to the empirical results World and Zara excelled in forecasting, supply-chain speed, inventory planning, and gathering accurate available data. Therefore, these two organizations were selected, in order to describe how they work and how other organizations within the Japanese fashion industry can learn from these two cases of excellence.

Furthermore, it is important to note that the selected cases are both based in the medium fashion industry. That means that they deliver quality for a reasonable price, and therefore cannot be compared with retailers or manufacturers in the high premium class, such as Koshino or Balenciaga.

3.4 Data collection and analysis

According to Yin (1994), data can basically be structured in two groups, namely primary and secondary data. Primary data is data that has been collected for a specific study or purpose. On the other hand, secondary data originates from a previously done inquiry and does exist and is somewhere waiting to be used by somebody else. Normally when an investigator starts researching he or she begins by looking for secondary data in order to solve the problem partly or even wholly, since the collection of primary data is usually a costly operation. Secondary data sources include market resources, governmental publications, periodicals and books, the Internet and commercial data provided by certain companies. In this study I made use of secondary and primary data.

I have conducted several interviews with specialists in the field of Japanese fashion, which are listed below.

Mr. E. Wakamiya – Deputy Executive Director Japan Apparel Industry Council (Duration: 1 hour) Mr. S. Matsushita – General Manager of an Ito Yokado Store (Duration: 30 minutes)

Mr. M. Kurosaki – senior consultant of the Service Industry Consulting Department of the Nomura Research Institute (Duration: 2.5-3 hours)

Mr. Yamakuchi – Chairman of the Tokyo Federation of Wholesalers (Duration: 1.5 hour) Mr. Imashuku – Consultant of the Tokyo Federation of Wholesalers (Duration: 1.5 hour) Mrs. J. Koshino – Fashion Designer (Duration: 1 hour)

industry in order to understand how supply and demand chain management works within this particular industry.

In order to minimize the chances of representation I used several sources as a way of collecting data about World, my first case study. First, I found a Harvard Business School case on World, which was written by Raman, McClelland and Fisher (2001). Second, during my interviews I gained information from experts about World. Third, I have found data on the corporate website of World, in order to get an insight of the organization. Last, I have had an e-mail conversation with Mr. Kurosaki in which specific questions on the practices of supply chain management on World were answered as well.

The European case that I have selected is the case of the fashion firm Inditex, which sells the popular brand Zara. Because primary data was very hard to find, I have made use of secondary data only for the case of Zara. However, in order to minimize the chances of misrepresentation I have made use of several sources. First, I found three cases in Harvard Business Review that are based on Zara. Second, I have made use of an article by Dutta (2003), in which supply and demand chain management at Zara is widely discussed. Last, I made use of the corporate website of Inditex.

To analyze the data, I linked the data found with the literature in the theory section, thereby using the framework as proposed by Jacobs (2006) in which various forms of linkages between the supply and demand chains are described. Furthermore, I examined how supply and demand chain improvements are made by these two organizations.

3.5 Quality of the research

4

Supply and Demand Chain Management in the Japanese apparel

industry

Within this chapter the usage of supply and demand chain management in Japanese apparel industry will be discussed. First of all an overview is given of the Japanese apparel industry. Furthermore, important quantitative data of how the industry looks like will be showed. Second, the current usage of supply and demand chain management in the Japanese apparel industry will be discussed.

4.1 Japanese apparel industry

The Japanese fashion market is characterised by a fast-moving trend cycle with a vast choice of styles of quality items (Azuma, 2002). As stated by Mr. Kurosaki (interview, 29-06-2007), a senior consultant of the Service Industry Consulting Department of the Nomura Research Institute, there are clear differences between the four seasons, and therefore Japanese customers are willing to have four wardrobes. Because Japan is historically a closed society with a homogeneous general population, it requires less size variety than most of the countries in the world (Fisher et al., 1999). As an example, in brands targeted at younger women (i.e., less than 25 years old), bottoms were frequently offered in only two or three sizes, and tops and dresses in a single size (Raman, McClelland and Fisher, 2001). This enables consumers to enjoy a diverse range of design choices. It is a common practice that major apparel companies, such as World, Sanyo and Onward introduce new styles on a weekly basis, incorporating ongoing trends into merchandising designs. The apparel companies do not rely solely on a seasonal collection. Instead, they reduce the time gap between designing the product and designing, in order to catch up with the fast moving trends (Azuma, 2002). The way major apparel companies, like World tries to reduce the time gap, will be discussed in chapter 5.

