Benetton’s ‘Dual Supply Chain’ System
Case study Reference no 608-003-1
This case was written by Indu Perepu, under the direction of Vivek Gupta, ICFAI Center for Management Research. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2008, ICFAI Center for Management Research (ICMR). No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
ecch the case for learning
Distributed by ecch, UK and USA www.ecch.com All rights reserved Printed in UK and USA
North America t +1 781 239 5884 f +1 781 239 5885 e email@example.com
Rest of the world t +44 (0)1234 750903 f +44 (0)1234 751125 e firstname.lastname@example.org
BENETTON’S ‘DUAL SUPPLY CHAIN’ SYSTEM
“The Group’s new industrial set-up is based on a double supply chain: a better gauged and more efficient one, based on a logical sequence of activities for minimizing costs; and a more rapid one with better response capabilities. A balance between these twin tracks makes the system flexible and provides the required support for the large expected growth in production….” - Benetton Annual Report, in 2006.
BENETTON MOVES TO FAST FASHION
In 2004, Italy based clothing company Benetton SpA (Benetton) formally adopted the ‘Dual Supply Chain’ system. The new system was a top down, pull driven supply chain, which enabled the company to bring in more products on to the store shelves more often, in accordance with the growing demands of the customers and changing fashion trends. Through this system, Benetton was able to delocalize some of the production to countries, where the production costs were low compared to the European countries, where Benetton had earlier produced all its products. Benetton was the world leader in the casual apparel market during the 1980s and the early 1990s. The company’s success was attributed to techniques like postponement, where the dyeing of the final product was postponed as long as possible to dye it in the colors that were in vogue during the season. By the early 2000s, Benetton had to face tough times; its new collections were limited to just two a year - not enough to sustain the interest of the consumers, who were getting used to fast fashion – fashion that changed every week – provided by the likes of Zara1, H&M2 and Gap3. Benetton recorded losses in 2002, mainly due to limited collections, and growing competition. Under the ‘Dual Supply Chain’ system, the main tasks like design, planning and coordination were carried out in Italy, while production was carried out in locations in Europe and Asia. Apart from Benetton’s regular twice-yearly new collections, Benetton began to bring in several new collections at different times of the year to meet the changing fashion trends. The time required to restock the stores was reduced and new collections were brought in every four weeks. Commenting on the importance of an efficient supply chain management for Benetton, The Wall Street Journal wrote, “Replenishing its racks with new clothes as often as once a week is helping the Benetton brand get its groove back after years in the retail doldrums. Its success underscores how logistics can be as important as style in the increasingly cutthroat business of mass-market apparel.”4
Zara is the largest division of Spain based Inditex Group, one of the largest fashion retailers in the world. Compared to the average period of nine months taken by most of the designer stores to bring in new collections, Zara brought in new collections every two weeks. In 2006, Inditex recorded revenue of € 8.196 billion and net income of € 1.010 billion. Sweden based Hennes & Mauritz AB (H&M) is a clothing company famous for fashionable clothing at reasonable prices. H&M operated in 29 countries, through 1,300 stores. Gap Inc. is San Francisco, US based clothing and accessories retailer. Gap operated through more than 3,000 stores in 11 countries across the world.
4 3 2
Stacy Meichtry, “Benetton Picks up Fashion Pace,” The Wall Street Journal, April 10, 2007.
there were more than 200 Benetton stores across Europe.608-003-1 BACKGROUND NOTE
At the end of the Second World War. a famous architect from Italy. Benetton began producing jeans. In 1966. The Benetton family bought the Villa Minelli5 in 1969. He brought in a new store ambiance by eliminating counters. Italy. ‘My Market’ with pullovers and shirts. To manage the increasing number of clothing labels and its overseas operations. The first store out of Italy was opened in Paris in 1969. Giuliani was incharge of design.
The Villa Minelli is a complex of sixteenth century buildings in Ponzano Veneto. a silkworm farm and a World War II military base. In 1986. They started Benetton Group as a partnership in March 1965. a popular French clothing brand which had been launched in Paris in 1968. Over the past 500 years. this slogan became the logo of Benetton. selling and stocking the products. mainly Far East and China. as a result of corporate reorganization.
Sisley was aimed at the more fashion-conscious and trendy customer segments. he started a small business with his brothers Carlo and Gilberto. During the 1970s. In 1986. During the late 1980s. a hospital. Benetton was opening one store a day. trousers and shirts for juniors. and Carlo took care of the production. Benetton expanded into global markets. Benetton had different labels for various age groups. shirts and T-shirts. Luciano Benetton (Luciano) left school. Benetton ran a campaign titled ‘All the colors of the world’ after which the ‘United Colors of Benetton’ (UCB) slogan emerged. Later on. ‘My Market’ was designed by Tobia Scapa. Benetton had a presence in over 100 countries. Soon. In 1956. trousers and shirts. The first Benetton store was opened in 1968. and sister Giuliani. who were bored of outfits in plain colors. In 1984. and shirts mainly for women. Italy accounted for 39% of Benetton’s total sales. the Benettons hired French designer Lison Bonfils. high ceilings and original frescoes are of great historical and cultural interest. wide range of colors and affordable prices. the Benetton family set up Benetton International Holding headquartered in Luxembourg.
