Operation Management & Supply Chain Management 

Executive Summary:

This report demonstrated two recent supply chain issues from fast-fashion company Hennes &
Mauritz ( H&M). Our solutions are based on quantitative and qualitative  research and personal
opinions based on academic information that we learned from this semester.The data and
research provided in this report was collected from UTS library, google scholar, articles, and 
reports.

Overall in this report, the introduction will provide the background of the H&M and briefly
discuss the expansion and scope of activities in recent years. Moreover, one of the main supply
chain issues was lack of inventory management, caused by big competition under the e-
commerce market and their competitors. Competitors such as ZARA and ASOS have more
comprehensive systems compared to H&M. Besides, the renewal speed is always clipping on the
fashion market and sometimes the company might make the wrong prediction and forecasting for
the next season. Once large amounts of inventory can  not be sold on time, profits drop down and
damage the reputation of the company . In order to solve this obsolete inventory issue , H&M
should change their production distribution into short lead time and focus on investing in a new
production line that is more agile and flexible.

Furthermore, as a successful multinational industry, H&M always needs to deal with a large
number of suppliers. In order to save cost, most supplies come from developing countries. 
This has become an ethical issue where some of the suppliers create negative impact on H&M’s
brand image. Therefore, H&M needs to improve the standard of regulations for their suppliers
and consider the political and legal factors as corporate social responsibility. This is essential to
companies such as H&M as they need to maintain a reputation for long term development. 

Dealing with both the inventory and unethical issues will be in particular beneficial in the long
run. For instance, the gross profit will increase as cost are saved from inventory. In addition,
H&M  will obtain a higher reputation and brand image by running business under a good
corporate social responsibility. In addition, when H&M moves parts of their manufacturing into
Europe, the supply chain system will become more comprehensive and lead times will decrease. 

However, for the short run H&M will be undertaking some potential risk as well. Such as, in
order to update the progressing system there are large amount of costs that might lead to
shareholder dissatisfaction and could also lead to cash flow problems. In addition, before H&M
can cooperate with European suppliers, the company needs to consider different political and
legal factors such as product quality standards, and legal conduct with local employees in order
to avoid these kind of issues on future.
Introduction:

H&M participates in the fast-fashion sector of clothing, accessories and footwear for women,
men and children. In order to reduce its costs and maintain a parity strategy, H&M does not own
its garment factory but outsources to 21 low-wage countries. In order to operate in this industry
H&M provides the latest fashion trends with affordable prices. To keep track with its
competitors Zara and ASOS, H&M requires a tight supply chain and management system to
launch cutting-edge products at any time. Thus, the company strives to minimise inventory and
replenishes new goods. Short production processes and distribution lead times are essential to
achieve this goal. H&M recently faced two major supply chain challenges which were inventory
management issues and management of the suppliers. The company struggled to sell off 4.3
billion of unsold inventory in 2018 due to a slow supply chain and lack of control in inventory
(Paton 2018). Furthermore, the negative influence of child labour with H&M’s suppliers
increased the risks of supply delay (Gomes 2017). This issue displays the lack of control and
management of H&M’s supplier, which as a result affects the overall supply chain management
system. The purpose of this report is to analyse the impact and causes of both issues and to
provide operational solutions to optimize H&M’s overall  supply chain. 
Supply chain issue 1:
Inventory management
H&M’s environment is characterized by a highly volatile demand and short-lived product life-
cycles. Managing the inventory is a crucial part for the success of H&M’s overall supply chain
management. “It helps to regulate inventory levels and guarantees customer satisfaction without
compromising assets with excessive volumes of inventory” (Cui et.al, 2011) (Muller, 2011). 
Unfortunately, as of last year, the company has been struggling with a large amount of unsold
inventory. In 2018, the unsold inventory was estimated to be worth about $4 billion U.S. dollars.
The scale of the issue illustrates H&M extensive company size. Currently, the company is
dealing with so much excess inventory that their power plant in home town Vasteras, relies
partly on burning unsold inventory to create energy (Paton, 2018). 

