MOVING MOUNTAINS AT MARKS & SPENCER This case was prepared by Martin Christopher and Helen Peck of Cranfield School of Management, Cranfield University Bedford, United Kingdom. ABSTRACT Marks & Spencer had long been the doyenne of British retailing, its name a by-word for quality, service and value for money. Having turned in record profits for 1998 and accelerated its global expansion plans, things suddenly went horribly wrong for the retailer. Out-of-touch management, complacency in marketing and above all an ossified supply chain were subsequently identified as root causes of the retailer's problems. Marks & Spencer's partnership approach to supply chain management had made it a textbook favorite and the subject of numerous magazine articles, almost all of them complimentary. But how had things slipped so far without anyone noticing and, importantly, what could be done to put things right? The case examines the events leading up to the retailer's fall from grace, its management's efforts to put things right and the results of their endeavors. It leaves the reader to identify the pitfalls in the course of action taken and to recommend what changes might be made to retrieve the situation. MOVING MOUNTAINS AT MARKS & SPENCER INTRODUCTION For managers at Marks & Spencer the year 2000 was turning out to be a less than auspicious transition from one century to the next. The previous 18 months had seen cadres of senior staff dismissed or redeployed in newly created posts with job descriptions that bore little resemblance to the ones they'd had before. Few would argue that the company had lost its way in recent times, becoming complacent and out of touch with the customer. Now though the company was fighting back with enticing new stores, products, services and a sophisticated new image. However, as newly appointed marketing director Alan McWalter had pointed out, it was going to take more than smart new store layouts to turn around the struggling giant. \"We won't change M&S by changing a bag or the look of some packaging...First and foremost we have to say, 'Have we got our stores in the right place with the right merchandise at the right time\". [Alan McWalter, Marketing Director, March 2000i] COMPANY BACKGROUND - THE 1890s TO THE 1990s. Marks & Spencer was formed in 1894, when Russian migr and successful market stall holder Michael Marks formed a partnership with Tom Spencer, a cashier employed by textile manufacturer I. J. Dewhirst. Marks' first market stall had been financed by factory owner Isaac Dewhirst. The Marks & Spencer partnership had all the ingredients of a winning team, combining entrepreneurial flair with the commercial acumen required to develop a string of 'Penny Bazaars'. In the 1920s the business went on to adopt the then revolutionary policy of buying direct from manufacturers, instead of through wholesalers. These unique supplier relationships gave the business an advantage that few of its rivals could match. In 1926, Marks & Spencer was floated on the London stock exchange. Two years later, it registered the St. Michael trademark, removing manufacturer's own brands from its rapidly expanding chain of stores. By the early 1930s Marks & Spencer had established a presence on London's fashionable Oxford Street. Soon afterwards, food departments selling canned produce were introduced into the stores. The company had by now acquired a reputation for excellent service, quality, and value for money. During the Second World War (1939-1945), the British Government turned to Marks & Spencer for expertise when setting up its wartime Utility Scheme, a program designed to bring clothing of dependable quality within the reach of everyone. Marks & Spencer was by now a British institution. MOVING MOUNTAINS AT MARKS & SPENCER In 1973 the company opened its first overseas store in Canada and in 1975 it ventured into Europe, opening stores in two Continental European capitals, Paris and Brussels. Back in the UK, 'M&S' as it was affectionately known to millions of customers, went from strength to strength. In the 1980s Prime Minister Margaret Thatcher was regularly seen attending high profile political events attired in off-the-peg ladies suits from M&S. Mrs. Thatcher was a tireless and outspoken advocate of the company's products, eagerly promoting it as a standard bearer for British enterprise. In the mid-1980s, a study undertaken by management consultants McKinsey & Co. ranked the Marks & Spencer brand alongside Her Majesty the Queen and the humble Mars Bar in terms of consumer-perceived reliability. In 1985 M&S's trustworthy reputation enabled it to branch out into the profitable financial services market. Nevertheless, clothing - particularly women's wear - remained the mainstay of the business. M&S had provided successive generations of middle class shoppers with high quality clothing in classic styles and conservative colors. Each season, the incrementally updated core classic range would be supplemented with a selection of more contemporary (though never leading edge) fashion items. In addition to woman's outerwear, the company held a significant share of the UK market for children's clothing and