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Gucci’s agile supply chain1

Professor Corrado Cerruti, University of Roma Tor Vergata, Italyand Professor Alan Harrison, Cranfield School of Management, UK

Case date: 2005

Gucci Group: a brief overview

Gucci Group, with consolidated sales over �3.2bn, is a world-leading, multi-brand company inthe fashion business. In addition to the core Gucci brand, the Group incorporated other leadingbrands such as Yves Saint Laurent, Sergio Rossi, Boucheron, Bottega Veneta and Balenciagatogether with designer brands such as Alexander McQueen and Stella McCartney (exhibit 1).Leather goods, and in particular bags and accessories, represented the traditional core businessof the group, with a growing presence in ready-to-wear clothing and shoes. The majordistribution channel is directly operated stores (DOS), which contributed roughly 50% of Groupturnover. Gucci is a global company, with Europe accounting for just over 40% of sales: theUSA, Japan and ‘Rest of the World’ each contribute roughly 20% (exhibit 2).

Gucci Group was founded in 1923 by Guccio Gucci, and developed rapidly after World War IIto become internationally known as a luxury brand. In the 1970’s, arguments and legal disputeswithin the Gucci family brought about a rapid decline in fortunes. At the end of the 1980’s thecompany - in spite of the entry of the Arab investment group Investcorp – was in poor shapefinancially. The famous brand was also suffering because of the extensive practice of licensing.

Starting in 1994 under Domenico De Sole, Gucci underwent a rapid turnaround process. Thispainful experience not only aimed to cut costs and locations, but also to build a modernisedcompany. Thanks to the cheerful contributions of Creative Director Tom Ford, it also built arenewed brand. Within a five year period, De Sole – together with Tom Ford as stylist, RenatoRicci as head of human resources, Bob Singer as chief financial officer and James McArthur asdirector of strategy and acquisitions – managed to increase company sales almost four times(table 2). The turnaround gave Gucci a leading world-wide position, allowing the company toreturn to positive earnings and then to finance a strong acquisitions campaign and movedtowards the present multi-brand configuration. The major acquisition was Sanofi Beautè. Thiscompany owned YSL licences and comprised two major divisions: YSL Couture for Yves SaintLaurent ready-to-wear and YSL Beauté for cosmetics and fragrances. The traditional Gucci

1 The authors would like to thank Vivencio Fernandez de Aragon - General Manager of Gucci Logistica –and Karl Heinz Hofer – Production Manager - for their support in providing us with essential informationfor this case: any errors are our responsibility!

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fashion and accessories division accounted for the largest part (54%) of group revenues, and ofthe margins (240%). However, the newly acquired brands allowed the group to nearly treble itssales in the 5 years from 1999 (�1174m) to 2004 (�2,544m).

Following acquisition of Gucci group by Pinault Printemps-Redoute (PPR) in May 2004, a newmanagement team led by CEO Robert Polet was set up. PPR started investing in Gucci in March1999 in order to help Gucci management to face up to a hostile takeover bid by LVMH, one ofits strongest competitors. On September 10th 2001, following a settlement with LVMH, PPRincreased its interest in the company to 53%2. In April 2004, following a strategic investmentagreement with LVMH, PPR offered to purchase all Gucci public shares. After the acquisition,PPR started de-listing Gucci shares from the New York Stock Exchange and EuronextAmsterdam in July 2004. Gucci Group is now the pillar of PPR Luxury Goods division.

While very international in its presence, its management and its ownership, Gucci was stillrooted in Florence, and in the craftsmanship strengths of the Tuscany region. All of itstraditional leather production (bags and accessories) was carried out in the Florence region by anetwork of more than 600 small to medium sized firms. While the re-launch of Gucci Groupwas led by Tom Ford and its successful commercial future depended heavily on the collectionsdesigned by the new creative directors3 , part of Gucci’s success has also been due to its abilityto deliver promises made at fashion shows, respecting both strict delivery times and high qualitystandards.

The need for an agile supply chain is crucial in the fashion business because a high variety ofarticles must be managed within strict time constraints. Most fashion companies renew 60-80%of their range each season, so they must develop several thousands of new articles each year.The selling period is quite short, and requires strict compliance with the fashion show calendar -with no possibility of running late in developing a new collection. After an introduction to keybusiness processes in the fashion business, we focus especially on the Gucci supply chain. Inaddition to a successful marketing effort in repositioning its brands and collections, Gucci hasbeen able to restructure its supply chain to achieve agility, while preserving its traditionalcraftsmanship.

Key business processes in the fashion business

Fashion activities are centred on seasons and collections. Traditionally, a company in thefashion business presents at least one collection in both of the classical seasons (winter/autumnand spring/summer). Most fashion companies - while keeping the official accounting andlegal/fiscal reporting according to the fiscal year - focus management accounting and controlmainly on seasons. Seasons are the key reference point for evaluating company competitivenessand profitability. Results each year are in effect the sum of the contributions of the collectionsfor each season.

