7/24/2015

MGMT S-5033 Supply Chain ManagementAssignment # 2

CROCS: REVOLUTIONIZING AN INDUSTRYS SUPPLY CHAIN MODEL FOR COMPETITIVE ADVANTAGE

Assignment # 2

MGMT S-5033 Supply Chain Management

Instructor: Zal Phiroz Harvard University Summer 2015

CROCS: REVOLUTIONIZING AN INDUSTRYS SUPPLY CHAIN MODEL FOR COMPETITIVE ADVANTAGE

1. a) Crocs have been discussed by many industry experts as a fad product. Applying core competencies, how can Crocs supply chain model be used to mitigate the potential of the brand becoming a fad?

Crocs has a highly flexible supply chain model that allows the company to fill orders within season, as opposed to common industry practices of having orders pre-booked months before. By having a short lead-time, fast replenishment system and excess capacity, Crocs was able to meet large demand upswings. However, this agile supply chain model does not work in cases for large downswings in demand, especially for a fad product[footnoteRef:1]. With Crocs flexible supply chain and functional product, there are certain actions that the company should have or have not taken to mitigate its potential of becoming a fad. [1: Gonzalez, A. (2009, June 22). Crocs: From a Revolutionary Supply Chain to Almost Bankrupt. Logistics Viewpoints. Retrieved, 2015, July 24, from http://logisticsviewpoints.com/2009/06/22/crocs-from-revolutionary-supply-chain-to-almost-bankrupt/ ]

Continue making product out of croslite

Judging from the appearance of Crocs iconic clogs, it can be inferred that the product was not meant to be a fashionable item but a functional one. Croslite, the main material that differentiates Crocs from other footwear and that makes it comfortable and odor-free, should have been the bases of its product line extension and its acquisition of new businesses. Crocs should have put more emphasis on offering its functionality and comfort, instead of attempting to be a fashionable product. Making products out of other materials only increased material cost.

Withhold product line extension

Crocs success in 2006 and 2007 hit a high-watermark of $847.3 million in revenues and a staggering public offering that led them to raise over $200 million[footnoteRef:2]. With the company riding a wave of successes, the company should have withheld product line extension and acquisition of new businesses. While Jibbitz complemented the core product line, other acquisitions such as EXO Italia, which manufactures sports-protection items, and other plans of expanding to adding clothes to its portfolio, did not succeed and only distracted the company from adding value its core product line[footnoteRef:3]. These multi-million dollar mistakes could have been pretended had the company slowed down its product line extension and investment on assets. [2: Seid, J. (2006, August 9). Crocs ugly shoe score a pretty pay day. CNN Money. Retrieved, 2015, July 24, from http://money.cnn.com/2006/08/09/smbusiness/crocs/ ] [3: How Crocs Crashed. (2009, October). Ries Pieces. Retrieved, 2015, July 24, from, http://ries.typepad.com/ries_blog/2009/10/how-crocs-crashed.html]

Leverage economies of scale of suppliers

Aside from putting money on acquisitions of new businesses, Crocs invested heavily on vertical integration at a global scale. Because many suppliers could not adopt to Crocs highly flexible supply chain, the company decided to build it own manufacturing plants and distribution centers in various parts of the world including Mexico, China, Netherlands, and Japan. Although this shortens lead-time, its global expansion should have been done carefully and strategically. To put it simply, there is no crawl, walk, run evolution to Crocs[footnoteRef:4]. [4: Gonzalez, A. (2009, June 22). Crocs: From a Revolutionary. (See paragraph 8). ]

Limit distribution

Lastly, by making the product available in almost every retailer, from small ones to big ones such as Nordstrom, the brand became ubiquitous that people started to hate them. The company should have focused on its core customers and made its product available to selected retailers. Although being present in almost every retailer generated a lot of revenue for the company, this only hurt brand perception and significantly affected demand in the long term. Nurtured relationship with core customers

Crocs could have avoided being a fad product had it continued to cater to the needs of its core customers. Instead of extending its product line to target other markets, the company should have focused on adding more value and more offerings to its core customers and growing within this market. This is how iconic products retain its base of loyal followers.

b) Why do competitors in the industry not have as flexible a supply chain?

Although Crocs supply chain was revolutionary for a short period of time, it did not help the company in improving and maintaining its core competencies. The supply chain strategy that Crocs implemented only led to inefficient production and excessive inventory due to inaccurate forecast of customer demand. With demand fluctuations, especially in uncertain economic times, it is challenging for firms to strike a balance between all internal and external processes.

Does not work for large demand downswings

Having a flexible supply chain works best when there is a surge in demand. Where there is a demand downswing, this results to increase in fixed cost and inventory cost due to excess capacity and inefficient production. Because of the fickleness of the fashion industry, many footwear manufacturers focused more on predicting demand accurately instead of investing heavily on a flexible supply chain.

Requires huge investment

In Crocs case, many suppliers turned down establishing partnership with the company due to its highly flexible supply chain. Consequently, the company adopted a vertical integration and doing so required multi-million dollar investments and a complex supply chain. As seen in Pumas case, the company opted to leverage economies of scale by suppliers and partners and therefore kept the supply chain simple and cost-effective.

