9-609-029
APRIL 27, 2009
ANANTH RAMAN
NICOLE DEHORATIUS
ZAHRA KANJI
Supply Chain Optimization at Hugo Boss (A)
Introduction
Katja Ruth and Constantine Moros sat facing each other in the empty conference room. Covering
the table between them were the latest operational and financial figures from the supply chain
optimization pilot Hugo Boss had been running in its global bodywear and hosiery Division.1 Ruth,
the director of the division, agreed with Moros, the division’s head of operations and procurement,
that the pilot had been a success—better product availability and lower inventory to sales ratios had
been observed for the stock-keeping-units (SKUs) involved in it—but was not convinced that
expansion of the initiative beyond those SKUs would enjoy the same success. With Hugo Boss’s chief
operations officer expecting her assessment in a few days, she and Moros had a lot of work to do.
They needed not only to precisely quantify the pilot’s financial impact, but also to determine whether
the initiative should be rolled out to other products and, if so, which ones.
Company History
Founded in 1923 in the German town of Metzingen, Hugo Boss became known for its high-quality
men’s and women’s fashion apparel, shoes, and accessories. Begun as a brand focused exclusively on
men’s business wear, over time it came to offer a wide variety of lifestyle clothing for both genders
(Exhibit 1). Business wear and casual wear accounted for nearly equal proportions of Hugo Boss’s
2006 total sales (44% and 46%, respectively; see Exhibit 2). Shoes and accessories accounted for the
remaining 10%.
Europe was Hugo Boss’s principal consumer market, accounting for 69% of 2006 total sales (the
Americas accounted for 18%, Asia and the rest of the world for 10%).2 The company’s global brand
spanned more than 100 countries with more than 5,500 retail points of sale (Exhibit 3), sufficient
reach to assure it a market leadership position in men’s fashion around the world.3
1 This division is comprised of Bodywear (tanks, t-shirts, long-sleeved shirts, and underwear), Swimwear, Loungewear,
Terrywear, Nightwear, and Hosiery (or Legwear—socks and knee-highs) product categories.
2 The remaining 3% of total sales was from royalties.
3 Michael Geiger, “Hugo Boss,” Credit Suisse, November 12 2007, via Investext, accessed August 2008.
________________________________________________________________________________________________________________
HBS Professor Ananth Raman, Professor Nicole DeHoratius, University of Portland, and HBS Research Associate Zahra Kanji prepared this case.
We gratefully acknowledge the Sloan Industry Studies Program and the Zaragoza Logistics Center for their support of Nicole DeHoratius’
research. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management.
Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Supply Chain Optimization at Hugo Boss (A)
Product leadership, market intimacy, and operational excellence were believed by Hugo Boss to
distinguish its brand from others in the luxury fashion goods market. Unlike luxury goods
competitors such as Ralph Lauren, Armani, and Prada that relied on a single major designer, a team
of creative managers and designers was responsible for understanding and fulfilling the fashion
needs of Hugo Boss customers. With market intimacy thus assured, Hugo Boss parlayed operational
excellence into accurate fulfillment of retail orders within 48 hours or less.
Industry Background
Luxury fashion goods was a $60 billion global market populated by designers and brands such as
Armani, Ferre, Christian Dior, Valentino, Gucci, Dolce & Gabbana, Ralph Lauren, Prada, and Hugo
Boss (Exhibit 4). These companies sought to differentiate their brands through craftsmanship, quality,
and design, but success often depended on external factors. Sales boosted by an expanding economy
could erode quickly in an economic downturn, leaving distribution centers brimming with inventory.
Consumer confidence was the cornerstone of consumer spending and, concomitantly, of the
performance of the apparel and footwear sectors. Europe’s apparel and footwear industry saw
compound annual growth of 2.3% in 2006 and 1.7% in 2005.4 A trend observed in recent years for
consumers to split their spending between high-end luxury goods and value merchandise was
attributed to the availability from chains such as Hennes & Mauritz of increasingly trendy apparel
and footwear tagged at affordable prices.
The perpetually shifting demands and preferences of the public encumbered the apparel sector
with the need to maintain large-scale inventory systems, the financial burden of failed items, and the
risk of stock-outs of popular items. The speed of change together with the lag between production
and retail availability made accurate inventory forecasting a persistent challenge.