Impact and Causes:

H&M has faced many issues due to poor Inventory Management. H&M has 4.3 billion dollars
worth of unsold inventory accumulating from the past few years. The result of this incident
leaves H&M in a negative spot. In February 2018 H&M reported that their  unsold stock had
risen by 7 percent in the past year and the unsold inventory is now worth 35 billion Swedish
Kronor ($ 4.3 billion U.S. dollars). According to the The New York Times, “The company said
operating profit fell 62 percent in the three months through February, sending its shares to their
lowest closing price since 2005 on the Stockholm stock exchange”(Paton, 2018).We decided to
take a look into Hennes & Mauritz 2018 Quarter 1 report, and compared the 2017 Quarter 1
results. The results are as follows: 
Figure 1:H&M final report  2017-18 in Swedish Kronor

When comparing the numbers to each other, there is an obvious decrease from the previous
quarter. The net sales decreased by SEK 804m, while the gross profit decreased by SEK 1,426m.
Gross margin and Operating margin fell by 2.2 percent and 4.1 percent.Operating decreased SEK
1,951m which is more than half of 2017’s operating profit. Lastly the overall profit for the period
from 2018 decreased by SEK 1,085m from Q1 of 2017. H&M also reported in their first quarter
report, “Profit after financial items amounted to SEK 1,263 m (3,212). The group’s profit after
tax amounted to SEK 1,372 m (2,457), corresponding to SEK 0.83 (1.48) per share. Profit
development in the quarter was negatively affected by weak sales development as well as higher
markdowns” (H & M Hennes & Mauritz AB (publ), 2018). H&M has tried to lower the price of
clothing in order to balance out the inventory, but this has resulted in a loss of profit. The
negligence of this problem and development has cost H&M both time and money. 

Profits and stock are not the only thing at a loss, H&M’s reputation is also losing credibility and
respect. Paton explains, “Critics, however, blamed poor inventory management and
underwhelming product offerings, prompting once-loyal shoppers to take their wallets
elsewhere”(Paton, 2018). For H&M to reclaim their reputation they must find the sources of their
problems and find a way to resolve the issues while improving.

There seems to be many reasons behind H&M’s accumulation of inventory. When asked by
critics why there was such a large amount of unsold inventory, Mr. Persson (CEO) responded
that it was due H&M new openings of 220 new stores around the world and expansion of e-
commerce. H&M is indeed far behind in e-commerce especially compared to their fast fashion
competitors Zara and ASOS. According to Wahba, “The retailer’s inventory problems go back to
its relatively late start in e-commerce, which has made merchandising more complicated
compared with a stores-only business. (Rivals like Zara who were earlier to the web can quickly
shift languishing items online.)” (Wahba, 16).H&M products have been late compared to the
new and latest fashion trends. 

Another reason for the piling inventory is H&M’s transition to their new logistic systems, and
automation of their warehouses. Persson’s goal was to shorten the time of the supply chain in
order to increase the efficiency and effectiveness. Some interruptions occurred during the
transformation process due technological difficulties. This resulted in a delay and loss of
efficiency for H&M’s warehouse automation and logistic system, and inventory began to
accumulate with nowhere to place it. Persson believed they could catch up and sell more in the
third quarter, but he was wrong. ‘"The inventory level is too high and that is because we haven’t
sold according to plan,’ said Persson” (Goodman, 2018). 

