H&M: How Fast Fashion Translates into Low Prices and Success
H&M has become one of the leading fast fashion companies using its supply chain and techonology as core competitive advantages.
Fashion for All
H&M’s business model consists of creating value for customers by offering fashion and quality at the best price. H&M offers products for women, men, teenagers and children. Products include sportswear, underwear, shoes, accessories, cosmetics, home textiles and decorations (H&M Home). The company sells through retailers and through its online site Hm.com.
Operating Model
Design: A mix of traditional and trendy collections
H&M has a group of approximately 160 in-house designers and 100 pattern makers that decide on the collections. The company offers two main collections each year, one in spring and one in fall. H&M has two design processes: long term planning of collections and real-time design driven by customer trends in the market. The real-time design allows H&M to respond to the market in a faster way and be more flexible in the eyes of the customer.
Manufacturing: Independent suppliers, but strong relationships
H&M doesn’t own factories. Its products are produced by 850 independent suppliers, mainly in Asia and Europe. Usually products with longer lead times are produced in Asia and products with shorter lead times are produced in Europe.
H&M has production offices in strategic locations close to suppliers. Production offices have several functions:
- They are the liaison between the designers and the suppliers. They work with information from both to choose the suppliers that are more convenient and efficient for a specific product.
- Act as auditors and perform extensive safety and quality testing to ensure requirements of the company are being met.
- Create a closer relationship with suppliers and help them improve working conditions and standards. This allows the company to work with suppliers to reduce lead times.
Ordering the product at the right time is very important to obtain the best price, quality and lower lead times. H&M manufactures 80% of its inventory in advance and introduces the remaining 20% based on current market trends. Lead times vary from a few weeks to six months, with garments such as basics and children’s wear ordered in advance while more trendy clothes that require smaller quantities may be produced at a shorter notice.
Logistics: Managing inventory out of the stores
Most of the manufactured products from the factories go directly to the logistics centers and from there are distributed to the stores closer to the area. Stores don´t have back up stocks, but inventory is held in regional replenishment centers from where it is distributed to stores.
Technology: Integrating the system, from product design to sales
Due to the complexity of the supply chain, the company relies on a very well developed IT system that integrates the headquarters, administrative offices, production offices and stores. This allows for real time communication.
- Through IT, the company has information about the fabrics that each supplier has and can make informed decisions as to where to place a specific order.
- There is a central inventory management software. Each store is connected to corporate logistics and H&M warehouses which makes the process of ordering and restocking stores more efficient.
- The head office can monitor the trends from sales in each store and use this information for design and production choices oriented to the customer.
Do the business and operating models align?
H&M has created an operating model that allows it to be flexible and respond to market trends, but also to be a low cost provider that can reach markets with low prices.
The company is flexible because it can track customer trends via its IT system and also it leaves 20% of manufacturing to be done with shorter lead times (mainly in Europe). It is also flexible because it has the ability to restock easily from its replenishment centers that monitor the inventory in each store and replace it accordingly. The company also manages to control costs due to its close relationships with suppliers, to guarantee quality at a low cost.
Does H&M have a Competitive Advantage?
The whole world is looking at fast fashion as companies in this market are continuing to grow. For competitor Zara, design and reacting to consumer trends and design trends is most important. For Uniqlo, technology and getting customer preferences right is most important due to longer lead times. H&M is thought to be in the middle, focused on researching and predicting customer trends with a partly flexible operating system. But, even if each company has its own focus, they all focus on customer preferences as a core competitive advantage.
Sources:
Annual Report 2014
Press Conference Presentation Q3 2015
https://www.tradegecko.com/blog/hm-retail-inventory-control
http://erply.com/in-the-success-stories-of-hm-zara-ikea-and-walmart-luck-is-not-a-key-factor/
Great overview of H&M, Carolina. It’s very interesting that they don’t have their own factories which I think both Zara and Uniqlo do. This makes their partnerships with suppliers crucial. One thing that also differentiates them from their rivals is their partnerships with high-end designers such as Balmain and Maison Martin Margiela for special collections. These sell out instantly. It will be interesting to see how they leverage technology as they continue to expand rapidly across the U.S.
I think it is very interesting how H&M is leveraging IT systems to help manage the complexity in their supply chain. As Luthan mentions, not having their own factories makes the relationships with suppliers crucial, and this can be very complicated when suppliers are very fragmented and geographically disperse. It is great that the company has access to its suppliers’ stocks in real time, as this helps reduce uncertainties in the decision making process.
Great write-up Carolina. Both H&M and Zara have successfully disrupted the men’s fashion industry with me being one of many beneficiaries! Similar to the above comments about IT, I think the next area of growth for the company is e-commerce. Website like ASOS continue to gain share from traditional brick and mortar, and I think H&M has the supplier relationships and operating flexibility to be a major player in the e-commerce space. In your research, did you come across online retail as a strategic priority for the company?
Thank you for your comment Bruce! As you suggested, e-commerce is indeed an important priority for the company. They are invetsing to improve the platform and to gradually offer e-commerce to new markets each year. In 2015, they will offer e-commerce in 10 new markets and H&M online markets totaled 23 as of November. In 2016, they plan to expand to 9 new markets.