2 The deal was closed the day before 9/11.3 The new creative directors are all Tom Ford ‘heirs’: Frida Giannini for Gucci women’s wear and accessories andJohn Ray for Gucci men’s wear.

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Each season a fashion company needs to re-invent itself by renewing around 60-80% of itsrange. The manufacturing process cannot be planned in advance in detail, as only a smallproportion of production comprises ‘classical’ articles where sales history has been established.It is therefore risky to plan large lots of new items in advance when sales of lines, colours andfinishings can be very different from those originally planned. Supply chain agility is importantin order to avoid stock-outs on the one hand, and mark-downs on the other.

The season is planned and controlled by 3 key business processes:

• collection preparation: definition of the prototypes, production of pre-industrialised smallquantities (the ‘samples’) for use at fashion shows

• sales campaign order management: collection of orders from the fashion shows, agents,distributors and other sources.

• production planning: formulation of the production plan based on pre-season sales plansupdated as the sales campaign unfolds.

Exhibit 3 shows key stages in collection preparation and production planning, and how theyinterface with budgeting and control

1. Collection preparation

Collection preparation is a key activity for competitiveness both in terms of sales potential andin terms of costs (it involves up to 5-7% of the total collection costs). Collection preparationcomprises two major phases with different outputs:

- prototypes: unique elements aimed to express the fashion/style of the new collection thatcan be made either by an external or an internal design workshop;

- samples: small lot productions aimed to transfer the prototype ideas into a pre-industrialised product in terms of bills of material and process cycle.

In the prototypes phase, the goal is to prepare new models for the target market. Creativity ofthe stylist is the key input, but effectiveness of the process has become increasingly important -as indicated by a growing use of dedicated CAD systems. These support the design phase whileautomatically generating the bills of material. The CAD system can also define part of theproduction cycle - the fabrics cutting phase. In the prototyping phase the goal is to achieve amixed yet balanced set of offerings for a new collection. The stylist has to look at fashion trendsand at the previous parallel season sales statistics in order to select prototypes that match themarket target. Moreover the stylist and the product manager have to manage all the elementsthat determine the standard cost. For example, they have to balance cost of leather, fabrics andaccessories with the cost of manufacturing cycle. Where necessary, these costs can be tuned bytransferring production to subcontractors in a region with lower costs, or by substitutingspecified materials with lower priced ones. After an analysis at the level of the single item, thewhole collection is revised in order to establish a ‘balanced’ offer for the sales campaign interms of target prices, standard costs and gross margins - with the goal of achieving the overallseason budget.

In the samples phase, the goal is to obtain a small production lot of industrialised products.This helps to develop the new collection to be presented to potential customers, and to definethe industrial process for large-scale production. Management of the collection sample orderscovers - in a very short time and in very small quantities - the whole business process from bill

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of materials definition to production order launch to physical distribution to showrooms andagents. Sample orders are critical because they are made of small orders with a large number ofparts to be delivered in a very short time - in spite of their new bill of materials. The bill ofmaterials and the process cycle of the samples are normally different from normal production,because during this phase the emphasis is on shortening the throughput time rather than onreducing costs4. Moreover, preliminary bills of material and process cycles are fine-tuned forreliable production based on samples production, with the support of suppliers andsubcontractors.

2. Sales Campaign Order Management

Collections presentation at the fashion shows represents completion of the collectionpreparation phase, and start of the sales campaign. Between the two phases, there is often atwo-week overlap where - based on the preliminary collection editing and review - productmanagers decide modifications to collections and cancellations. The sales campaign normallylasts from 4 to 6 weeks, and involves orders acquisition from the various distributors and Gucci-owned shops and from boutiques via agents. Each collection is brought to the sales campaignhaving been assessed in terms of its potential and accompanying sales target. Incoming ordersduring the sales campaign create a rolling sales target revision. These ongoing adjustments inturn impact on production planning. The order portfolio is developed during the sale campaign,and after the sales campaign has finished, it is frozen in order to specify the overall productionplan, process capacity and materials availability. Because of the short delivery window, manyarticles cannot be further replenished after closure of the sales campaign, because additionalmaterials cannot be procured within the time available.

3. Production planning

Production planning starts with overall goals from the season budget based on characteristics ofthe collection presented and historical sales trends. Such an overall budget determines initialpurchases of inputs (i.e. yarns for the textile manufacturers and fabrics for the clothingcompanies). Initial purchases are made al buio (in the dark), as they are based on Gucciforecasts with no market input. These purchases can reach up to 30-40% of the overall plannedrequirements, and mainly address items and colours that are very likely to be ordered andproduced. For the most extravagant items and colours, purchasing normally takes place onlyafter order receipt. Once the sales campaign has started and customer orders are coming in,Gucci makes a weekly updated projection of the campaign result (the so called ‘projectedresults’). New purchasing orders are issued, and old ones are modified or cancelled. At the endof a sales campaign, Gucci has a complete view of the order portfolio. This is, however, subjectto cancellations and modifications from customers. The orders portfolio is the basis for the finalpurchase orders to material suppliers and subcontractors.