In addition, inaccurate weather and demand forecasts also contributed to the excess inventory
issue. Weak sales in the autumn of 2017 resulted in a high level of clearance sales in the first
quarter of 2018. Moreover, the colder weather than expected in February had a negative effect on
the sales of the new spring collection (Goodman, 2018).
Furthermore, the company had trouble keeping up with the rapid demand of the fast-fashion
industry. According to a report by Goldman Sachs, H&M’s supply chain lead times are almost
double those of competitor ZARA (Bain, 2017)  (Figure 2). H&M launches approximately 16
collections each year. While new garments are delivered to stores on a daily basis, lead times
vary from a couple of weeks to six months. Basics and child-wear is ordered in advance. While,
more trendy items are produced in at a shorter notice. This is due to  a more volatile demand and
smaller production quantities (Manrique, 2015). 
Figure 2: Supply chain lead times of   fast-fashion industry’s leaders 
Solutions: 
According to Cachon & Swinney, fast fashion consists of two fundamental aspects: the
quickness of production and distribution and the ability to translate up-to-date fashion into the
garments (Golobovante et.al, 2018). Short lead times are a critical success factor for today’s fast
fashion industry, as it enables full-price sales and thus improves the overall financial
performance (Cano, 2018). Moreover, obsolete inventory piling up is extremely costly. A shorter
lead time will help to streamline the supply chain and enable the company to react quicker and
avoid obsolete inventory (Fritsch, 2015). H&M sources about 80% of its products from Asia
(Manrique, 2015). While, competitor ZARA sources most of its products from neighboring
markets. This in turn gives ZARA a greater flexibility to respond to fashion trends at a rapid
replenishment rate (O’Byrne, 2017). H&M should therefore invest in moving parts of their
operations closer to their European market (O’Byrne, 2017). Reducing the delivery time will
subsequently reduce the lead time. 
Furthermore, H&M should invest in sustaining a better product pipeline that goes hand in hand
with agile development. Agility is important due to the fast-fashion industry’s need for adaption
and ability to respond to trends. An agile supply chain consists of 4 fundamental prerequisites:
market sensitivity, networked logistical systems, process alignment and virtual integration
(Harrison at.al, 1999) (Figure 3). Quick Response (QR) management should be the company’s
main focus. QR enables the company to make demand-information driven decisions at the very
last possible moment. Which maximizes the ability to offer up-to-date garments and minimizes
the lead-time and inventory. Moreover, it emphasizes flexibility and product velocity in order to
meet the continuously changing demands of a highly competitive and volatile industry (Lowson
et.al, 1999).  One fundamental principle of QR is the alignment of organizational activity to
demand, which states that products are produced and delivered in the variety and volume that
match demand (Christopher et.al, 2004). Investments in IT and automation are necessary to gain
transparency throughout the supply chain and better understand and predict fashion trends and
customer preferences. Examples are enterprise resource planning (ERP) and product lifecycle
management (PLM) (O’Byrne, 2017). Currently, H&M has introduced Radio-Frequency
Identification (RFID), which enables a better understanding of real-time inventory levels. The
durable tags are attached to garments and trace every movement, from leaving the production
plant to point of purchase (O’Byrne, 2017). Moreover, H&M is using big data to analyze loyalty
card data, returns and receipts to tailor  merchandise for every different H&M store (Marr,
2018). 

Figure 3: The foundations for agility in a fast- fashion business

Up till now, efforts in solving the inventory issue have been put in investing in new logistic
solutions and optimizing lead times and forecasting methods. Furthermore, H&M has established
a new venture which will be used to unload its excess inventory. The company also launched a
new brand (Afound) that will be offering off-price products from the H&M group. Furthermore,
the company has invested in automated warehouses to increase capacity and improve lead times.
By optimizing their logistic network, they hope to increase product availability and reduce stock
levels related to sales (Goodman, 2018). 
 
 
 
 

 
 

Supply chain issue 2:

Relationships with Suppliers:

According to the research from Arrigo (2018), it can be found that H&M currently does not have
their own factories or plants and  is working with more than eight hundred independent suppliers.
Therefore, managing relationships with suppliers plays a significant role in H&M’s daily
operations. However, in recent years, there were several supplier issues that damaged H&M’s
reputation and brand image.

Impact and causes:

Based on the research from Gomes (2017), H&M’s supplier in Bangladesh employed children to
produce products. This kind of unethical commercial operation can  negatively impact the brand
of H&M. Especially as customers form European and American markets value commercial
ethics highly. If H&M cannot manage its suppliers well in the future, it would be a huge disaster
for the brand image of H&M. Moreover, according to the law from Bangladesh, it is illegal to
recruit child labor (Gomes 2017). The illegal business operation also may cause serious supply
delay if the local government takes mandatory measures. For example, the production capacity
of H&M’s suppliers in Bangladesh could be zero if the government decided to shutdown the
legal factory instantly. Nowadays, for saving labor cost most of H&M suppliers are located in
Asian developing countries including Bangladesh (Chen et al., 2019). However, some of these
developing countries in Asia do not have perfect legal systems and great legal cognition in child
labor. Especially, in Bangladesh and Cambodia, child labor still happens  to a large extent
(Boateng, 2017). H&M has several suppliers in these countries with high ethical risks on the
aspect of child labor. Therefore, some entrepreneurs of H&M’s suppliers try to recruit child labor
for gaining more profits. For H&M, these illegal business operations carried out by suppliers are
hard to be found and supervised. More seriously, these Asian suppliers may subcontract the
orders from H&M to other factories, which may cause potential legal problems and ethical
issues.