. In December 1985. By 1996. The stores were designed so that the same room could be used for displaying. Benetton bought the exclusive rights to use the name ‘Sisley’6. and started producing sweaters. The buildings with their large picture windows. a small town 30 kilometers north of Venice. which became the company’s head office in the mid-1980s. In the same year. US 15%. and ‘Tomato’ with pullovers. By 1978. in Ponzano Veneto. who later continued to design most of Benetton’s stores. The store in Paris did very well on account of its styles. an orphanage. in 1985. By the early 1980s. after the death of his father. ‘Merceria’ with pullovers. Other countries in the world 6%). to work in a clothing store. who worked with them for 10 years. Benetton set up the brand as an exclusive line in 1985. the Benettons launched their own line of sweaters under the label Trés Jolie. in several bright colors. It took architects Afra and Tobia Scarpa over 15 years to complete the restoration and modernization of the entire complex. the villa has been used as a monastery. trousers and shirts for children. on average. At that time Luciano was taking care of marketing. and Benetton was reorganized as a limited liability company. they opened their first store called ‘My Market’ which sold several collections including the newly introduced Benetton label. the company’s shares were listed on the Milan stock exchange. The bright sweaters immediately attracted the attention of consumers. Sales from the other markets stood at 61% of total sales (European countries 40%. France and Scotland. a bicycle repair shop. velvet trousers. the company adopted the name Benetton SpA. he sold these sweaters door-to-door. By this time. The labels were ‘0-12’ which had pullovers. Gilberto managed finance and administration. Initially. ‘Benetton’ with pullovers. Benetton had nine factories in Italy. In 1974.
Luciano said. A similar strategy was followed in the US where stores were opened on Fifth Avenue. through a network of international partners. In 1996. followed by Asia (12%) and the Americas (3%).
“Benetton Family Steps Back. Frankfurt.1 Americas 3. AIDS. textile and others. watches. In line with this strategy. the step back by the family will directly correspond to the reinforcement of the managerial structure with the entry of new managers. March 07. In the textile segment. 2003. cosmetics. Benetton designed. sports equipment.3 Asia 12. and accessories from Benetton. etc. Under the apparels business.”7 Benetton operated through three business segments. By 1990. As of 2006. in Benetton Group. into mega-stores. Barcelona. Benetton posted its first ever full year loss and in 2003. restaurants.000 stores of which 354 stores were operated directly by the company (Refer Table I for Benetton’s revenues by market). Capital punishment. Benetton revamped its stores in London. etc. In 2002. Benetton launched a magazine titled ‘Colors’ in 1990. which included apparel. and Prague. Among Benetton’s other businesses was production of sports equipment for third parties (Refer Exhibit I for different brands of Benetton).com. Benetton decided to increase the floor space of its existing stores.9 Europe (other than Italy) 36. Cultures. the company’s sales stood at US$ 1. caring for the elderly. In the mid-1990s. Benetton operated in more than 120 countries. apparel accounted for 93% of the total sales. which accounted for 5% of total sales in 2006.benetton. The magazine was available in four languages and addressed issues like smoking. under the brands UCB. manufactured and marketed apparel for men. Benetton produced and sold semi-finished products and raw materials. etc.7 billion. Undercolors and Sisley. women and children.com. which involved themes like Peace and War. “The responsibility of the managers has to be total.
. Benetton family decided not to involve itself in the day-to-day affairs of the company. Benetton was also involved in producing and marketing sportswear and equipment.3 Rest of the World 0. These stores offered a wide range of clothing. Vienna. stationery. In 2006. New York and in San Francisco. Italy remained the most important market for the company accounting for 48% of the total revenues in 2006. Benetton also diversified into other businesses like financial services.” www. Benetton’s largest store was opened in London.4
Source: www. Lisbon.608-003-1
Benetton became famous all over the world for its advertising. And I will go further. In the apparel segment. Benetton operated across the world through a network of more than 5. TABLE I BENETTON’S REVENUES BY MARKET (2006) Market % Italy 47. under the brands Killer Loop and Playlife. Other European markets accounted for 36% of the revenues.benetton.
and each consignment was provided a specific order number. Benetton used CAD (Computer Aided Design)8 to design its garments. finishing. To understand customer preferences better. and quality checking. and therefore could coordinate the activities among different contractors smoothly. Benetton had more than 200 contractors. furniture. The contractors had workshops employing anywhere between 30 to 200 people. Sisley. The first tier consisted of suppliers of raw materials and unfinished products. which undertook quality checks. With the existing software. and Playlife. The contractors were an integral part of Benetton’s supply chain and played an active role in the work being carried out. the contractors collected the material from the company. The tasks that were carried out by sub-contractors included labor intensive tasks like stitching.