The Bodywear and Hosiery Division
Hugo Boss’s two distinct brands, Hugo and Boss, were divided into five subsidiary lines—HUGO,
Boss Black, Boss Green, Boss Orange, and Boss Selection (see Exhibit 5)—designed to meet the needs
of specific men’s and women’s fashion segments. The bodywear and hosiery division produced
bodywear, hosiery, terrywear, and swimwear products for Boss Black, Boss Orange, and HUGO, and
loungewear and nightwear products for Boss Black. Bodywear accounted for 53%, hosiery 32%,
swimwear 7%, loungewear 5%, and terrywear 3% of the division’s 2006 net sales of € 33,040,259 (see
Exhibit 6)5.
The division was further segmented by replenishment type (Exhibit 7). The division’s 711 product
stock keeping units (SKUs) included a wide selection of men’s underwear variously classified as
Selection, News, Athletic, Basic, and Packs styles (Exhibit 8). Styles differed in terms of raw material
composition, cut, elastic type, and color, each style being sufficiently different that an average
customer would be unlikely to substitute one style for another. The majority of the 513 SKUs of Boss
Black bodywear and hosiery products were classified as Never Out of Stock (NOS) products to
discourage customers from substituting similar product offerings from competitors such as Calvin
Klein, Polo Ralph Lauren, Dolce & Gabbana, Tommy Hilfiger, Triumph International, Lacoste, Bjorn
4 DataMonitor, “Apparel Retail in Europe,” August 2007.
5 Nightwear’s contribution to the division’s 2006 net sales was negligible.
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Borg, DKNY, 2 X-ist, and Armani.6 NOS products differed from the majority of the 198 other
bodywear and hosiery SKUs in the Boss Orange and HUGO collections in that they did not change
seasonally in style, color, or fabric each season, remaining consistent year to year for a period of
approximately three years. Products that did change from season to season, such as loungewear,
terrywear, and swimwear products in the Boss Black, Orange, and HUGO collections, were classified
as fashion items. These items were rarely repeated once featured in a specific collection. Fashion
items for which inventory was depleted were permanently stocked out.
Fashion items needed to be designed, prototyped, sampled, and presented to buyers associated
with the more than 200 Hugo Boss bodywear and hosiery retail accounts (Exhibit 9 delineates the key
steps involved in bringing a collection of fashion items to market). The division’s procurement and
production management team negotiated production capacity and established production schedules
with contract manufacturers and assisted them with raw material procurement and workforce
scheduling (Exhibit 10). The design, prototyping, and preproduction steps were skipped for NOS
items, for which the division needed only to plan production, perform quality checks, and arrange for
shipment from the factory, warehouse storage, and delivery to retail accounts7.
Impetus for Choosing NOS Items for the SCO Pilot
In 2004, Moros had been thinking hard about what changes could be made to improve the
efficiency and responsiveness of the division’s supply chain. Operational performance metrics for the
last half of the year revealed average availability for NOS items to be 97.9%, not bad, but still shy of
the 100% product availability guarantee.8 Moros was concerned that retail partners such as Oy
Stockmann would threaten to take their buying dollars elsewhere if the division was unable to fill
unexpected NOS orders promptly and in full. But filling unexpected NOS orders, Moros knew, often
taxed the capacity of Hugo Boss’s production partners.
Knowing that retail customers, like consumers, might substitute for or delay the purchase of an
out-of-stock product, or take an entire order elsewhere, Moros had set out to quantify the impact of
warehouse stockouts on sales. He observed (1) that stockouts often occurred during key retail
replenishment periods like the month of December, and (2) that stockout patterns differed across
product styles. He calculated that stockouts among NOS items during 2004 resulted in lost revenue of
1.1% of net sales.9
It was with these figures in hand that Moros had approached Ruth, believing that she would be
extremely interested in the performance impact of poor product availability in NOS items. It was she,
moreover, who would have to approve his next proposed step, a detailed process mapping exercise
that would track orders from the time they were placed through fulfillment. Having learned in
business school about the complex interrelationship between inventory, availability, and sales (see
Exhibit 11), Moros was convinced that doing so would enable him not only to identify opportunities
6 NOS products, staple items including underwear, tank tops, and hosiery that a consumer would wear and replace on a semi-
regular basis, were guaranteed to be in stock 365 days a year.
