Sector Update: Textile and Apparel Industries Transforming Enterprise January 28, 2003

1. Sector Update:Textile and Apparel IndustriesTransforming EnterpriseJanuary 28, 2003 Jan Hammond Harvard Business School

2. Industry Overview: Bases of Competition • Price/Cost • Overcapacity, retail consolidation. • Prices dropping: e.g. 1994 – 2002, CPI up ~23% • Women’s/Girls Apparel price index down ~13% • Quality • Look, feel, durability... • Fashion • Short product life cycles, unpredictable demand • Variety • Closets are full: consumers need a reason to buy

3. Product Proliferation Forecasting Uncertainty • Lean Retailing • Weekly+ replenishment • Small order quantities • Short lead times Inventory Risk Short Product Life Cycles • Technological Enablers: • Barcodes and Scanners • Product level identification • Shipping container identification • EDI & Internet • Automated Distribution Centers Competitive Impetus for Lean Retailing with Technology as an Enabler Need for New Supply Channel Management Models & Practices

4. Apparel Plant 1 Retail Store 1 Manufacturer’s Warehouse Large Bulk Shipments Retailer’s Warehouse Retail Store 2 Apparel Plant 2 Retail Store m Apparel Plant n Low Frequency Retail Order Channel Structure: Lean Retailer-Supplier Dynamics Retail Store 1 Apparel Plant 1 Small Replenishment Shipments Manufacturer’s Distribution Center Retailer’s Distribution Center Retail Store 2 Apparel Plant 2 Retail Store m Apparel Plant n Weekly Orders Channel Structure: Traditional Retailer-Supplier Dynamics

5. Source: Standard and Poors, 2002

6. Distinctive Aspects of Industry: Factors Affecting E-Commerce Adoption • Difficult to specify key aspects of product • Fit • Color • Touch and feel • Reviews by customers, industry experts, independent performance evaluations not as helpful • Emotional aspects to purchase • Brands help (somewhat) • Some product categories easier: • Basic products: • More familiar touch, feel, and fit; • Less expensive • Less important emotionally • Product with clear sizing standards

7. Business to Consumer

8. Evidence of Industry Challenges (B2C) • Returns high • Casual sportswear: 12% - 18% • Fitted fashions: 20%-28% • “High” fashion: up to 35% • vs. average on-line return rate among all product types ~10% • Returns expensive to process • Arrive one at a time, not necessarily in good condition • Need to be classified, undergo quality control with a determination made: • Repackage and back to inventory? • Back to vendor? • Liquidate? • Requires higher level of judgment in distribution center • Customer credit (scan or input order number) • Update inventory/sales systems • Example: Spiegel volume: 6M units/year: 24,000/day

9. Technological “Solutions” • Zoom Technology • Color Representation Technology • Swatch Technology • Technology to address fit challenges: • “Personalized” on-line “models” • Input your measurements and other characteristics: “try clothing on” the model • Take body measurements • “Fit calculators” translate measurements to sizes • Body scanning • Fidelity issues • And … do you want to see your own body online? • Marketers want images more “aspirational” • Alight.com for “plus sizes”: you give measurements: no image, just says “loose”, “tight” or “best” fit

10. Mass Customization • Dell Model: Book orders prior to manufacturing • But, can’t hold all components like Dell. • Fabrication required as well as assembly; Color matching critical. • Custom Fit • In store measurement/ordering: • Levi’s jeans: measure • Brooks Brothers’ shirts: measure • Brooks Brothers’ suits: body scan • On-line measurement/ordering: • Lands’ End • Take own measurements • Jeans, chinos: now 40% of all purchases are custom fit • Price premium ~50% • Moving into men’s shirts, trousers • Custom Design • Fabric, components, style options

11. B2C Issues for Different Participants • Bricks and Mortar Retailers • Different data requirements • Order fulfillment challenges • Manufacturers • Channel conflict • Order fulfillment challenges • Catalog Companies • Easiest transfer, but new skills required • Pure Plays • Order fulfillment challenges • Need brands to instill consumer confidence

12. Case Study - Levi Strauss • 11/23/98: On-line Launch • #1 e-mailed consumer request for direct on-line sales of Docker products • - Levi launches on-line sales of Levi and Docker brands • Industry debate: Levi should first use the web to improve spotty fulfillment record with retailers instead of using web to sell direct • 01/99: On-line Exclusivity • Levi retains exclusive rights to selling Dockers and Levi on line • sales of Levi and Docker brands declared off limits on all retailer web sites: anger in channel

13. B2C - Levi Strauss • 11/99: Off Line • Levi announces halt to e-commerce efforts and web sales post holiday season • Instead, Levi will use site as a merchandising vehicle, with final sale directed to retail partner sites • All online efforts now moved to JC Penney and Macy’s • Debate: why Levi changed online strategy: • Overwhelming opinion claimed due to channel conflict • Others claimed Levi was caught in a fulfillment challenge as they failed to develop an infrastructure to support the site • Levi announces a renewed focus on working hand-in-hand with retailers to meet consumer needs • 01/03: Continue to sell on Penney and Macy’s site.

14. Partnerships • Fewer in each category choosing to “go it alone”: Combine bricks and mortar presence and online capabilities: • Levi’s and Macys/JC Penney partnerships • Sears bought Lands’ End • Amazon site: Sears/Lands’ End, Eddie Bauer, Target, Gap, Liz Claiborne, …

15. On-line apparel sales growing (much at expense of catalog sales) Source: Standard & Poors, 2002

16. Expect continued growth, but understand challenges • Amazon entry is a big deal: • First 6 weeks of Amazon apparel store site (holiday season): $1.29 billion sales, # 2 only to computers, at $1.32 billion • Partnerships critical: combine brand name w/ bricks and mortar w/ on-line fulfillment capabilities • More women using the internet

17. Business to Business

18. Forces Driving Implementation • Demand unpredictability is high: the need for improved channel information is considerable. • The high fragmentation of plants and global dispersion of plants make the need for transparency high: there are many local players who benefit from lack of good market information. • “Pain” in the industry is high; there is great room for improvement.

19. Expected Performance Benefits • Decreased cost of communication in the channel. • Extension of lean retailing practices • From EDI to web based: easier to scale, maintain, improve • Estimate for Sears for purchase orders alone: • Purchase order cost expected to drop from $100/order (cost w/ previous EDI system) to $10/order (using Web-based retail exchange) • Annual savings for 100 million purchasing orders ~ $9 billion/year • Improved visibility in the supply chain • Improved forecasting capability • Reduced channel inventories • Improved design

20. Forces Hindering Implementation • Difficulties of specification persist: Products, plant capabilities and components are difficult to characterize. • Apparel plants are small, with relatively low levels of sophistication. Implementation will be challenging. • The complexity of interaction among channel partners is relatively high. • Communicating about product design, product quality, plant capabilities, involves significant subjectivity. This type of communication will be harder to put on line. • Intermediaries provide domain expertise and local knowledge that will be hard to automate. • Deep knowledge is required to be effective

21. Understanding the Value Proposition for Textile-Apparel-Retail B2Bs Where many of the benefits lie Tightly coordinated supply chains Depth of Relationships Where the hype has been B2B Auctions, Exchanges, etc. Breadth of Relationships