CAD is a combination of hardware and software used mainly by engineers and architects to design wide range of products ranging from clothes. The design data stored on the computer was sent to the garment cutters. Through this arrangement. This arrangement provided Benetton the flexibility to operate in a highly competitive environment and lower labor costs. The company had a huge collection of all its previous designs stored in a video format. and several sub-contractors who worked to produce the garments as specified by the company. In many cases. fabric in neutral colors was then laid in layers and cut into the required pieces using a prototype. the company never entered into formal contracts with any of the contractors as the need to do this was not felt by either party. Benetton conducted in-store surveys and testing among customers. which operated as franchisees and agents. and also used computer aided garment cutting and assembly. the second group carrying out research on the fabrics and the third group responsible for graphics. In order to keep up with the trends. They designed collections for UCB. and designers often referred back to them. Once the designs were ready. from various backgrounds and cultures. The second tier had contractors and sub-contractors. While technically sophisticated parts of the garment manufacture process. Every day. to automobiles and airplanes. they returned the finished product to Benetton. Contractors received production planning support. Benetton stepped in to provide contractors with financial assistance to procure the required machinery. labor intensive parts were outsourced. and keeping tabs on the innovations happening in the apparel retail sector remained with the headquarters of Benetton. Benetton was able to maintain a high level of flexibility and low labor costs. and also had designers who essentially took clues from fashion shows across the world.
. The cut unstitched fabric was then sent to the contractors. and production plants.608-003-1 THE OPERATIONS
Benetton operated a three-tier model. Benetton built close relationships with its contractors. Benetton had a design center at Ponziano. The designers worked in three groups. They operated at a low volume and had low cost processes. Once the order was executed. and the third tier had retail outlets spread across several countries. and technical assistance to maintain quality. dyeing. with the first group taking care of the commercial aspect of the products. However. cutting. Benetton manufactured garments using a vertically integrated model. Design samples were shown to the sales force as well. and adapted some of them to clothes that would fit into Benetton’s price range. Benetton hired top designers. designers were able to create new designs choosing colors from a multiple-color palette. Benetton also encouraged employees to become contractors as they were aware of the quality and other specifications of the company. Italy. The design center had several designers. Killerloop. Some of the tasks that were carried in-house were weaving. were retained in-house. and ironing. The responsibility of designing.
Benetton owned 85% equity stake in Olimpias SpA. and to other countries. the shipments were sent by road and rail. As Benetton was sure about the quality of the supplies. leading to an increase in production capacity. could sort garments for more than 5. the garments were sent to around 5. The plant became fully operational in 1986. the plant covered an area of 190.000 Benetton’s outlets located across the world. with the remaining in other European countries and in India. As of December 2006.608-003-1
Another function that was centralized was purchasing. By 2006. Olimpias SpA9 (Olimpias). and carded and combed wool. but were much smaller in scale. investments in this plant continued through the 1990s. meters. the shipments were sent by air. could handle around 40. The shipments were sent directly to the stores in different countries. which was the main source of woven fabric. packed them into separate boxes. thus reducing the lead time. At the receipt bays. One of Benetton’s key suppliers was its subsidiary.000 consignments every day.000 sq. either fully or partially owned.000 square meters. the automatic sorting system in the plant. The company had around 180 suppliers who supplied the raw material.000 parcels. The distribution center had a storage area which was 170 meters long. and sent them to the distribution center through a tunnel that was one kilometer long. Benetton was one of the largest buyers of wool in the world. In 2006. The center was highly automated and operated in three shifts a day. every day. spread across 20. the plants were similar to the plant in Castrette. Benetton planned to invest in advanced production facilities in Castrette.000 boxes. addressed and barcoded from production areas were collected at the receipt bays below the ground level. At these locations. Benetton had a subsidiary. By 2006. Over the years. The storage area in the distribution center could hold upto 250. with around 19 employees. The distribution center handled about 6. Every year. However. the sorting system sorted more than 130 million hanging garments. In 1984. The complex had two plants . knit fabric. packed. Benetton operated through 18 factories. The finished garments. Apart from producing textiles. it bought the remaining stake from third parties.000 Benetton outlets. Italy. the distribution center. Of these. Benetton purchased about 62% of the materials used by the apparel segment from Olimpias and other textile companies within the group. (Refer Exhibit II for the details of the factories operated by Benetton). but directly managed by the company. From the distribution center.000 boxes both incoming and outgoing.
. Olimpias also functioned as a dye-house for the group companies. comprising of more than 12. The distribution center’s capacity to handle garments was gradually increased to 90 million items of clothing every year by 2002.one to produce cotton garments and shirts. By the year 1999. Benetton had gone in for vertical integration to consolidate its suppliers and ensure control over the quality and the supply of materials. from 43 million garments every year in 1987. 12 factories were located in Italy. they were scanned and using high speed conveyors were transported to the storage area above the ground level (Refer Exhibit III for the visuals of the sorting system and the distribution center). and the other to produce jeans and skirts. The building had around 20 loading and unloading bays. built on two levels. These subsidiaries coordinated
Till 2004. 80 meters wide and 20 meters high. In other countries where Benetton produced apparel.