As materials are received (such as yarns for textile companies and fabrics for clothingcompanies), Gucci launches production orders. These can be either for an internal departmentor - more frequently - for external subcontractors. All purchasing and production phases in the

4 The samples are produced in-house (often the only in-house production) or by selected suppliers, with the goal toguarantee a fast process at the highest standards while keeping tight control on design innovation.

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fashion chain need to be managed in an agile way because they are as fragmented and changingas the unfolding season itself. Production planning therefore needs to take into account:

• launch of production orders through a long production cycle that is distributed across manysuppliers (for example, 3-4 months for fabrics and 1-2 months for leather)

• optimisation of work phases by grouping production batches of different items whereverjoint processing can be done

• flexible rescheduling of work assignments due to cancellations, modifications and newcommercial priorities.

Because of these challenges, textile and fashion companies do not generally use an integratedprogram such as MRP for planning purchasing and production. Instead, they prefer to haveprograms dedicated to each phase, including manual interventions at different steps of theprocess. Examples of such ‘manual interventions’ are purchase orders at the beginning of eachseason, and decisions on priorities for launching production lots. Flexibility of the non-integrated planning programme, which allows suppliers to respond quickly to market requests,limits their capability to control the whole process. This makes calculations of order deliverydates more uncertain.

Fashion companies have different production planning approaches based on their CustomerOrder Decoupling Point (CODP, exhibit 4). This represents the point where production is nolonger generic, but becomes dedicated to a specific customer order. In a Make to Order (MTO)regime, the CODP is positioned before the beginning of the first transformation process. InMake to Stock (MTS), the CODP is located after the end of the last transformation process. Inform postponement (FPp), the CODP is at the semi-finished product stage. Here, the product isin generic form to ensure that final manufacturing is performed to specific customer order.Most companies work with a system that is a hybrid between FPp and MTO. This means thatenterprise software needs to be able of supporting alternative CODP configurations. FPp is usedfor final assembly of products that are only completed after customer order confirmation,including special processing like the customer tag or particular packaging. Production up to theCODP is carried out as if for stock (based on the total volumes) and differentiated only in thefinal phases. Such an approach is used mainly for classic items, especially when fabrics orknitted items can be colourised after the CODP.

MTO is the most popular regime for fashion items because as it is possible to follow customerrequirements and trends, thereby limiting the risk of building up stocks that may not sell. Thismay be specially important if a new model is very innovative. Even in this case, however, partof the purchasing commitment to suppliers is made on the basis of forecasts. This is becausethe supply lead time for both yarns and fabrics (‘P’ time) would be much longer than therequired customer order lead time (‘D’ time). If production is delayed until customer orders arereceived, allocation to specific orders can be changed if a quality problem has taken place orcommercial priorities have changed. Few fashion companies use MTS, because it requiresproduction of finished items for the warehouse without a link to customers’ orders. While MTSregimes are feasible for classic, long lifecycle items, they are too risky for most fashion itemsbecause unsold stock at the end of season has to be discounted.

The order portfolio is frozen at the end of a sales campaign, and an overall production plandefined by considering process capacity and material availability. Normally the processingcapacity is not a problem as the company can look for additional subcontractors if necessary.

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However, material availability within the requested timing can be a problem. This ‘rough cut’plan enables a fashion company to approve production so that it is possible to concentrate onexecution without distractions from changes in the order portfolio. Inevitably, there will beday-to-day requests for cancellations and additional orders throughout the season.

A further element of complexity is caused by the need to carry out planning and execution for 3seasons at the same time. For instance in February 2004, operations managers have to:

• work with the design and product development for the preparation of the Spring/Summer2005 collection;

• work with the marketing and commercial on closing the sales campaign for theAutumn/Winter 2004 collection;

• work with suppliers and distributors for completion of production and shipments of theSpring/Summer 2004 collection.

This often creates difficult trade-offs in resource allocation between urgent tasks (deliveries forthe current season) and future tasks (support for the new collections).

Gucci’s agile supply chain

Pressures that characterise the fashion business are accentuated in a leading company such asGucci. Product churning creates particularly difficult challenges. While the average competitorcarries over 30% of product lines from one season to the next, Gucci carries over just 10%. Inother words, 90% of Gucci products are new each season. Moreover, Gucci presents specificcollections to the market on given ‘events’. There are roughly thirty events per year for theGroup as a whole, including Cruise5, and Men’s and Women’s fashion shows. Gucci presentstargeted creations at each of these events. The company develops 18,000 prototypes/year(including single pieces for public relations purposes), and manages some 4,000 different stockkeeping units (sku’s, which allow distinctions to be made between product ranges, materials andcolours). Managing such a wide product portfolio with short product lifecycles to tightcollection deadlines is the core operations capability at Gucci.

