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Managing Supply Chain Risk: A Comparative Case Analysis

Olorunfemi Oladayo
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July, 2014.
Executive Summary
Separating Supply chain strategy from Business strategy is unsustainable and transform
to hazard risk in the long-run. For some global businesses that focus on Agile supply
chain strategy and in-house distribution channel or retail stores requirements for quick
response to market-place expectation and unique branded-product varieties, the end
result or impact on survival is a deficient working capital base along and across the
supply chain upstream. To reshape strategic management thinking, the worst case
scenario is to implement an aggressive transpose (shift) of agility processes to lean
supply chain process in the short-run. For operational managers, its critical to address
the financial constraints relating to working capital problem that causes supply chain
headache, more importantly in areas of logistical limitations and global sourcing
strategies. For Top management that intend to restructure their agile supply chain and
also get the business out of the crisis, adaptability strategy in terms of sensitivity to
global sourcing cost should be used as managerial approach, this will help to enhance
overall flexibility and competitive relevancy of the companies to changes in
unpredictably demand in the market place.



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Head of Research and Development. DWIPS Technology lokoja Nigeria. Many thanks go to the undisclosed lagos
based sponsors of this project, and to my brother Rotimi Olorunfemi, for his role of editing and standard
referencing efforts and contribution to this paper.
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Introduction
To achieve the right supply chain for a product with global coverage, the hypothesis
decision begins with the opportunity cost to determine appropriateness of quick
response and reduction of waste in the production/supply process. Fundamentally, in
order to diagnose business problem of right or wrong supply chain or issues concerning
balancing supply to demand decisions made by Top management team, the
commentators framework of product dimensions and design of value for customer
backwards (Fisher, 1997; Christopher et al, 2006) is the measurement threshold. This
translates to finding the supply chain solution that best fits or satisfies demand in the
market place. Notwithstanding, the ideal supply chain cannot be divorced of risk in the
long-term. This perception is traceable to Tang (2006); according to his connotation the
management of supply chain risks through coordination or collaboration among the
supply chain partners so as to ensure profitability and continuity (Charles et al, 2014).

Review of Related Literatures
Supply chain management (SCM) is responsible for the movement of materials all the
way from initial suppliers through to final customers. Supply chain risk appears as any
event that might affect this movement and disrupt the planned flow of materials. One
adaptation of risk definition put forward by Zsidisin (2003) states: the potential
occurrence of an incident or failure to seize opportunities with inbound supply in which
its outcomes result in a financial loss for the purchasing firm (Cited in Charles Mensah et
al, 2014). Hopkins, (2010) asserts that organizations face wide range of risks that can
impact the outcome of their operations. Therefore, the events that can impact an
organization may inhibit what it is seeking to achieve (hazard risks). The goals of SCM
are to reduce uncertainty and risks in supply chain, thereby positively affecting the
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inventory levels, cycle time, processes and ultimately, end-customers service levels
(Guiffrida and Nagi, 2006).

Conceptual Framework: Matching Supply Chain with Demand Patterns of Products
Global measurement to determine the reliability of a company supply chain that is well
aligned to range of products and target markets (geographical location driven by
customer demand & ability to afford product type) hinges partly on sustainable
business model on one hand and sustainability of supply chain process on the other
hand. Following Fisher 1997 proposition, the first step before devising an effective
supply chain strategy is to consider the nature of the demand for the products that
ones company supplies. Fisher emphasizes specific aspect of variability in demand to
classify generic products into two distinctive dimension of functional or innovative
product type. Functional products threshold he tag as predictable demand and wide
variety (brands), with possibility of profit margins eroding due to high competition in
the market place (Fisher, 1997). By contrast, innovative products have attribute of short
life-cycle, unpredictability of demand inclusive of high profit margin tendencies.
However, a globalized lead time issue (delays in product delivery owing to
transportation/logistic problems) is nonetheless an incremental cost function that is
integral to devise a sustainable and optimal supply chain for a product.
Consequently, this differential /partial or incremental cost can be related to the
aggregate cost functions in terms of physical cost and market mediation cost function
echoed by Fisher in his supply chain model. Physical costs are the costs of production,
transportation, and inventory storage. While market mediation cost arise when supply
exceeds demand and a product has to be marked down to be sold at a loss (Fisher,
1997). An example of fashion companies that needs to focus on market mediation costs
is ZARA manufacturing and retailers, as well as ASOS online retail shopping firm. ASOS
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is renowned for speed and online marketing focus majorly on women outfits using web
centric product content management (enabler technology) and emails to respond
quickly to customer order & demands. In contrast, due to physical costs in terms of
downstream logistics integrated with global fashion industry competition, Zara strategic
managers had to markdown unsalable product price by 50% on average; this decision
had significant adverse impact on operational working capital as a major breakdown to
supply Chain management and timeliness of procurement decisions (Galin Zhelyazkov,
2011). Although according to Zhang (2008) the main duty of ZARAs designers is not for
product innovation, but for reorganizing fashion elements of the existed products on
their purpose, transferring them into new kinds of products. This implies that product
modification is a business strategy often utilize as counter product innovation strategy
for quick response to demand with high profit margin in the market place.
Speed and responsiveness are more important than cost. For Zara, its supply chain is its
competitive advantage. Says Berfield et al (2013, November 14), Bloomberg BusinessWeek
Types of Supply Chain Strategies and Competitive Philosophy
An agility supply type is concerned primarily with quick response and significantly about
the ability to match supply and demand in turbulent and unpredictable markets (Matrix
in Figure A below). Essentially, it is about being demand-driven rather than forecast-
driven (Christopher et al, 2006). Meanwhile lean philosophy which originated from
Japanese Company (Toyota Production System) and management thinking aligned with
competitive strategy is based on the reduction or elimination of waste (muda) through
lean process (plan & optimize) predicated on the efficient use of resources through level
scheduling (cited in Christopher et al, 2006).