2. What strategy did Crocs use to reduce the ordering risk of smaller businesses? What impact did this strategy have on economies of scale, and on the supply chain as a whole?

Whether or not its a small or big retailer, Crocs remained consistent in filling and replenishing orders quickly. Because small retailers do not have the same supply chain capabilities as big retailers do, it appears that Crocs shouldered inventory and shipping costs for small retailers. It retained operations in its company-owned warehouse in Colorado to cater to the needs of these customers and to directly ship orders to these shops. However, this supply chain strategy has certain implications that are proven ineffective.

Flexible supply chain

Although the company changed its warehousing model by adding warehouses to its manufacturing facilities, it kept its Denver warehouse for small orders[footnoteRef:5]. This ensured that orders are filled, shipped, and replenished in no time. [5: Crocs: Building Flexible Supply Chains. (2013, February 5) CMU SCM. Retrieved, 2015, July 24, from http://cmuscm.blogspot.com/2013/02/crocs-building-flexible-supply-chains.html]

Not cost effective

Having a highly flexibly supply chain to small retailers is just not sustainable, especially when there is demand fluctuation. Because these small retailers are not capable of ordering and receiving orders directly from Crocs manufacturing plants all over the world, the companys decision to keep its warehouse in Colorado only means unnecessary warehouse, labor, and inventory cost, which could have been completely gotten rid off.

Contributed to inaccuracies in demand forecast

There is no doubt that Crocs is a victim of the bullwhip effect. And part of this is due to their serving multiple distribution channels that only added to inaccuracies in demand. While company perceives demand to be driven by customer needs, it was actually driven by retailer orders.

Reduced distribution power

By making the product available to almost every imaginable store available, Crocs lost its distribution power[footnoteRef:6]. It was no longer special to stock Crocs product and was no longer a differentiating factor to these retailers. This does not also motivate retailers to support and promote the brand. It became a commoditized product that almost everyone had. [6: How Crocs Crashed. (2009, October). (See Control Distribution).]

3. Why did Crocs not sell to Wal-Mart? What effects did this decision have on the overall supply chain, and relationship with other retailers?

It was a good strategic move for Crocs to not distribute its product to Walmart. First of all, selling to Walmart would have considerably affected Crocs brand perception and relationship with other retailers. Sold at $30 a pair, Crocs established a premium brand image and high quality product and selling to Walmart would have questioned its credibility.

Next, Walmarts reputation of having a strong bargaining power and everyday low prices would have driven prices of Crocs products down, affecting other retailers. This would put Crocs at a disadvantage and tarnish its relationship with other retailers. One of the reasons that retailers are willing to stock Crocs products was because it gave them better margin, as compared to other brands. If the company partnered with Walmart to distribute its products, not only would it hurt other retailers margins but would also further decrease demand.

By not selling to Walmart, Crocs was able to maintain its premium brand image and maintained a strong relationship with retailers, at least for a while. In addition to that, the company was able to maintain a strong bargaining power against bigger retailers. Crocs would have been overpowered by Walmarts bargaining power and therefore loses control. 4. Crocs is sold to buyers within a number of consumer market (gardening, boating, medical, etc.) How does this business model affect the overall supply chain? What areas of concern within the supply chain may result?

Crocs created a demand for their product by associating different uses for their shoes (e.g. gardening, boating, medical, etc.). While this seems to be effective in generating revenue, this raises areas of concern in the companys strategic and operational goals.

Discouraged core customers

In the early days of Crocs, its shoes were marketed to sports/boating enthusiasts. Its unique properties attracted a base of followers, who value its functionality. However, from a niche product, it grew to be a product that tried to appeal to everyone. The proliferation of Crocs shoes discouraged these core customers from supporting the brand and end up not having any loyal followers[footnoteRef:7]. As a result, it did not become an iconic brand such as Clarks and Doc Martens, which up to these days still have a strong relationship with its core customers. [7: How Crocs Crashed. (2009, October). (See Focus on Core Customers).]

No product differentiation

While it was advantageous for the company to grow its market to doctors, gardeners, and other professionals, it discouraged product differentiation. By associating different uses of the product, the company felt that there was no need to differentiate its product from competitors.

Encouraged knockoffs

In addition to the lack of need for the company for product differentiation, its attempt to enter into new markets (e.g. ladies shoes, flip-flops, sandals), which are dominated by key industry players, encouraged competitors to copy the product and hurt sales.

Price differentiation strategies

Another area of concern is Crocs price differentiation strategies across channels in order to promote sales. However, this might fireback as consumers would realize that a pair of Crocs sold at a sporting goods store would be priced differently at a small specialty shop.

Multiple distribution channels

Due to the product being marketed to a broader audience, this prompted Crocs to be present in multiple distribution channels. From a product that was only sold in selected retailers, it became ubiquitous. As mentioned earlier, this does not provide incentives for retailers to promote the product and only affected the companys distribution power. It also made the distribution process more complex. Moreover, selling to different retailers turned it in to a fad product that nobody no longer wanted.