The importance of this capability is recognised by assigning the operations task, excludingworldwide distribution, to a dedicated company - Gucci Logistica. Gucci Logistica employs320 people and is structured around five major areas: materials research & development,operations, technical management, production and costing6 (exhibit 5).

• Materials R&D: is a department of 30 people - much larger than the industry norm -dedicated to the development of new materials and production processes. The department

5 Cruise is a mid-season event aimed to tackle the US market between Thanksgiving and Christmas.6 Gucci Logistica includes also two additional positions responsible for the technical management of both YSL andemerging brands products. These two positions have not been considered here as for both these areas Gucci Logisticais responsible on for a part of their supply chain management.

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has achieved important results in water jet leather cutting, nest optimisation, and speciallytreated crocodile and buffalo leathers. It is also involved in looking at long term fashiontrends to identify ‘future’ materials and to experiment in collaboration with qualified rawmaterial suppliers.

• Technical management: is responsible for technical definition of the product. It supportsdesigners from early phases of collection preparation (from initial samples to prototypes andmodels), and is closely involved in events coordination. On the basis of feedback fromstylists and the market, it engineers the collection models and defines the rules for qualityassurance of finished products7.

• Operations: is responsible for raw materials purchasing (including hardware like bucklesand buttons), managing suppliers, definition of time and methods for production and internalraw materials cutting8.

• Production department: is responsible for order fulfilment through planning and controllingproduction. While most production activities are outsourced, production department plays akey role in monitoring workflow progress across the supply chain. The department isresponsible for order handling, procurement9 (on the basis of the confirmed orders),production planning and production follow-up

• Costing: develops costs for a collection, based on planned material usage from the bill ofmaterials and labour methods

Exhibit 6 summarises the main activities, dates and responsibilities for launching a newcollection. Agility in the supply chain begins at the start – preparing the prototypes. Technicalmanagement is involved from the stylist’s drawing. Prototypes must be supplied within twoweeks from receipt of design. These prototypes are considered both in terms of style and ofmanufacturing methods and costing. On this basis a limited number of samples is preparedwithin a week. At the fashion show the company presents the sample items, having defined a‘cost price list’. Once the new collection has been presented, there is usually a week for finetuning the actual items that will be presented for the sales campaign. During this period, someitems are cancelled and others modified, cost adjustments are made and the definitive price listprepared. There is then a two-week sales campaign, where both internal and external purchasersmeet to decide their orders. At the end of the sales campaign, orders are collected andconsolidated. If an item fails to collect a minimum number of orders, it can be removed from thecollection. Some purchase orders will already have been made by Gucci on its suppliernetwork. These orders are based on preliminary bulk orders from Gucci internal merchandising.However it is only after the sales campaign has been closed - and the order portfolio frozen -that the detailed production plan is defined. Depending on timing of the order and on the

7 It is important to highlight that, while Gucci products are based on ‘craftmanship’, product engineering is carriedout in a detailed way in terms of both measures and materials merging. Gucci quality has to be consistently achievedfrom each of the 600 Gucci suppliers. In order to help suppliers to comply with Gucci standards, there are technicaladvisors (ispettori tecnici) that support the supplier network in the definition and the start-up of the new collections.In addition to these advisors acting at the beginning of the cycle to prevent defects, there are also QC inspectors thatcheck the quality of the finished products.8 Supplier management can be quite complex because not all suppliers are allowed to make all products, plus somesuppliers have ‘guaranteed’ quotas from Gucci.9 All the raw materials (including hardware) are purchased by Gucci and received by Gucci at its own warehouses.Materials are then checked and distributed to the various suppliers according the production order allocated to them,while Gucci retains ownership (conto lavorazione) whereby only purely production activities are outsourced.

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destination, a delivery window is fixed for each collection. Customer orders are aggregated intoproduction orders, and operations has to honour the agreed delivery windows by allocatingmaterials and manpower to the different production orders (exhibit 7).

Production activities – controlled and coordinated by Gucci Logistica - are carried out by abroad and flexible supply network both for materials/components production (from leathertanning to metallic accessories) and for end products preparation and assembly10. All end-product suppliers of leather bags and accessories that represent the majority of Gucci divisionturnover are based in the Florence region. The supply network comprises more than 600 firmswith an overall employment of roughly 4,000 people.

The Gucci supply network is based on two tiers, with 70 first tier suppliers and roughly 500-600second tier companies. There are three categories of first tier supplier:

• partners: selected suppliers that work 100% for Gucci with a 3-year contract. Gucci has acommitment for minimum annual turnover and volume levels. Partners are often supportedfinancially for investments in machinery and product development, but Gucci does notacquire shares in any of them. There are 7 major partners that are fully involved in Guccioperations, starting from modelling (modelleria) for sample preparation.