men's wear, while its perennial dominance of the underwear market was undisputed. In 1988, Richard (Rick) Greenbury was appointed to the post of CEO and then to that of executive chairman, having risen through the ranks at Marks & Spencer's. Greenbury successfully piloted the company through the recession of the early 1990s. Few other High Street chains fared so well, but few of them enjoyed the benefit of such a profoundly loyal customer base. The recession raised cost-awareness within M&S to new heights, leading management to search for new ways to improve in-store-efficiency. Greenbury's unparalleled success at the helm earned him a knighthood in 1992 and saw him nominated 'Retailer of the Year' in 1994. At around that time, some industry-watchers began to criticize M&S's increasingly dated in-store merchandising techniques, though few could argue with the overall success of the formula as profits remained on an upward trajectory. ***Take in Table 1 Here**** Mars Bars are marketed as 'Milky Way' bars in North America MOVING MOUNTAINS AT MARKS & SPENCER In May 1997, M&S's profits exceeded 1billion for the first time in its history. Under Greenbury's stewardship profits (return on sales) had risen steadily from a healthy 10% in the 1980s to 14% by 1997. M&S was now without question the most profitable retailer in Europe. Encouraged by seemingly unstoppable success, the company's top management team had happily sanctioned an ambitious expansion strategy. PREPARING FOR THE 21ST CENTURY \"Marks & Spencer aims to become the world's leading volume retailer with a global brand and global recognition\". [Marks & Spencer Annual Report, 1997] By June 1997 M&S's retail empire stretched to 651 locations across 31 countries (see Appendix A). Further expansion plans were outlined in the company's Annual Reports for 1997 and 1998. The intention was to expand overseas selling space by a further 40% in the three years to 2000. Most of the company's stores traded under the Marks & Spencer name and format, the notable exceptions being in the US and Japan. M&S had entered the US and Japanese markets through its acquisition of Brooks Brothers and Kings Super Markets in the 1980s. In North-west Europe M&S concentrated on buying stores to build critical mass in and around major centers of population. In Central Europe, the Aegean and the Gulf states it relied on franchise agreements with local partners. Similarly, in Asia there were plans to use M&S's own operations in Hong Kong as a base for expansion into China. Plans to open up the Korean market had collapsed along with the Korean economy, but elsewhere in South East Asia and Australia partnerships were again seen as a viable vehicle for expansion. In the demanding markets of North America expectations were more modest in terms of the development of the store base, though the Far East's receptiveness to US culture made a geographical extension of the Brooks Brothers chain an attractive option. Back in the UK, the company was planning a 20% increase in retail space. New larger out-of town stores were opened, and additional town center stores were acquired from struggling rivals. In Manchester, managers from M&S were seconded to assist in replanning the City Center following the devastating bombing of 1996. The biggest M&S store in the world would be the anchor of the new development. MOVING MOUNTAINS AT MARKS & SPENCER Meanwhile long-established smaller stores were subjected to scrutiny as new ways were sought to increase returns further. The profitability of each product category was analyzed resulting in some of the less profitable ranges - such as children's clothing - being removed from the smaller stores. The move was unpopular with store-level managers who feared that customers might react badly to the new more focused retail strategy. Regardless of these reservations, M&S pressed ahead with the changes, driven by a growing conviction amongst top-level managers that consumer shopping habits, preferences and lifestyles were changing. One noticeable trend in British retailing had been a renaissance in home shopping. Mailorder catalogues were rapidly throwing off down-market associations and although the UK lagged some years behind North America when it came to on-line shopping, by the late 1990s it too had appeared on the horizon. By 1997 M&S was considering both options. The company had previously used direct mail only to improve customer access to a wider choice of non-clothing products, mostly home furnishings, flowers, hampers and wine. Seeing the possibilities to improve garment sales, a limited range adults' clothing mail order catalogue was piloted in the spring of 1997. Months later, a school wear catalogue was launched in time for the busy back-to-school period. By the spring of 1998 the company was confident enough to launch 'Marks & Spencer Direct', a clothing catalogue for adults and children. The mail order selection was designed to complement the retail offer in terms of product, style, image and price. Overall, the group's home shopping activities still accounted for only a tiny proportion of its business, nevertheless attracting new staff with mail order