PRODUCTION AND DISTRIBUTION
Benetton operated through production facilities which produced garments in high volume and with few varieties. To locations in Italy and neighboring countries. these could be sent directly to the production facilities from the suppliers. and in February 2004. below and above the ground. and capacity to produce upto 100 million units every year.
Benetton Croatia had workshops located at Croatia. in the 1980s. Earlier. who obtained a license from Benetton to sell its products. and offered the retailers support in terms of publicity. The agents acted as intermediaries between the stores in their region and the company. Romania. or royalty to be paid by the franchisees. most of the stores were typically of 400 sq. Czech Republic. from where they were sent to the final customers spread all over the world. Bulgaria and Moldavia.608-003-1
the production activities carried out by the contractors. These locations then decided on allocating the tasks to the contractors. For several years. All the items produced at other countries. WIDE dealt directly with air carriers and this eliminated the need for freight forwarders. As of 2002. Benetton’s stores’ turnover averaged twice as much as that of competing companies. and letting the company know the latest trends in a particular region. and would help in attracting more customers. where the needs of the retail market were catered to by agents. feet area while the stores of competitors occupied around 1. and they entered into agreements with the agents. Benetton’s franchise operations were quite different from other apparel manufacturers. Benetton operated through the model of direct selling through the third parties. Even so. To manage private air transportation. It was common to find several Benetton outlets in the same shopping street in several locations across the world. The outlets operated by the franchisees were also much smaller compared to those of Benetton’s competitors. were shipped back to Italy. The area managers reported to the commercial director. whose activities were supervised by seven area managers in the company. The company created an agency named Benlog to manage all its logistics. Benetton decided on what was to be produced at each of the foreign locations. But they needed to agree to stock and sell only products and accessories supplied by Benetton and also follow the guidelines provided by the company pertaining to display in the stores and pricing. In choosing the licensees. In order to address the issue of growing competition. and there was no license fee. This was done as Benetton was of the view that high number of stores at a particular location was equivalent to a good advertising campaign. resulting in consignments of garments. and commitment. Benetton transmitted the documents prior to the departure of the consignments to enable quick clearance from customs. in 1999. Ukraine. Poland. The foreign plants usually specialized in one type of product. especially those at the distribution center at Castrette. Benetton had more than 80 agents. and being sent back. selecting retailer locations. Benetton had faced several problems from freight forwarders and custom brokers. The agents were responsible for recruiting retailers. etc. The store owners did not have a formal agreement with the company. product selection. store location. production and distribution. Benetton decided
.500 sq. feet. another agency Benair was incorporated by Benetton. in which they had established their skills. Initially. training. Benetton’s subsidiary in Hungary looked after the activities in Hungary. Benetton established a joint venture – Worldwide Integrated Distribution Enterprise (WIDE) – to manage its international forwarding and custom clearance. The commercial director provided guidance about merchandising. Slovenia and Serbia. The agents were paid a commission of around 4% of the total sales in that region. reaching their destinations without adequate papers. processing retailer orders. showing Benetton’s collections in a particular region in a country. There was no written contract between Benetton and the franchisees. The company supplied clothes on a no-return basis.
Benetton functioned through a licensor–licensee relationship. This system helped Benetton to focus on designing. Benetton essentially looked for ability to develop the market.
which were changed frequently reflecting the new collections and fashion trends. one for each season (spring/summer and fall/winter). Benetton began producing the clothes.930 2. Then Benetton dyed the yarn in the required colors. for instance. Benetton decided to open its own retail outlets with area ranging between 10. considering the first 10% of the orders.149 5.608-003-1
to enlarge its stores to display a wider range of garments and accessories.932 1.157 1.307 5. and finished it to knit different parts of the garment. by asking for different colors from the ones originally ordered.com. the final designs were decided in March of the previous year. In July.217 Other Europe 2.270 2. The store owners could place orders for the new designs till July.ft.
THE POSTPONEMENT STRATEGY
Every year Benetton came out with two collections.240 5. From August till December.999 1.095 2. They were then stored to be sent to the retailers.
. The collection primarily comprised of a base collection10.benetton. different parts were joined. By January.256 2.911 5. In the main shopping districts of prominent cities across the world.865 1. which included the classic items.095 4.359
Source: www. and garments according to the prevailing trends. the garment manufacture process began with spinning or purchasing the yarn. The company felt that by owning and managing retail outlets it could get firsthand feedback from the customer (Refer Table II for Benetton’s Franchise network).085 Americas 294 259 262 286 282 288 273 Asia 699 606 585 539 537 726 743 Other 19 16 90 82 27 38 47 Total 5. In its initial model.200 2. or focus only on one range in its smaller stores. This model had a disadvantage as any change in the demand could not be met immediately and the lead times for making the garments were long.167 2.000 sq. TABLE II BENETTON – FRANCHISING NETWORK 2000 2001 2002 2003 2004 2005 2006 Italy 2. To develop the final product.202 2. The base collection includes basic and Benetton classic items and other items.