• integrated suppliers: suppliers who work for Gucci 70-100% of their sales turnover, whohave no exclusivity agreement, and who have a contract horizon of 24 months. Thesesuppliers are involved on the basis of target production volumes, with actual ordersperiodically revised on the basis of sales campaign results11.

• others: suppliers that work on 6-12 months assignments in order to provide the requiredsupply chain flexibility. Gucci maintains a list of suppliers who are pre-qualified to thenecessary level of product complexity and competencies. Such suppliers can support apeak of demand for a given product line/model in a very short time.

All relationships between Gucci and first tier suppliers are governed by formal contracts - evenif relationships between parties have to comply with the pressures of fashion seasons and theneed for informal co-operation. Gucci meets partners and integrated suppliers at least twice ayear in order to explain targets for the next season, and to explain the wider context in terms ofmodels and volumes.

Gucci has full visibility of second tier suppliers: each sub-supplier has to be evaluated andapproved by Gucci for both QA and security reasons12. However, daily management of secondtier suppliers is the responsibility of first tier suppliers. Gucci doesn’t track order progress, nor

10 In-house production activities are limited to selected cuttings on expensive materials, or on difficult models.11 The difference between the partners and the integrated suppliers relies more on the quality of the relationship thanon volume. The partners are involved early in critical phases of the collection development and the trust andreciprocal commitment is very high. In several cases the integrated suppliers are larger companies than the partnersand produces larger end-products volumes.12 Gucci has got an inspection department that monitors suppliers (also with on-side inspection) in other to assess thecorrect operations and to prevent counterfeit reproduction. Because of the very premium price Gucci brand is able togain, the production of Gucci items for the parallel market would represent for suppliers a very lucrative business.Gucci inspection starts from the very beginning by excluding from its network companies that have been involved inthe past in any kind of counterfeit reproduction.

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does it carry out regular QA of second tier suppliers. Sub-suppliers’ performance is alreadyincluded in the duties of first tier companies. On average, each first tier supplier has 8 to 10 sub-suppliers and their relationship is long-term.

Gucci always buys materials, and sends it to suppliers for processing while maintainingownership (conto lavorazione). The process is optimised by Gucci time and methods engineers,who provide suppliers with precise bills of material and process specifications. Such a strongemphasis on operational issues is important considering the craftsmanship characteristics of thenetwork: sub-suppliers are often family businesses that are manned by the owner’s relatives.Gucci also employs inspectors who – in addition to regular QA visits – support suppliers when anew product is launched and who supervise early deliveries13. While such a decentralisednetwork allows Gucci a high level of flexibility, it requires significant coordination efforts.Production planning involves allocation of production activities to the supply network that mustallow for capacity constraints and minimum contractual assignments, together with individualcompetencies and costs.

Management of the supply chain is centred on a MRP system that is launched every two weeks.Gucci planning carries out a pre-production simulation so that planners can check availability ofcomponents and processing times at suppliers, and then define production quantities. Loading atsuppliers can subsequently be changed by up to ±15%. By mid 2003, Gucci developed an inter-organisational system that links it to its ten top suppliers. A more extensive inter-organisationalinformation system (Cross Information System) will allow full visibility over progress of eachproduction order and is scheduled to be installed by early 2006. Supply chain responsiveness isclosely monitored in terms of the ramp-up speed in supplying distributors and shops with thenew collection items. Deliveries to worldwide points of sale across the season are monitored byGucci management not only in terms of schedule completion at the end of the season, but alsoin terms of monthly progress. Early availability of products in the shops means increasedchances of selling the goods. Last year Gucci – thanks to tighter management of the supplychain – succeeded in improving product availability while increasing sales volumes. Productavailability at the end of the season increased by 7-10% on average, with a remarkable increaseto an average 40-50% in first month availability (exhibit 8).

Agility in the inbound supply chain allows for both accuracy and speed in the distributionprocess. As soon as they are ready at supplier warehouses, parts are transferred to theconsolidation centre in Florence14 the same or the following day. Deliveries are consolidatedand then sent to the global distribution warehouse in Bioggio in Switzerland15. Within a weekfrom completion of the production process, goods arrive at locations around the world. In theevent that production quantities originally scheduled are not met, or that sales increase in anunforecasted way, a merchandising team decides how to allocate the quantities availablebetween retail stores. Prior to this, Gucci Logistica teams are encouraged to find a way of

13 There are certified suppliers that carry-out a self-inspection before the delivery to Gucci warehouse.14 The emphasis on speed is due also to safety reasons as the value of the goods at the suppliers warehouses can easilyend up being several thousands euros.15 The worldwide hub in Switzerland is also the European Distribution Centre. This DC handles both directdeliveries and deliveries to the American and Japanese Regional DCs.