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Figure 1: Matrix of Generic Supply Chain Strategies (Christopher 2005)

Source: Adapted from Balkan Cetinkaya et al (2011)

At the dawn of a new millennium, fundamental suggestion was made by Professor
Martin Christopher in the year 2000. His postulation that lean concepts work well where
demand is relatively stable and hence predictable and where product variety is low.

A good example of agility is the case of Zara, the Spanish fashion garment manufacturer
and retailer. No doubt, Zara agility is sufficient for competitiveness in fashion industry.
One signal of flaws or weakness of global Businesses in the game of supply chain
strategy is the consistency of negative working capital for annual operations. However,
Top management at INDITEX group (Zara label + chain stores) attributed this adverse
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impact to corporate business models utilized to drive both sales and profit upward. A
deficient working capital base is a symptom of insolvency (the short-run inability to
make regular payment to internal and external suppliers as at when due
is observed as a supply chain risk). In this case, across the supply chain process,
outsourcing decision therefore becomes a postponement technique relevant in order to
achieve flexibility regardless of uncertainty embedded in demand forecasting (control
risk).

Waste is producing a product the customer doesnt want. You need to be lean to be
agile. (Cited in Zurich help point report, 2011)
Conversely, For example, Christopher develops the matrix (see figure 1) of possible
supply chain strategies by specifying supply characteristics according to the lead time of
stock replenishment, and demand characteristics by the demand forecast of the
products (Cited in Balkan Cetinkaya et al, 2011)

Comparative Case: ZARA versus ASOS Supply Chains in Fashion Industry
Both Zara and ASOS companies are well known for agility (quick response). Yet, they
differ in terms of competitive philosophy because high proportion of physical costs is
peculiar with horizontal integration strategy (in-house retail stores growth in Zara)
where tornado for logistics and lead times is heavy and significantly impact the supply
chain and cost of goods sold. By contrast, vertical supply chain integration (outsourcing
decision) helps ASOS (global online fashion & beauty retailer with Central Distribution
Centre in the United Kingdom) to gain more flexibility in areas of physical costs, quick
response to order /target market and also mitigate risks relating to global logistics
issues which are properly managed through fast delivery by courier services firms
worldwide. Although, investment made in internal delivery proposition as at 2012 by
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ASOS executives have driven distribution cost upward, accounting for increase in
physical cost due to increased customer order number (demand) international.

You dont want to carry inventory of finished products. Then keep it flexible, and keep it
generic. Therefore product are pulled through the supply chain, rather than pushed. Says
Prof. Martin Christopher, Cranfield University
Following deductions from the two graphs below, the visibility of information provides
possible solutions that unpredictable demand of fashion out-fit or style in the global
market place tends to require addressing issues of over-stocking of finished goods (see
exhibit A).