Apart from the child labor issue, some Chinese suppliers of H&M even subcontracted the
production to prisons. The report from Mochalova (2017) has mentioned the issue that some of
H&M’s suppliers in China subcontracted the orders to prison staff for chasing lower production
cost. These subcontract issues show that H&M does not have a good control on its Asian
suppliers. Even though nowadays H&M is trying to make all of its products traceable, the
suppliers information showed on the trace results may be not real. If the control of Asian
suppliers cannot be better in the future, the brand image and reliability of H&M group may be
destroyed. Moreover, due to these potential risks, the supply chain system of H&M cannot be
robust enough because the risks of supply delay will be high and unpredictable. Apart from that,
the unethical issues of H&M’s suppliers will also harm the supply chain sustainability of H&M
because these suppliers may not follow the sustainable coducts. However, recently, H&M is
focusing on the development of a  sustainable supply chain and is finding ways to better control
the operations of their suppliers (Shen et al., 2017). 

Solutions:

First of all, as mentioned earlier, H&M should move parts of its operations from Asia to Europe.
H&M should especially terminate the cooperation with suppliers that show high unethical risks
and build strategic cooperation with more ethical European suppliers. Nowadays, according to
the report from Shen & Mikschovsky (2019), the labor cost in Asian countries are increasing
faster when compared with the labor cost in Europe, which shows that certain Asian countries
including China is losing the advantage in competitive labor cost. Therefore, it is becoming more
reasonable to transfer the Asian suppliers to European suppliers. Even though the labor cost in
Europe is still higher than Asian suppliers, the strategic cooperation with European suppliers
could help H&M to build a more robust supply chain system and less risks in supplier
management. After all, in Europe, the related legal system about unethical labor are stricter and
more complete. This can  dramatically decrease the potential supply chain risks of H&M.

Besides,  the company should  set up a complete and strict codes of conduct for all its suppliers
(Kashmanian, 2018). Research by Kashmanian  shows that it is important to set requirements
prior approval or authorization of a supplier's use of subcontractors. For H&M, they should make
a stronger and greater regulation to its suppliers in ethics and subcontract aspect to restrain the
commercial operations of its Asian suppliers. More specifically, H&M can improve its code of
conduct department by enhancing the supervision. The staff in code of conduct department
should regularly investigate its suppliers and visit suppliers’ factories to ensure whether  these
suppliers perfectly follow the legal and ethical codes. The investigation channel should be
random enough and highly secretive. Most significantly, the code of conduct department should
be highly independent and not controlled by other departments in case of corruptive issues.
Besides, the punishments for unqualified suppliers should be taken more seriously. Suppliers that
have negatively influenced the brand image of H&M should receive high penalties. Even though
supply chain cost saving is important, in 21 century building a sustainable supply chain system
st

is more important in the long run.

Overall, H&M should work with more trustworthy suppliers and improve its code of conduct for
suppliers. In this way, the potential supplier risks will be minimized and it will help H&M to
build more sustainable supply chain system.

Conclusion:
The fast-fashion industry is characterized by a highly volatile demand, low predictability and
short-lived product life-cycles. In order to compete against Zara and upcoming online-rivals
ASOS and BooHoo, H&M needs to firstly optimize its supply chain operations. Moving the
production closer to European borders will reduce the company’s lead times. In addition,
investments in artificial intelligence and advanced analytics will enable the company to respond
quicker to its highly dynamic marketplace. The focus areas should be trend detection,
personalization, allocation, and price management. 

To conclude, it is necessary to take actions against the unpredictable risk of supply delay due to
child labour issues. H&M should build new strategic cooperation with European suppliers as
they have a complete legal system for unethical labor. Subsequently, this will decrease the
chance of facing future legal and ethical charges that slow down the movement of the supply
chain. Nevertheless, rising costs make it harder to maintain previous selling prices, which in turn
will damage their comparative advantage. Another solution was found by upgrading H&M’s
code of conduct department to enhance supervision of the suppliers’ factories. To ensure a strict
management of suppliers, H&M should terminate the cooperation with disqualified suppliers to
minimise any future losses. 
 

Word count: (...)

 
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