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satisfying market demand. An example of the pressures that arise happened in the spring of2003 with the success of the ‘chain bag’ line.

Managing a shortage in chain bags

The ‘chain bag’ line has been a success story in the Gucci leather goods range. Chainaccessories used for the chiusura (the bag fastner), together with the GG logo, have made thema sales hit (exhibit 9)16. According to the different collections, the chain bag family cancomprise 15 to 20 basic models. But each basic model can be offered in different shapes (suchas top handle, mini bag, evening, hobo), different materials (for example leather, python, silk,velvet and shammy), and different colours (such as black, beige, flame red, palm green andAfrican violet). In the 2005 collection, the chain bag family was made of 17 basic models, with166 variants in total (table 10)17.

In September 2005 Vivencio Fernandez de Aragon (Gucci Logistica general manager) and KarlHofer (Gucci Production Manager) had to come to terms with the strong commercial success ofthe new line. The final forecast - based on actual sales - was almost twice the original.Continuing hot sales meant that market demand was still higher than the additional re-order. Toavoid missing such an opportunity, Vivencio and Karl had to react quickly in order to produceand distribute more product. To proceed effectively they had to look at the sales trend and thestock levels of each SKU, taking into the account the following data:

• sell-out: actual sales in the shops since the beginning of the season campaign;• in DOS and warehouse: stock immediately available for sale, either in the stores or in

warehouses nearby;• in transit: quantities that within 5 days will become stock available in the shops;• on order: quantities that will be delivered to the DOS/warehouses within 45 days.

The data for four of the ten models in the chain bag line are analysed in exhibit 1118.Considering that logistics and production lead times are on average 10 days and 55 daysrespectively, and that there are 130 days left of the sales campaign (50 days of the 180 dayshave already passed), Vivencio and Karl have to decide the re-order strategy for the currentseason19.

16 The chain bag line was originally launched in the fall/winter 2003 collection with initial deliveries to thedistribution network scheduled starting from May 2003. Forecasted quantities for the line were 65,000 pieces, but thechain bag showed an unexpected success from the start and Gucci had to immediately reorder an additional 35.000pieces! Since then the success of the “chain bag” line has continued, reaching high sales levels also in the followingseasons .17 The breadth of the “Chain bag line” varies according to the collection and its models are almost always redesigned(at least slightly) or modified as to colours and materials.18 Data have been simplified and disguised, but represent a classic example of a successful start-up.19 The actual decisions are in fact more complex than presented here, as Gucci Logistica had to take into accountmany additional details. For examples product allocation to current suppliers often cannot be increased more than 15-20% and the eventual assignment of the additional product to suppliers that had not been included in the originalproduction plan required set-ups and training (with additional expenses and additional lead time). Moreover thewhole rescheduling process is made even more difficult by a potential lack of raw materials (for example, aluminium

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They issued a production order 20 days ago, as shown in the exhibit. Now that they havereceived all the requested materials from the leather suppliers, they are going to send them tothe production suppliers. In doing so, they could modify the model mix partially with respect totheir original order. While modifying the model mix, they have to consider:

- that they have to maintain the total volumes of the different types of leather, as these quantitiesare already ‘in house’- that they have a constraint on the accessories/finishing and that they cannot increase theoriginal ’on order’ quantities by more than 15%. Moreover - in order to avoid a high stock ofaccessories and finishing - the company has a rule not to go beyond a 15% change in orderquantities.

In order to simplify the calculation of different model mixes, we assume that:

- all these bags have roughly the same shape and that the quantity of leather required by eachmodel is roughly the same;- all these bags have roughly the same retail value and therefore there are no priorities in regularreplenishment of any model20.

Moreover Vivencio and Karl have to decide whether to issue the new order for additionalproduction immediately, or whether to postpone such a decision for 5, 10 or 20 days to obtainbetter visibility on the market trend and actual sales. They know that it takes 65 days in totalbefore the new ordered items will be available in the shops and that because of the supplycontracts they will have only one re-order opportunity (this one, either today or delayed in thefuture). They are also considering that 20 days after their new order, they will be able to modifythe model mix with the same constraints they are facing today on the ’on order’ items.

Vivencio and Karl will have to start thinking about how to proceed with the new season - whichpartially overlaps this one - in terms of initial quantities and optimum stock levels. They facetwo scenarios in regard to the next season:

• the chain bag will be a lasting success with the same or even higher sales;• the chain bag will behave according to the more usual short life cycle that characterises the

fashion business. After a rapid start-up phase, sales will stabilise in the second half of theseason and start declining in the next, as new models prove to be more popular.