The Shibuya area (Shibuya, Harajuku, Aoyama and Daikanyama) in Tokyo is famous for its youth fashion and culture of Japan. This area has considerable impact on trend-setting among the young consumers. Street casual fashion styles are purely born in the streets of this particular area of Tokyo and are often featured internationally as the fashion style to counter the Western tradition of couture/collection-driven fashion (Azuma, 2002).

4.2 Figures of the Japanese apparel market

According to JETRO2, a Japanese government-related organization that promotes trade and investments, the Japanese fashion industry began to shrink in the early 1990s as a result of sagging consumer incomes and the influence of low-priced imports. The total sales of apparel decreased from 1998 till 2003 as can be seen in Table 2. It is however important to notice that the speciality stores are

2

not suffering from this decrease, as they faced a slight increase of sales. Sales are still levelling off, but it seems that they have reached the bottom. According to Mr. Kurosaki (interview, 29-06-2007), Japanese customers are willing to pay more for good quality clothing nowadays. Especially the European super brands, such as Louis Vuitton, Gucci and Armani, are very popular in Japan, because these brands offer status and a guaranteed good quality. Therefore, he states that for foreign apparel makers, Japan is still a very attractive market.

Table 2 Sales of Apparel (billion Euro)

Total Department stores Superstores Speciality Stores Others Total 1998 69,83556 24,39328 13,27234 23,69144 8,4785 1999 67,73798 23,40872 12,923776 23,23946 8,16602 2000 66,94078 22,59838 12,00258 24,14652 8,1933 2001 66,55018 21,56918 11,58904 25,56818 7,82378 2002 63,8817 20,95476 10,75452 24,54394 7,62848 2003 62,85684 20,3515 10,19652 25,04428 7,26454 Source: www.jetro.go.jp/en/market/report/pdf/2004_45_d.pdf

There are basically three sales channels, as it can be seen in table 2. The range of sales channels expanded the last few years, because shopping centres consisting of specialty stores replaced department stores and superstores as the major sales channel. Sales of apparel dropped, but this does not imply that the volume dropped as well, because prices tend to decrease as well. Customers could buy more clothes (higher volume) for a lower price.

According to JETRO, the structure of the Japanese Apparel industry can be drawn as followed:

Figure 7: Structure of Apparel Industry

Textile companies Subsidiary materials wholesalers Domestic manufacturers (Subcontractors) Apparel manufacturers (design and sales)

Trading companies Overseas production Secondary wholesalers Trading companies, import agents and overseas companies High-quality imported apparel * Department Stores * Large retailers * Speciality stores * Other retailers Specialty retailers of private label apparel (SPA)

Specialty Chain Stores (Both domestic and foreign

Source: www.jetro.go.jp/en/market/report/pdf/2004_45_d.pdf

Figure 7 shows that Japanese fashion firms rely on other partners for an important part of the value chain.

Textile companies manufacture fabrics, such as wool, silk and cotton, and sell those directly to the apparel manufacturer. Those companies are mainly situated in China. There are however more options in levering these textiles, such as the general trading companies (sogo shosha). These general trading companies distribute large volumes of textiles to apparel manufacturers, mostly from China as well. These trading companies are not solely active in the field of apparel, but are active in a wide field of materials and products. The three leading trading players within the textile industry are C. Ito, Marubeni and Sumitomo3. These players can however play another role as well, namely as a direct distributor of clothing to the retailer, which will be discussed later on.