7 The design, prototyping, and pre-production steps were conducted the first season a specific NOS item was introduced.
However, these steps were skipped in subsequent seasons.
8 Availability was measured weekly by dividing the total number of NOS SKUs with positive inventory by the total number of
NOS SKUs.
9 This number was derived by observing the number of out-of-stock days for a given NOS SKU. Moros estimated what Hugo
Boss would have sold on those days, assuming sales were lost (and not backlogged), by calculating the average daily sales per
SKU conditional on the SKU being in stock and multiplying this number by the total number of stocked-out days.
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to lower current inventory levels and thereby reduce costs, but also to improve NOS product
availability and improve sales.
Although she agreed that taking a closer look at the numerous steps in the NOS replenishment
process might yield beneficial insights, Ruth asked Moros to begin by reviewing the company’s
upstream processes, in particular, how the division ordered NOS items from suppliers.
Moros’s team forecasted demand for NOS items six months in advance to help contract
manufacturers with raw material procurement,10 workforce scheduling, and capacity planning.
Forecasts were customer neutral and made on a style-color basis.
Firm production orders were placed with contract manufacturers monthly. Hugo Boss’s
production planners sought to keep on-hand inventory levels equal to 3.5 months of forecasted
demand. Production lead time for NOS items was eight weeks: one week for material cutting, six
weeks for sewing, and one week for packaging and quality inspection. Transportation lead time, by
sea, was two and a half weeks including the generation of customs paperwork at the port, which
could not begin until an entire order had been assembled. Orders thus arrived at Hugo Boss’s 18,400
qm warehouse in Wendlingen ten and a half weeks after being placed by production planners.
Approximately 2,500 qm of warehouse space was dedicated to the NOS items that were sorted,
tagged, and stored until pulled from inventory by retail orders (see Exhibit 12). The cost of holding
inventory, according to warehouse department estimates, ranged from 9% to 12% and included
various warehouse expenses such as handling, shelf space rental, etc.
Retail customers like Oy Stockmann, El Corte Ingles, and Peek & Cloppenburg could order from
the division in two ways: pre-order and replenishment. Pre-ordered items were made well advance
of delivery. Fashion items were usually pre-ordered. Fulfillment of replenishment orders was
promised within a short period of time (typically less than a week). Orders for NOS items were
frequently replenishment based with a guaranteed 48-hour delivery window.11 Orders could be
placed either electronically or by fax, and retail buyers and the Hugo Boss sales team interacted
frequently to discuss availability, delivery deadlines, and general fashion trends.
The SCO Proposal
Upon reviewing the flow of product through the supply chain, Moros identified a number of
opportunities for improvement. Among the most promising was to change the frequency with which
inventory planners ordered from the contract manufacturers. Why did they order only monthly?
Would ordering more frequently afford greater flexibility, enough to offset the attendant costs?
Moros proposed a pilot project to answer some of these questions. His specific proposal to Ruth
was to change order frequency for a subset of bodywear NOS SKUs from monthly to weekly. The
subset he suggested, 45 similar SKUs within the Black Brand known as Packs, was produced in a
single factory owned by Delta Galil and accounted for 16% of the division’s 2004 unit sales. He
maintained that the proposed change could improve product availability and planning flexibility,
reduce lost sales and inventory levels, and lower transportation and ordering costs. NOS products
not selected for the pilot constituted a control group of SKUs.
10 Procurement of raw materials such as fabrics, elastics, and packaging took one to two months and was the responsibility of
Hugo Boss’s contract manufacturers.
11 Actual delivery time differed across retail partners and depended on the retailer’s proximity to Wendlingen.
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Project Stakeholders
The strategic production partner with which Moros’s team worked to test the SCO initiative, Delta
Galil Industries Ltd., was an Israeli textile production company with approximately 13,000 employees
known for its strong position as the global provider of ladies’ intimate apparel and men’s underwear
and hosiery. Delta Galil had production facilities for clothing, undergarments, and textiles around the
world and partnered with companies such as Victoria’s Secret, J. Crew, GAP, and Abercrombie &
Fitch as well as Hugo Boss. For 2004, Delta Galil reported operating revenue of approximately $654
million with Delta Galil’s European operations accounting for almost 30% of this total and a net
income of $12.8 million.