In order to proceed with their decision, they start from marketing department forecasts. Theymust also consult with marketing on issues such as feedback on product assortment strategy andthe possibility of recovering stock-outs.

components have a very long lead-time), and by the need for replenishment product to reach the distribution networkwithin given dates to be successfully presented in shops.20 In any case, there are further considerations than retail value alone, as it is important to consider commercialpriorities for customers and regions as well. It’s also important to decide when and how much to refill the variousregions.

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With these data on the table, Vivencio and Karl will decide this afternoon the re-orders they aregoing to request for the different items, and will also start to consider the next season’scollection. They are only too familiar with how difficult it is to forecast in the fashion business- and conversely, how agility across the whole supply chain is key to their plans.

Study Questions:

1. Discuss the purchasing & logistic implications of managing the launch of a new fashioncollection.

2. Identify the key trade-offs the logistic manager have to face in a fashion company such asGucci.

3. Propose what steps Vivencio and Karl might follow to make their decision on how tomanage the shortage in chain bags.

4. Identify the key trade-offs at work in arriving at their decision.

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in Euro Millions In Dollar MillionsRevenues 2004 2003 2002 2001 2000 1999 1999 1998 1997 1996 1995Gucci Division 59.2% 60.2% 60.4% 66.3% 66.2% 96,0% 96.0% 100.0% 100.0% 100.0% 100.0%Yves Saint Laurent 6.1% 6.0% 5.8% 3.9% 4.3% 0.6% 0.6% 0.0% 0.0% 0.0% 0.0%YSL Beauté 22.9% 23.7% 21.6% 20.2% 23.7% 2.6% 2.6% 0.0% 0.0% 0.0% 0.0%Other 11.8% 10.1% 12.2% 9.6% 5.8% 0.8% 0.8% 0.0% 0.0% 0.0% 0.0%Total 3,210.1 2,587.4 2,544.3 2,565.1 2,461.3 1,173.8 1,236.0 1,042.0 975.0 881.0 500.0

in Euro Millions in Dollar MillionsEarnings data 2004 2003 2002 2001 2000 1999 1999 1998 1997 1996 1995Revenues 3,201.1 2,587.4 2,544.3 2,565.1 2,461.3 1,173.8 1,236.0 1,042.0 975.0 881.0 500.0Gross profit n.a. 1,735.4 1,742.2 1,791.7 1,709.5 789.1 831.0 693.0 611.0 568.0 329.0Operating profit n.a. 119.8 179.4 268.4 354.4 250.4 270.0 240.0 237.0 239.0 121.0Net incombe 295.1 174.2 226.8 312.5 366.9 313.7 330.0 195.0 189.0 168.0 83.0

Exhibit 1: Gucci Group key financial data: 1995 – 2004 (Source: Gucci company reports; 2004 data are taken from PPR company report)

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Gucci Group

Gucci brand

Exhibit 2: Gucci Group key data – FY 2004 (source:PPR company report)

Leather goods 35,4%

Shoes 11,1%

Ready-to-wear 12,5%

Jewellery 5,1%

Fragrances 16,4%

Other 5,9%

Skincare products 1,5%

Cosmetics 5,0%

Watches 7,1%

Europe 41,1%

North America 20,9%

Japan 20,5%

Asia-Pacificexc. Japan 13,1%

Other 4,4%

by product category by geographical area

Leather goods 49,8%

Shoes 12,1%

Ready-to-wear 13,0%

Jewellery 6,5%

Fragrances 0,9%

Watches 11,2%

Other 6,5%

Europe 32,3%

North America 21,9%

Japan 24,9%

Asia-Pacificexc. Japan 17,7%

Other 3,2%

by product category by geographical area

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Exhibit 3 - Key business processes

Collection preparation

1. Prototyping

2. Bill of materials definition

Order management

6. Orders for samples production

7. Samples production

8. Samples control and delivery

10. Sales campaign

11. Estimation on sales progress

12. Completion of sales campaign

17. Order confirmation

18. Order cancellations (customers)

24. Assignment to customer orders

25. Order modification (producer)

Production planning

9. Initial purchases based onbudget

13. Eventual additional purchases

14. Eventual preorders to subcontr.

15. Completion of purchase orders

19. Yarn/fabrics receival/control

20. Production orders

21. Orders to subcontractors

22. End product receival/control

26. Eventual dedicated operations

27. Picking list to warehouse

28. Delivery to customer

29. Invoicing

Budgeting and control

3. Sales budget bycollection/season

4. Standard costs

5. Economic result budget

16. Control on purchase costs

23. Control on production cost

30. Collection/season results eval.

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Exhibit 4: Form Postponement and Make to Stock(source: H. Skipworth and A. Harrison, International Journal of Production Research, Vol 42 No 10,2004, pp 2063-2082)