As can be seen in Figure 7 and also according to Mr. Wakamiya (interview, 28-06-2007), Deputy Executive Director Japan Apparel Industry Council, a distinction needs to be made between the first wholesalers, typified here as apparel manufacturers and secondary wholesalers. Secondary wholesalers only distribute clothing which they buy from apparel manufacturers. These secondary wholesalers are especially focusing on lower fashion, and their role is diminished during the last couple of decades. Those secondary wholesalers do sell to general retailers, but these retailers are mainly based outside of the large cities. Furthermore, these retailers consist of only small shops, so the distribution of clothes only consists of small lots. Mr. Yamakuchi, chairman of Tokyo Ton’ya Renmei (Tokyo Federation of Wholesalers) (interview, 28-06-2007) states that if these retailers are low in stock, they come in these wholesaling shops buying these clothes, which are already stocked in the shop and thereby directly distributing these clothes to the store where it can be sold. This means that the wholesaler has some inventory of goods that are popular, and those can be ordered by a shop that is running out of clothing. As stated by JETRO, the apparel manufacturers are engaged in designing, production and sales. As wholesalers, they control the entire flow from production to retailing, including original designing, materials purchasing, production and sales, which has enabled them to lead the apparel industry. There are various big major apparel companies, as can be seen in Table 3, which states the major apparel companies with their sales from 2000 till 2003. These major apparel companies are mainly active in the field of the medium segment, although they licence high premium brands from Italy, United Kingdom and France for instance.

Table 3: Sales by Major Apparel Companies (million euro)

2000 2001 2002 2003

Onward Kashimaya 1500,13 1569,57 1606,73 1633,24

3

World 1316,51 1352,86 1420,20 1440,97 Five Fox 879,96 1022,03 1097,51 1067,64 Wacoal 988,34 993,26 998,62 995,25 Gunze 1046,47 1006,67 975,07 975,66 Itokin 868,74 838.04 841,46 884,34 Sanyo Shokai 824,99 824,99 863,83 866,72 Moririn 712,22 689,25 693,17 696,28 GSI Creos 755,19 691,18 675,97 645,79 Renown 740,62 722,97 654,46 609,69 Source: www.jetro.go.jp/en/market/report/pdf/2004_45_d.pdf

The major apparel companies design most of the clothes in-house, although a company like World makes use of external designers as well. Companies like World and Onward have several Japanese brands in the medium segment for different customers and also for different retailers. These apparel firms sell their clothes in the various sales channels. Specialty retailers of private label apparel (SPA) are fully owned stores in which they sell only one (private) brand.

The major apparel companies contract factories where they can produce their clothing. As shown in Figure 5, apparel companies can make use of domestic production and overseas production. However, most of the companies make use of overseas production (see Table 4 and Table 5). This is mainly because of the low costs and because raw materials come from outside Japan as well. Table 5 shows that China is exporting 28,9% of it’s clothes to Japan and according to Mr. Yamakuchi (interview, 28-06-2007) most of the manufacturers are situated in China. Table 6 shows us that almost 80% of the clothing comes from China, and that 5.5% is imported from Italy. The apparel imports from Italy are from the luxury brands, and these are not imported on the basis of low costs.

Table 4: Japanese imports of clothing in %

1997 70,6 1998 73,6 1999 79,7 2000 85 2001 87,7 2002 89

Source: Nomura Research Institute, 2005

Table 5: Exports of clothing from China in %

Japan 28,9 EU 20,9 Hong Kong 18,3 United States 13,8 Korea 5,8 ASEAN countries 4,1 Mexico and Canada 3,5

Pacific 3

Africa 1,7

Table 6: Japanese Apparel Imports, by country or region (billion, euro, %) 2001 2002 2003 Share Total 14,14 13,35 13,67 100 China 10,90 10,43 10,93 80 Italy 0,73 0,76 0,75 5,5 Vietnam 0,40 0,36 0,35 2,6 Rep. Of Korea 0,50 0,32 0,24 1,8 Thailand 0,20 0,18 0,18 1,3 France 0,18 0,18 0,18 1,3 USA 0,26 0,20 0,17 1,2 Indonesia 0,16 0,12 0,10 0,7 Malaysia 0,09 0,09 0,09 0,7 UK 0,08 0,08 0,08 0,6 (Asian NIEs) 0,60 0,41 0,31 2,3 (ASEAN 4) 0,53 0,48 0,44 3,2 (EU 25) 1,12 1,15 1,14 8,4 Source: www.jetro.go.jp/en/market/report/pdf/2004_45_d.pdf

Some firms are active as a manufacturer in Japan. The high-end fashion designers, such as Junko Koshino, contract these firms. She states (interview, 03-07-2007) that the price of the clothing is not that important to her customers, because it is all about the design. Therefore she contracts two factories from Yokohama, because these factories know what she wants and because communication can take place in Japanese.