Base collection is the main collection within spring-summer and autumn-winter collections and is the first collection to be designed and presented to the clients. For collections that were to reach the stores in January every year.206 5.200 2. The stores had large display areas.000 and 20. about (80-90%) of all items ordered were made available at the stores to meet customer demand (Refer Table III for estimated time taken to market Benetton’s Base Collection). the stores could modify their orders.
in some cases every month. it had a few drawbacks.
During the late 1990s. started demanding new products more often . but just stored as it was. Each fashion season generally began with ten alternative colors of which only two or three recorded high demand. Benetton failed to keep pace with the changing fashion industry. Benetton was able to gain a competitive edge over the other players in the market. The bright colored clothes. The agents provided Benetton information about the demand. The orders from each area were analyzed. as by then most of the next season’s stock was ready. Since the popular colors get sold during the first ten days. At that time.
In order to be more flexible. the next step was to manufacture the garment parts and then join them. the challenge was to address the needs of this segment of customers. and the customers. For Benetton. most of the stores did not have much idea about the upcoming fashion trends. Benetton lacked clear positioning and could not maintain the ‘cool’ factor with which it was earlier associated. the garment was dyed in the required colors and then shipped to the retailers. where it postponed dyeing of the garment. In 1964. Buyer behavior changed drastically. along with a dye specialist arrived at a method of dyeing wool11. In case of wool. for which Benetton was famed. and using this. Luciano. Only after the final demand was assessed. especially younger customers. were no longer unique to Benetton. which can shrink the garments. This method allowed Benetton to ensure minimum obsolete inventory. replenishment schedules for the garments were drawn up and the colors were chosen.com. and retailers whose orders differed widely from those in the same area were informed of the trends and new orders were obtained.608-003-1
TABLE III ESTIMATED TIME TAKEN TO MARKET BASE COLLECTION Process Time Cumulative (in weeks) (in weeks) Designing collection & producing samples 8 8 Orders by shopkeepers / partners 1 9 Purchasing raw material (wool/cotton) 1 10 Manufacture and purchase of materials (spinning cotton. The emerging trends during the closing of the season could not be used. However. producing yarn. Customers were spoilt for choice with several retailers like Zara and H&M offering the
While dyeing fabric. Benetton required the network partners to place most of the orders around eight months in advance. The new process also began with spinning or buying the yarn. Compared to the competitors.cazenove. colors can be added at any stage. The feedback from the customers was also not incorporated. Unlike in the earlier process. That was the time when ‘fast fashion’ had emerged and made a huge impact across Europe. where sweaters could be dyed after they were fully made. here. it provided the company an opportunity to respond to the demand on time. Benetton came up with a new manufacturing process. As Benetton delayed dyeing the garments. colors are added to the yarn as dyeing wool required high temperatures. The garment was not dyed.
. resulting in dwindling profitability. weaving) 10 20 Manufacturing garments 6 26 Printing & Dyeing 2 28 Delivery to logistic hub 1 29 Transport from hub to shops 1 30
Adapted from www.
There were several other factors which contributed to Benetton’s poor financial performance.098 billion in 2001.
InterCorporate is Milan. Armando Branchini.”12 While Benetton had several in-house designers and a few consulting designers. 2003.
“Has Benetton Stopped Unraveling?” BusinessWeek. Due to growing production costs and production not being decentralized. in other activities like providing new designs. One was the company’s limited collection – just two new collections a year. Analysts blamed the company’s commercial strategy for the lack of support from the franchises. and it could not obtain real time data from all its stores as it did not have much control over retailing carried out by third parties. “The Benetton brand is out of fashion. presented only two collections every year. Zara and H&M. In some locations where Benetton has opened its own megastores. According to Sagra Maceira de Rosen. 2003. While in some activities like dyeing. the franchisees experienced declines in sales and profits. it was far behind. According to industry experts. Italy based consultancy that provides strategic advice and execution support for companies in Italy and abroad. on the other hand.
. Retail Analyst at JP Morgan Chase & Company in London. June 23. The company’s lead time to manufacture garments was much longer than its competitors. when it came to retailing it relied mostly on franchisees. the margins remained flat. The problem is that 93% of Benetton’s sales come from franchise operations. at affordable prices. Moreover. June 23.14 The problems had an adverse affect on the revenue growth and profitability of Benetton. The franchisees were not happy with the company as they were not earning as much as they had been earning a few years earlier. who in turn got the feedback from stores about the sales trends. it was the base collection that fulfilled around 80% of the total orders. “They are manufacturers. Benetton obtained point of sale data only from few stores. Most of Benetton’s production took place in Italy and Europe. while in downstream.