The bodywear and hosiery division sourced a variety of NOS items from Delta Galil’s Egyptbased production facilities. Recognizing the need for the active involvement and commitment of one
of the most important producers of the division’s products, Ruth and Moros began negotiating to get
Delta Galil on board a year before the initiative was launched. Delta Galil management was initially
concerned that changing the frequency with which the division placed orders might negatively affect
production planning and procurement processes and potentially erode the economies of scale
achieved under the current supply chain set up. Moros’s analysis suggested otherwise, and after
several months Delta Galil management accepted his and Ruth’s assurances that the project would
yield a more predictable and flexible production schedule without any loss of economies of scale, and
agreed to the SCO pilot.
Delta Galil was to produce all NOS products including the subset involved in the SCO pilot in a
single factory located within a tax-free zone in Cairo. Both parties would extend their supply chain
management know how and continue with a monthly production commitment based on a six-month
forecast. Delta Galil then allocated production capacity based on these six-month forecasts. This longterm horizon forecast was initially specified on a style-color basis, with detailed (SKU-based) orders
placed weekly for Packs products and monthly for other NOS products, and continually compared
against monthly production commitments. Weekly orders were an opportunity to fine-tune
production to demand patterns while working with Delta Galil to meet unofficially agreed upon
production levels. If production volume fell short during one six-month period, Delta Galil
management trusted the division’s planners to make up for lost capacity in the following six-month
forecast. If, on the other hand, production volume exceeded what was anticipated, Delta Galil would
do everything but compromise production lines dedicated to other companies to provide it. Save for
products destined for North American distribution, which were delivered to central warehouses in
North America, all merchandise produced by Delta Galil’s Egyptian factory was delivered to the
Wenldingen distribution center.
SCO Results
Ruth and Moros expected the change in order frequency implemented in week 31 of 2005 would
result in lower on-hand inventory levels as well as improved product availability for the NOS items
involved. The change in order frequency was accompanied by a four week reduction in total lead
time because production needed only half a week for material cutting, three weeks for sewing, and
another half week for packaging and quality inspection. Moreover, the change in order frequency
allowed Moros’s production planners to readjust their forecasts on a weekly basis ensuring that
current production schedules accurately reflected observed changes in demand. With the pilot in
progress for the past year, it was time to take stock.
Comparing divisional performance one year before the pilot to the past year, figures showed a
16% increase, from 41,697 to 48,372 units, in the average weekly on-hand inventory held for all 45
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piloted NOS SKUs. Moros wondered whether he should reduce the targeted on-hand inventory level
used by his production planners even further. In anticipation of an upcoming SAP implementation,
Moros had chosen to play it safe for the duration of the pilot by asking his team to maintain on-hand
inventory levels close to two months of forecasted demand. Product availability, as expected,
increased from a weekly average of 97.9% prior to the pilot to 99.9% after the pilot. See Exhibit 13 for
a plot of inventory levels and product availability levels over time for both the piloted and control
SKUs.
The division also managed to reduce inbound transportation costs by 9% to €0.29 per item
shipped. More frequent ordering meant smaller shipment quantities which, in turn, allowed the
division to utilize a single, twenty foot shipping container. This was a more efficient alternative than
the shipping method used prior to the pilot. With sales growing by nearly 31% during this last year
from a weekly average of 3,107 units sold before the pilot to a weekly average of 4,065 units after the
pilot (see Exhibit 14), any increase in transportation or handling costs was a concern.
The pilot was receiving praise from warehouse managers who reported fewer instances of
inventory obsolescence and a reduction in billable hours for warehouse staff due to the smaller, more
frequent and more predictable deliveries. Members of the sales team, although unaware of the pilot,
noted how easy these products were to sell. One retail partner went so far as to label these items as
“safe” not just because they were basic in color and good value for money but also because the NOS
service level of 99.9% almost guaranteed that these products would be in stock and available to
purchase when needed. Because most clothing companies could not guarantee such a high service
level, retailers generally had in place a contingency plan known as insurance brands (a white Calvin
Klein boxer might, for example, be an insurance brand for the equivalent Hugo Boss boxer), but
implementing and maintaining insurance brands was resource intensive and costly to monitor.