As stated earlier, high quality imported apparel comes from countries like Italy and France. In order to enter the Japanese market trading companies, important agents and overseas companies are importing the high quality apparel and these are licensed by the major apparel companies, such as World, Sanyo and Onward.

4.3 Supply and Demand Chain Management within Japan

As stated earlier, the apparel manufacturers are engaged in designing, production and sales. As wholesalers, they see themselves as the leaders in the value chain.

Response benefits (Fernie and Azuma, 2004). This led to the elimination of the labour intensive and costly processes of ticketing and inspections into an electronic way of thinking which can result in a smooth flow of information.

time. However, there are still niche opportunities in the market for domestic manufacturers in the supply chain, considering the rise of the creative class in Japanese fashion and their geographical concentration across the nation, something which has impressed the high-fashion community of the world.

According to Wakamiya (interview, 28-06-2007), Deputy Executive Director Japan Apparel Industry Council, the medium-to-large apparel organizations might face fierce competition from Japanese trading companies, because these trading companies are willing to increase their interest in the apparel industry, especially in the production of clothing in offshore markets. This means that these organizations need a business model that is organized in such a way that it creates a sustained competitive advantage.

4.4 Summary and Conclusion

5

The cases of World and Inditex

In this chapter the cases of World Co. Ltd. (‘World’) and Inditex will be discussed as cases of excellence in the field of supply- and demand chain management. According to the article of Fisher, Raman and McClelland (2001) both cases excel in four areas that are seen as critical to excellent retailing, namely forecasting, supply-chain speed, inventory planning, and gathering accurate available data.

5.1 The Case of World

In this first paragraph I will present World. In the second paragraph the external relations within the demand- and supply chain will be discussed. In the third paragraph the supply- and demand chain concepts at World will be discussed. In the last paragraph I will draw conclusions.

5.1.1 Introduction of World

As can be seen in Table 3of the previous chapter, World is one of the largest apparel companies in Japan. World was established on January 13, 1959 as a clothing wholesaler specialized in knitted garments. Nowadays, it sells nearly 40 clothing brands, which are targeted at different sets of customers. These brands can be bought in own stores or within department stores or other general retailers. For example, Untitled is one of the larger brands, which sells clothing for the more career-oriented women and men. Even though these individual brands generate less than $45 million in annual sales on average, World maintains separate merchandising groups for each of the brands. Every six months, World’s strategy team reviews each of the company’s brands, competitors’ brands, and other offerings in the marketplace. However, the individual brand teams have considerable latitude, within the general corporate strategic direction, to make merchandising decisions that best serves their customers.

Table 7: Financial highlights of World

Table 7 shows that sales are still increasing, although the net income is fluctuating during the years. However, it is interesting to see that sales are increasing, because the last chapter showed a decrease of the overall sales of clothing in Japan. Furthermore it shows that the Net Margin is fluctuating as well. According to Mr. Kurosaki (interview, 29-06-2007) this is because of the large amount of brands. He states that not all brands are equally popular by the public. World invests a lot of money in every single brand, such as advertising costs, which results in the fact that the net margin is fluctuating.

5.1.2 External relations within the demand- and supply chain

On the supply side, Untitled, one of the brands of World, works for example with approximately 20 retailers on a regular basis. Furthermore, World maintains a number of relationships with manufacturers through a network of business affiliations. According to Mr. Kurosaki (interview, 29-06-2007) these manufacturers are a mixture of fully owned subsidiaries from World as well as independent manufacturers who produce for other large apparel firms as well.

On the demand side, as regards the relationship between department stores according to Mr. Kurosaki (interview, 29-06-2007) three different types of arrangements and contracts exist:

- Outright purchase. Retailers purchase merchandise outright. The risk for the department store

is high in this case and salespersons are provided by the department store that sell the goods and control the inventory. The reason why the risk is so high is because the department store buys a total collection up front and therefore bears the risk of not selling items. Furthermore the existence of high inventories is a costly operation as well.