“Has Benetton Stopped Unraveling?” BusinessWeek. in contrast. Within these two collections. as several customers had switched to other branded apparel. The number of stores reduced from 5.100 stores in 2003. Benetton had to rely on orders provided by the franchisees and agents. They offered them trendy designs. which makes it easier to install unified systems that track global sales electronically. competitors like Zara had hundreds of designers producing thousands of designs each year.992 billion in the year 2002 as compared to € 2. Benetton. Benetton did not receive the required support from its franchisees who found their performance dwindling. own their shops.608-003-1
customers more than just colorful clothes. Benetton was ahead. not retailers. Commenting on Benetton’s problems. with about 12 collections a year (almost one a month). Benetton reported a decline in revenues to € 1. They need to make the move to more professional retail management.300 stores in 2000 to around 5. and the prices were comparatively high. the company reported a loss of € 10 million as compared to profit of € 148 million reported in the year 2001(Refer Table IV for Benetton’s financial performance from 2000 to 2003). it did not have any control over their activities. It lacks a clear position. President InterCorporate13 said. This led to low volumes and Benetton’s core apparel business continued to struggle. As most of the stores were not owned by Benetton. Benetton’s vertical integration was limited to upstream activities.
This forced Benetton to sell the division in 2002. He said. Benetton delocalized its production to Asia and Far East. reorganizing operations and logistics. They want a brand they can trust that is young and colourful. Flash collection is smaller than the base collection. Cassano was of the view that in order to revive the company’s operations. Benetton acquired control of Benetton Sportsystem15.686 929 757 653 317 217 123
2003 1. In 1997.” The Times.”17 Some of the production activities were shifted to locations where the production costs were lower. It had several known brands: Nordica. Kästle (ski equipment). The main aim of flash collection is to complete the base collection by bringing in specific themes that were presented after the base collection. Benetton’s sports equipment division failed. Benetton family’s holding company. and these would be delivered within one to two weeks.098 1189 909 776 398 286 148
2000 2. the needs of the franchise network had to be addressed. and restructuring commercial policy. where stores could order the products on demand through the Internet. for the items with long shelf life. Cassano announced that Benetton would not go in for price reductions. revenues were no longer sliding down rapidly. At the same time. In December 2003. Rollerblade.
16 17 18 15
Ingrid Mansell. where the base collections were produced. in the form of flashcollections18.
Benetton also faced lot of competition from Zara and H&M who were making their presence felt even in Italy. colorful brand. This was known as Delocalization. Rollerblade (in-line skates).
“Has Benetton Stopped Unraveling?” BusinessWeek.992 1124 868 744 376 243 (10)
2001 2. “We talked to our customers and found they didn’t want us to change. Latin. 2003. he came out with a concept of ‘continuous collection’. leading to deterioration in quality and reduction in market share. where the production activities were transferred from Europe to other locations. the company was not able to effectively manage most of these brands.859 1049 810 696 335 232 108
2002 1. He planned re-assortments. from Edizione Holding. but instead concentrate on improving quality. He decided to refocus on the core apparel business. and this was generally used as a measure to control cost. “Benetton Shuns ‘Sterile’ Price War with Zara. 2000-04. According to Cassano. the company’s revenues were looking better – though there was no upturn. with write-offs amounting to US$ 190 million. Silvan Cassano (Cassano). and Killer Loop (snowboards). June 23. warm. Within a year.”16 Cassano concentrated on refocusing the company’s efforts on its core business.
. Cassano decided to spend US$ 640 million to give some of the company-owned stores a facelift. December 10. for which he acquired Prince (tennis rackets). In May 2003. Kästle and Asolo. “We have to go back to being a friendly. Cassano announced a business plan aimed at increasing the profit by 40% over the following four years.018 1138 880 740 400 309 243
Source: Benetton Annual Report. Benetton also introduced a wide range of
Benetton Sportsystem was a result of Luciano’s diversifications into sports. was named CEO. We just have to jazz things up a bit. 2003. Prince. However. The collections that needed to be delivered quickly were produced in Europe. And in another major setback.608-003-1
TABLE IV BENETTON FINANCIAL PERFORMANCE
Revenues Cost of Sales Gross Operating Income Contribution margin EBITDA Income from Operations Net Income / (loss)
2004 1. taking a heavy toll upon the company’s performance.
This hub enabled Benetton to provide better response and customer service in the markets like China. Far East and the US. and to keep with the latest fashion trends. Cassano studied closely the business models of Dell.000 square meters and had a capacity to produce more than 3. Benetton brought out more collections per year and maintained the novelty of products by introducing new designs in accordance with the changes in demand. Japan. ‘Evergreen’. The company also ran a parallel operation in Asia. and other successful retailers and decided that obtaining information about demand and sales from the stores on time was far more important than owning the stores. A dual supply chain has a better ability to respond to changes in demand and to balance activities like production. The ‘Just-in-Time’ collection brought out between two months to two weeks before the sellout date incorporated the latest trends. stores across the world could bring in new clothes to meet the demands of customers. In this system. with sourcing mainly from India and Hong Kong. Before revamping Benetton’s logistics system. production was carried out in different locations depending on the time required to market the product. New trends in the fashion world were incorporated into the garments through minor adjustments. These were based on the main trends as highlighted in various fashion shows and were sent to the stores at the beginning of the season. and Eastern Europe.