One fundamental cause factor of difference in finished goods for resale (see
exhibit A) is that, ASOS has a global market penetration (customer base) in 190 markets;
compared to 87 markets coverage for INDITEX as at 2013 annual report. If agility
Source: Consolidated Notes to Financial Statement and Balance Sheet Extract 2005-2013 (INDITEX and ASOS Comparison)
-840.345 4159.655 9159.655 14159.655
2005
2006
2007
2008
2009
2010
2011
2012
2013
Exhibit B: Annual working capital base
(Million Euro value)
for Sustainable Supply Chain
Asos: Operational
working capital
Inditex:
Operational
working capital
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
0
20000
40000
60000
80000
100000
120000
140000
160000
2005 2006 2007 2008 2009 2010 2011 2012 2013
Exhibit A: Agile technique- Make to Stock
Finished Inventories for sale (Asos)
Finished Inventories for sale (Inditex)
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technique (make to stock) produces a negative working capital base consistently as can
be found in INDITEX (Zara label & retail chain stores) group, then a review of supply
chain strategy become paramount. Make to stock technique is equally administered by
ASOS Company. But ASOS have significantly improve her annual operational working
capital base since 2010-2013 (see exhibit B). Hence, Ineffective working capital
management has direct linkage to the supply chains in terms of long-run threat to
business continuity. Rethinking on the right supply chain for Zara and ASOS range of
products in the market place can therefore not be overemphasized. However, the
pursuit of order driven strategy matched with agility or quick responses to customer
demand, is critical for operational breakthrough and control of negative/deficient
working capital base (see Exhibit B) in the long-run, rather than forecasting demand for
all range of products supplies.

Discussion of Findings
Bruce and Daly (2006) assert that fast fashion does not apply to the whole range
in stores, and as much as 80 percent of goods may be core and basic lines, with fast
fashion accounting for up to 20 percent. In this case, cost adaptability is required for
survival. Adaptability strategy is in terms of sensitivity to global sourcing cost behaviours
(fixed & variable cost) towards enhancing overall flexibility and competitiveness.
One example of adaptability approach for apparel (relative stability in supply)
maker strategist is to mix lean supply chain and product-push strategy (marketing
decisions) for finished goods of inventory. This is essential for Zara and ASOS daily
commodities (zero or less customization level) like underwear, basic t-shirts, sweater and
socks with lower manufacturing cost. On the other hand, a demand-pull strategy and
responsiveness (agility supply chain) to customers is right for the high-end customized
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trendy Zara labels like Zara RTF, following differentiation strategy requirements in
competitive environment as echoed by Michael Porter (1985). This approach is a
prerequisite that can sustain a long-term supply chain strategy that is well aligned with
generic products and markets. Corroborating Christopher et al, (2006) argument that for
many so-called commodity items the lower manufacturing costs may well outweigh
the higher costs of transport and the longer lead times due in part to the greater
geographical distances covered. He stated further that low-cost off-shore sourcing
strategies can end up as high-cost supply chain outcomes (Christopher et al, 2006). To
this end, in-house retailers distribution channel & logistics cost cannot be minimized in
the short run.

Based on financial mathematics axiom of high return and high risk factor, one example
of supply chain efficiency is the ratio of sales per cost. For INDITEX & ASOS Group
Comparison, the story is indifference because there is a perfect correlation coefficient (r
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= 0.9692, 0.9933) between annual sales performance and cost of goods sold.
Approximately on average, every 2.5 or more returns from retail stores is a cover for 1
cost of sales in INDITEX 2010-2013 (see exhibit C). In contrast, an improved efficiency is
observed in exhibit C1. Every 2 or fewer returns from retail can cover 1 cost of sales in
ASOS operations.
In summary, managing supply chain risk effectively in practice will always
produce theoretical gap. Hiroshi Katayama and David Bennett (1999) in their case study
of 10 relatively large manufacturing companies in Japan, with objective to measure
competitive priorities in relation to agility, cost adaptability and leanness comparison,
the researchers finding revealed that - the distinctive agility-related priorities in most
companies are introduction of new products quickly and offering a broad product
range, which could be summarized as a product-focused direction. However, the critical
issue for agility is a company-wide ability to respond quickly and efficiently to customer
requirements (Katayama and David Bennett, 1999).
For operational managers, its critical to address the financial constraints relating
to working capital problem that causes supply chain headache, more importantly in
areas of logistical limitations and global sourcing strategies. Using this premise, another
approach to devise ideal supply chain for generic products is the integration of business
strategy/models with supply chain strategy, rather than separation. Without cost
adaptability, the agility strategy in the instance of Zara had adverse consequences. This
equates to a deficient working capital base along and across the supply chain upstream.
Also, it contradict derivable benefit of supply chain cited in literature by Mujuni Katunzi
et al, (2011) as major reason for firms to engage in supply chain activities is in response
to threats and overtures from competitors, both domestic and global.
Finally, Top executives need to think beyond agility versus leanness and move
closer to adaptability decisions because of the managerial sense that downward
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pressure on price (cost) will continue to be a real issue in deflationary market conditions
globally.

Conclusions
Although Sustainable supply chain in practice is beyond financial perspectives focus that
is used in this comparative case study, financing operational and global logistics cost
along and across supply chain is a key performance indicator of impact mitigation of
hazard risk and generic supply chain breakdown. Selecting the right supply chain for
companys product in the market place is the first step, financial and sustainable
response to customers profitably is the next direction which is often neglected in
crafting sustainable supply chain decisions in global business environment constrained
by uncertainty and risk.










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