- Sales on Consignment. Ownership of merchandise transferred to retailers when merchandise is

delivered to the retailers, but the retailers may return the unsold items to the wholesaler. Retailers bear cost of damaged and stolen goods. Most of the time World accounts for most of the salespersons in order to sell the products. According to Mr. Kurosaki (interview, 29-06-2007) this is done because the sales persons are willing to put more effort in selling these clothes and because they have more knowledge about these clothes. Furthermore, the inventory is controlled by World as well. This means that the risk for World is high, because they need to sell the products, because else they have to pay for the returned goods.

- Sales on consumption. Ownership of merchandise is transferred to retailers when merchandise

is sold to the customer. World bears the costs of damaged and stolen items because items are not entered into retailers’ inventory books until they are sold.

for assortment, quantities, and pricing reside with the apparel company. Arrangements between department stores and World vary according to brand strength and the desirability of a given store location. This means both parties can exert a certain amount of power over the other, depending on their position. A strong brand image induces department stores to carry a brand in its assortment and afford World leverage in negotiating a favourable sales percentage or level of decision rights and inventory risk. As stated by Mr. Kurosaki (interview, 29-06-2007), World sells nearly 40 brands and therefore there are large differences in contracts between the different brands and the department stores.

According to Raman, McClelland and Fisher (2001) the most heavily trafficked department stores and those with the most desirable locations are able to dictate nearly all aspects of their relationships with World. The department store typically receives a substantial portion of the retail sales generated at its store. This portion could be as high as 40% for the most desirable locations. In the case of Untitled, one of the brands of World, department stores buy 5% of merchandise through outright purchase, 25% to 35% through sales on consignment and 60% to 70% through consumption purchase (Lal and Han, 2005).

Untitled’s team members are constantly striving for better store locations, especially within department stores, although this is a difficult process as stated before. Therefore Untitled invests money in advertisements in order to achieve levels of brand awareness and prestige that would enable them to negotiate favourable arrangements with many of the best department stores.

5.1.3 Supply- and demand chain concepts at World

On the supply side, senior management of World believes that the company fashion approach must remain rooted in domestic manufacturing, because domestic manufacturers can respond to the inevitable small changes that are necessary more quickly than overseas manufacturing facilities are able to. Balancing the lower costs of overseas factories against the resulting slower inventory turns, senior management concludes that lower inventory turns would be highly detrimental to the company’s financial position in the long run due to their extremely fast fashion cycles (Raman, McClelland and Fisher. 2001).

The communication, decision and negotiation mechanisms between department stores and World are however different if we compare this with the communication, decision and negotiation mechanisms between manufacturers and World. According to Mr. Kurosaki (interview, 29-06-2007) the position of World is much stronger in relation to the manufacturer in comparison with the department stores. Japanese manufacturers are struggling to survive, which makes their position much weaker. However, because information systems and other expensive production systems are shared there is a mutual dependency relationship between these two parties.

inventory turns a year and gross margin of 47% in 2001. World’s private label SPA brands use the SPARCS system to coordinate the supply chain. This system stands for Super Production Apparel Retail Customer Satisfaction, which can be seen as a customer-centered system that unifies the entire business process, from production through retail, for maximum customer value and productivity, by converting losses and inefficiencies into new value4. This system turned 8,5 times a year with a gross margin of 47,8% in 2001. In comparison, a U.S. specialty retailer on average achieved 2,6 turns a year and 41% gross margins in 2001 (Raman, McClelland and Fisher, 2001). According to Mr Kurosaki (interview, 29-06-2007) World is leading the way for other apparel companies because it achieves the quickest turnaround.

Figure 8: Quick response by World Co. Ltd.

Monday Wednesday Friday Monday Wednesday Friday Monday

Source: Nomura Research Institute, 2005

Figure 8 shows how Quick Response is used by World Co. Ltd, for lead time for replenishing fashion apparel. The trends from sales of the last week from the department stores are transmitted to the corporate offices of World. If the sales of a particular item is doing well, World will inform the factories that it is in need of this particular item, and that it needs to be replenished. The factory works very closely with the corporate offices of World. They maintain open lines of communication with the

4 http://www.world.co.jp/english/company/business/index.html Deciding number of inventory Trends of Sales

Manufacturing process Retail

Fixing quantity to receive this week

Informing factories about next week