THE DUAL SUPPLY CHAIN
In 2004. and this production line supplied to the local lines. The second collection was known as ‘Contemporary 2’ and was made six to four months before the season. This was generally used for supplying garments which were ordered by the franchisees before the beginning of the season. was brought into stores one to two weeks before the season began and consisted of base items
. In 2004.a combination of the pull. An integrated dual supply chain was used for clothes that were delivered during the season. the focus was not on minimizing the cost but on serving the customer with trendy wear. sales. The integrated dual supply chain catered to pull focused demand. Wal-Mart. a new logistics hub was inaugurated in Hong Kong. Benetton could respond to consumer preferences much quicker. This was used mainly to top up the existing seasonal collections during the same season. By delocalizing the production processes. Benetton began implementing its dual supply chain model. The first collection called ‘Contemporary 1’ was made eight to six months before the season. Benetton had production platforms in Italy. Franchisees and partners were provided incentives to refurbish their stores and open new ones. Through the dual supply chain. The third collection was called ‘Trends’ and was ready four to two months before the season. Through this collection. In this approach.6 million kilos of knitted fabrics every year. and product design.and pushdriven approaches to meet the demands of consumers. Tunisia. Under Cassano’s leadership. Using this system in Benetton. The last collection. these items needed to be in the market within a very short timeframe. After the implementation of the dual supply chain system. The € 20 million factory in Tunisia was spread across 15. A sequential dual supply chain acted on push focused demand. each of Benetton’s seasonal collections was made up of five kinds of collections. Benetton introduced the dual supply chain system in 2004 . It had around 70 employees at its Hong Kong sourcing hub (Refer Exhibit IV for Benetton’s dual supply chain). the clothes were made taking into account the demand from customers and the inputs from the sales force. In Europe. The dual supply chains Benetton used were of two kinds – sequential dual supply chain. The dual supply system operated in Italy and in other delocalized locations. and integrated dual supply chain. The facility in Tunisia manufactured cotton-knit fabrics. The hub in Hong Kong and the one in Italy were coordinated through a centralized IT system. to customize the product deliveries across different destinations.608-003-1
accessories and started focusing on men’s clothing.
This unit also worked to reduce the time taken to restock stores. Russia. as it was now able to compete better and bring in more up to date collections. Information about the best selling products went directly from the stores to the commercial forecasting department. daily reports on the sell out data from selected stores were sent to the headquarters. In 2004. In 2006. and to offer new collections every four weeks. up by 8.
The dual supply chain helped Benetton offer new products to its customers on a continuous basis. and built the capacity to ship clothes every two weeks.27% over the previous year. Benetton was considering having more hubs across the world in order to move from a centralized logistics system towards satellite logistics. and South American countries. This unit rationalized the collections and reduced the number of articles. With the dual supply chain system in place. which were topped up by Just in Time and Evergreen collections. Moreover. Benetton divided the inventory shipments into smaller lots. From mid 2004 on. Till 2003. which had not been possible before. In 2006. Benetton added two hubs in China. Benetton maintained higher inventories for the ‘Evergreen’ collection. one in Shanghai catering to the Chinese market and the other in Shenzhen.
. which worked towards connecting product operations and sales units. The department carried out analysis of the total sales and used the data to plan production. Benetton saw that the garments reached shops within a week in Italy and within fourteen days in the other parts of the world. Base and Trend collections were presented. Benetton reported a net profit of € 125 million. for the European market. so that it could ship them on time across the world. Benetton benefited greatly from the new system.91 billion.608-003-1
with recurring sales and season specific items (Refer Exhibit VA for delivery schedule of UCB and Exhibit VB for the delivery schedule of Sisley). which were designed to address the day-today needs of the consumers. The company was also looking at alternative production centers in South America to cater to the local markets. Benetton considered India. The company was able to maintain the sales momentum even after the season by minimizing the time to market and offering products based on demand pull. The unit came up with ‘nice price’ articles. There was a slight difference in the supply schedule of Sisley. The dual supply chain was implemented for other clothing brands of Benetton like Sisley. up from € 112 million recorded in 2005. Benetton set up a Product Development Unit. Benetton was able to balance time to market and cost. During each season. It could also deliver garments in a week if the demand arose. This was the company’s best financial performance after many years (Refer Table V for selected financial data of Benetton). as the markets with strong potential. China. daily sales data from all the stores including foreign subsidiaries was sent to Benetton headquarters. The network partners were also enthused to expand their commercial networks based on this success. Total revenues during the year stood at € 1. The franchises had to use an Internet-based platform to order items under the ‘Evergreen’ selection. This led to better sales and profitability.