Reaching a Decision
Glimpsing the blazing evening sun through the venetian blinds, Ruth suddenly realized the
afternoon had flown by. She had been consumed by thoughts of what to make of the SCO pilot’s
results. Although the SCO pilot, being restricted to select NOS products, did not deal with typical
short-run fashion items, the division had still had the challenge of balancing production cycles,
inventory levels, and accurate demand forecasting. Ruth turned to look at the organization chart on
the wall (Exhibit 15) as the question “what next?” kept crossing her mind. Could the SCO initiative
be successfully applied in the current corporate framework of division-centered performance? Could
the project realistically be extended to other product groups, or were the results for the NOS
Bodywear Packs product an anomaly?
Hugo Boss prided itself on its uniqueness in the domain of high fashion combined with
operational excellence and unparalleled design. Could the SCO initiative broadly applied enable
Hugo Boss to improve its already excellent operational performance and further differentiate it
within the echelons of high fashion? Or, did the increased costs outstrip any benefits? How much, if
any, credit could operations take for the observed change in sales?
Ruth and Moros continued to linger over the figures, tossing around ideas about how to interpret
the results and brainstorming possible extensions of the pilot. It was a tough call. The numbers
painted one picture, but Ruth and Moros understood the capriciousness of the apparel industry, the
production cycle, and the retail buyer. Hugo Boss stood apart on its operational excellence, product
leadership, and market know-how. Which of these might be further improved, and in what ways, by
a broader application of the SCO initiative?
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Exhibit 1
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Milestones in Hugo Boss Company History
•
1923: Founded by Hugo Boss, a tailor born in Vienna, Austria who lived in Metzingen, Germany,
the company started as a manufacturer of work clothes such as overalls, raincoats, and uniforms.
•
1948: Founding of Hugo Boss GmbH in Germany.
•
1954: Production of the first men’s suit by Hugo Boss.
•
1970: Launch of the BOSS brand.
•
1980: Shirts introduced as an extension of the product line, initially given to Della Croce, a small
supplier in Ticino, Switzerland.
•
1984: Launch of the first Hugo Boss perfumes, produced as licensed products.
•
1985: Hugo Boss listed as a joint stock company on the German stock exchange.
•
1989: Eyewear introduced as an accessory product.
•
1991: Italian Marzotto Group, one of the best-established textile companies in Europe, acquires a
majority stake (50.4%) in Hugo Boss.
•
1993: Umbrella-strategy is presented introducing two new brands and philosophies—
BALDESSARINI and HUGO—to Hugo Boss and successful BOSS Product World.
•
1995: BOSS shoes are introduced as a licensed product.
•
1996: Former licensed producer Della Croce is purchased by Hugo Boss AG to become Hugo Boss
Industries (Switzerland) Ltd., the strategic business unit responsible for overall shirt production.
Watches bearing the BOSS label are offered as a licensed product, initially given to Tempus
Concept in Switzerland.
•
1997: Launch of the first BOSS Hugo Boss Golf collection, today known as the BOSS Hugo Boss
green label.
•
1998: HUGO BOSS introduces a new sportswear concept, BOSS SPORT, under the BOSS core
brand, now renamed to BOSS Hugo Boss with an orange label.
•
2000: HUGO BOSS Industries (Switzerland) Ltd. takes over tie production from licensed partner.
th
Hugo Boss Group increases sales by 23% to 0.923 billion Euro, marking the 5 consecutive year of
double-digit growth. BOSS woman is launched in Düsseldorf, Germany.
•
2001: The BOSS HUGO BOSS shop strategy is extended as a key marketing and distribution
activity designed to maximize market share and increase brand awareness. Development of
company vision at HUGO BOSS Industries (Switzerland) Ltd. supporting the company’s
management philosophy: “We Master Fashion Flow.”
•
2002: B…