CODP is the Customer Order Decoupling Point

FORM POSTPONEMENT

CODP

Forecast-driven Order-driven

BASIC MANUFACTURING

FINAL MANUFACTURING

DISTRIBUTION

GENERICPRODUCT

STOCKFinished product

Generic product

Generic product

MAKE-TO-STOCK

BASIC MANUFACTURING

Generic product

CODP

FINAL MANUFACTURING

DISTRIBUTION

FINISHEDGOODSSTOCK

Finished product

Finished product

Forecast-driven Order-driven

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Exhibit 5: Gucci Logistica organisational chart (source: company internal documentation)

FORECASTEDDATES

ACTIVITIESFROM TO

RESPONSIBILITY

DELIVERY OF DESIGN 01/09 10/09 DESIGN TEAM/PROD. DEV./MODELLISTS

PREPARE PROTOTYPES 03/09 16/09 MODELLISTS

FINAL REVISION OF PROTOTYPES 16/09 DESIGN TEAM/PROD. DEV./MODELLISTS

LAUNCH THE COLLECTION (DESIGN TEAM) 17/09 18/09 DESIGN TEAM

ORDER ALL MATERIALS FOR SAMPLES 18/09 19/09 PROD. DEV.

TECHNICAL DATA FOR SAMPLES 22/09 23/09 TECHNICAL DEPT.

SEND MATERIALS TO SUPPLIERS 23/09 RAW MATERIALS WAREHOUSE

DELIVERY OF SAMPLES 26/09 EVENTS DEPT./SUPPLIERS

DELIVER SAMPLES TO SHOWROOMS 26/09 27/09 FINISHED PRODUCTS WAREHOUSE

FIRST COST PRICE LIST 29/09 TECHNICAL DEPT.

FASHION SHOW 02/10

EDITING/MODIFICATIONS 03/10 DESIGN TEAM

MODIFIED FIRST COST PRICE LIST 03/10 09/10 TECHNICAL DEPT./COSTING

SALES CAMPAIGN 07/10

Exhibit 6: Examples of collection launch and sales campaign timing (source: company internaldocumentation)

Production & Industrial LogisticsVivencio Fernandez de Aragon

Materials Research & DvpmtMichele Guidi

Technical Mgmt GucciAlessandro Poggiolini

OperationsMarco Sani

ProductionKarl Heinz Hofer

CostingStefano Greco

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Order passed Ex warehouse deliveryLeathergoods within July 9th

within July 18th

after July 18th

Dec 10th – April 5th

Jan 15th – April 29th

Not acceptedFootwear within July 21st

within July 28th

after July 28th

Jan 15th – March 31st

Feb 1st – April 15th

Not accepted

Exhibit 7: Examples of fixed ordering dates and delivery windows (source: company internaldocumentation).

Exhibit 8: Delivery progress (cumulated monthly percentage on seasonal volumes)(source: company internal documentation)

Season Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept.

S.31 Cruise 4 27 65 90 100

Main 6 18 42 65 90

WFS 0 7 32 75

S.33 Cruise 5 25 48 75 80 95

Main 8 60 76 96

S.41 Cruise 5 45 70 90 100

Main 10 30 60 82 95

WFS 0 0 35 96

S.43 Cruise 15 30 50 75 80 97

Main 10 62 76 98

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Exhibit 9: Pictures of the « Chain bag line »(source: company internal documentation)

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131471 shoulder bag/flap/medium isoffered in the following variants:

131470 mini bag/flap is offered in thefollowing variants:

131464 evening is offered in thefollowing variants:

As to materials As to colours As to materials As to colours As to materials As to coloursJava soft Black

PralinePalm greenFlame red

Java soft BlackPralinePalm greenFlame red

Ostrich-niagara lux BlackAfrican violet

Ostrich-niagara lux BlackAfrican violet

Cocco millennium Anthracite pearlEgg-plant pearl

Cocco plongé BlackPalm greenFlame red

Cocco plongé BlackPalm greenFlame redPralineé

Cocco plongé BlackPalm greenFlame red

Original GG BlackPalm green/snow

Original GG BlackPalm green/snow

Original GG Palm green/snow

Velvet GG black Velvet GG black

Exhibit 10: Example of model variety within the Gucci Chain Bag line – reference to articles 13147,131470 and 131464(source: company internal documentation)

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Article Material Colour Sell Out In DOS &warehouse

In transit On Order

Model 1 Leather Beige 281 188 0 17Model 1 Leather Bronze 211 116 32 5Model 1 Leather Black 350 218 6 262Model 2 Leather Beige 498 422 800 41Model 2 Leather Bronze 723 599 94 361Model 2 Leather Black 1.082 664 181 1.647Model 3 Leather Beige 817 317 18 838Model 3 Leather Bronze 292 196 5 380Model 3 Leather Black 561 179 7 20Model 4 Leather Black 292 196 5 380

These are disguised and simplified data. The whole chain bag collection involves 10 or 11 articles(depending on the season) that can be made of various materials and colours.

Exhibit 11: Trend and stock data for the chain bag line – autumn/winter 2003 collection(source: company internal documentation – disguised and simplified data)