According to Vincenzo Scognamiglio. April 10.
. 2007. In the process of being fast. 2005-06. There is just the rush — you have to score that goal!”19
In recent years. Their say in designing new styles and bringing in new trends has become limited.765 995 770 643 285 157 134 112
Source: Benetton Annual Report. In the past it was easier to do the collections.608-003-1
TABLE V BENETTON SELECTED FINANCIAL DATA
(In € Millions)
Revenue Cost of sales Gross operating income Contribution margin EBITDA Operating profit Income before taxes Net Income
2006 1. “Benetton Picks up Fashion Pace.105 806 669 276 180 159 125
2005 1. “Time is my enemy. The latest trends from major fashion shows across the world are seen and within days. The information dissemination about new fashion trends through media like television has created instant demand for the latest products.911 1. the global fashion industry has experienced a huge shift from being creative to being fast. creativity is taking a backseat. because there was tranquility … Now the tranquility is gone. Chief Designer at Benetton. apparel companies are expected to be ready to bring new designs into their stores. However.”The Wall Street Journal. bringing new designs in quick time at regular intervals means not enough time for the designers employed by the companies.
and placed it in the lifestyle casual apparel segment. Sisley is priced at a premium compared to UCB (around 20%). from 2003. Killer Loop Killer Loop is targeted at young consumers of 14-27 years of age. kids wear.
. UCB planned to launch a collection for men called ‘UCB Man’ which would consist clothes. Though it had good response in the earlier years.
Compiled from various sources. Playlife accounted for around 1% of the net sales of Benetton in 2006. Benetton expected to expand the brand further and add a children’s line under the name – Sisley Young. In the years to come. Killer Loop did not fare particularly well. Benetton changed Playlife’s identity and positioning.608-003-1 EXHIBIT I BENETTON – BRANDS
United Colors of Benetton UCB is the brand under which Benetton began selling the garments. and consists of urban and sports apparel. UCB’s eyewear and perfumes are also quite popular. Sisley Sisley accounted for 19% of Benetton’s total sales in 2006. It accounted for more than 79% of the apparel sales in 2006. In 2006. This is promoted as a high quality-high price product. In 2005. The brand was to create synergies with the company’s sports equipment business. shoes and accessories during Fall-Winter 2007. Playlife Playlife was created to produce merchandise sportswear for customers in the 20-40 age group. The first store of the newly positioned brand was opened in Milan. Sisley extended into home textiles with the launch of ‘Sisley Casa’ and Benetton expected to sell the line through department store chains apart from its own retail network. and could not establish its identity in the highly competitive sportswear market. UCB is a causal wear brand and consists of adult wear. where it does not have many competitors in Europe. and knit wear.
608-003-1 EXHIBIT II BENETTON – FACTORIES
Country Surface Area Core business / (Sq.Meters) Products Castrette Italy 92800 Woolen dyeing. sports shoes and equipment Osijek Croatia 17000 Woolen garments. weaving.900 Control quality
Source: Benetton Form 20-F. weaving.
. washing Labin Croatia 7000 Weaving Gurgaon India 5400 Cotton garments Sibiu Romania 1. Fabric labels (production) Travesio Italy 20500 Weaving Soave Italy 18800 Dyeing Grumolo delle Abbadsee Italy 17800 Dyeing Piobesi Torinese Italy 15500 Dyeing Caserta Italy 14500 Woolen yarns Prato Italy 10500 Woolen yarns Follina Italy 9800 Dyeing Prato Italy 8300 Woolen yarns Vittorio Veneto Italy 6500 Spinning Nagykálló Hungary 26600 Garments. dyeing. packaging Ponzano Vento Italy 22400 Washing. dyeing. dyeing Sahline Tunisia 11100 Cotton garments.
press.608-003-1 EXHIBIT III VISUALS OF SORTING SYSTEM AND DISTRIBUTION CENTER
.com.cazenove.608-003-1 EXHIBIT IV BENETTON’S DUAL SUPPLY CHAIN
EXHIBIT VA UNITED COLORS OF BENETTON – DELIVERIES TO STORES (2007)
May Jun Jul X X X X Aug Sep Oct Nov Dec
X X May X X X X X X X X X X Jun Jul Aug X X X X X X X X X
X Sep Oct Nov Dec X X X X X X X X
Spring / Summer Jan Feb Mar Apr X X X X X X X X Evergreen X Spring Contemp 1 X X X Summer X X Spring Contemp 2 X Summer X X Trend X Just in Time Autumn / Winter Jan Feb Mar Apr Evergreen Contemp 1 Autumn Winter Contemp 2 Autumn Winter Trend Just in Time
EXHIBIT VB SISLEY – DELIVERIES TO STORES (2007)
Spring / Summer Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Spring X Base X X Summer X Spring Trend X X Summer X X X X X X X X X X Just in Time Autumn / Winter Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec X X Base Autumn X X Winter X Trend Autumn X X Winter X X X X X X X X Just in Time