expertise had become a recruitment priority. SUPPLIER PARTNERSHIPS Throughout the bumper trading years of the mid 1990s, M&S had retained its position as the UK's leading retailer of lingerie, men's suits and classic-styled ladies outerwear. By 1997 it had also emerged as the country's biggest single retailer of women's shoes and women's jeans, underlining the fact that M&S was now a significant player in the market for casual apparel. The company readily acknowledged that its achievements owed much to longstanding partnerships with its leading suppliers. Over the years, close ties with textile suppliers and manufacturers had enabled M&S to lead the way with innovative new products and fabrics resulting in, amongst other things, the introduction of the non-iron shirt and machine washable silk sweaters. MOVING MOUNTAINS AT MARKS & SPENCER \"We had exceptional success with velvet, chenille, fleece and 'soft touch' fabrics. In each case close links with fabric suppliers and garment manufacturers meant we could react swiftly within the season to maximize strong early sales. We meet modern demands for comfort and convenience with our growing use of stretch, non-iron and stain-resistant fabrics. Our technologists continue to work in partnership with fabric and garment suppliers to deliver the highest possible quality and performance\" [Marks & Spencer Annual Report, 1998] M&S designed most of its clothes in-house before putting the designs forward to favored manufacturers along with notoriously strict specifications regarding the finished product. The manufacturers provided dedicated facilities for M&S who required suppliers to refrain from bidding for work from other clients. The close partnerships arrangements also alleviated M&S of the need to allocate resources of its own to technological research and development activities. Instead, the retailer relied on its trusted suppliers to put forward their most recent innovations - often allowing M&S exclusive access to technological breakthroughs. Decades of experience had taught the suppliers that their reward for servicing such a demanding client was a culture of continuous improvement within their businesses and the loyalty of M&S through good times and bad. In the summer of 1998, the company's reputation for supplier management was stronger than ever, prompting academics and journalists to single out the relationships between M&S and its suppliers as a role model for British industry and as possibly \"the only true partnerships in [UK] retail\" ii. \"We encourage our suppliers to invest to our mutual benefit, innovation comes from sharing our knowledge as a retailer with their knowledge in production, distribution, logistics or information technology\". [Keith Oates, Deputy Chairman and Managing Director, Marks & Spencer, July 1998iii] UPGRADING THE LOGISTICS INFRASTRUCTURE Improving distribution efficiency through information technology was high on M&S's strategic agenda in 1998. In the stores, trials of a new EPOS system for the UK and Western Europe were underway. Decisions were taken to minimize non-selling activities in store by preparing stock in warehouses, increasing paperless transactions and consolidating administration regionally. Beyond the UK and Western Europe, franchise operations were also moving towards standardized operating systems. MOVING MOUNTAINS AT MARKS & SPENCER \"We are substantially increasing investment in information technology to drive sales, enhance customer service and improve efficiency...Technology is central to delivering the services that customers want. For example in-store ordering, whereby customers can have any St. Michael product delivered to their local store within 48 hours, now represents 3.5% of our sales\". [Annual Report 1998] The physical distribution of merchandise had been outsourced for years to specialist suppliers. The UK remained the hub of all distribution activities. Five transport service providers - BOC, Lex Transfleet, Christian Salvesen, Exel Logistics and Tibbett & Britten (T&B) were involved in transportation and distribution of goods within the UK and Ireland. Exel and T & B carried goods from suppliers to fourteen regional distribution centers and four consolidation points. The other three companies were contracted to bring goods from the RDCs to the stores. The RDCs themselves were each managed by one or another of the five suppliers. T&B had been handling M&S's hanging garments for almost 30 years, in 1998 it had four dedicated facilities in the UK, as well as a dedicated fleet in M&S livery. Exel was also a long-standing service supplier, like T&B it was involved in haulage and RDC management. Both companies also worked for M&S overseas. A review of M&S's non-food distribution activities for the UK and Ireland had been underway for three years (since 1995), with the retailer keen to improve the efficiency of these operations. By 1998 M&S was also aware that it could not continue to service its international operations solely from the UK. The UK-centric sourcing and supply strategy was inhibiting the development of the business in Asia and the Pacific. M&S still officially encouraged its suppliers to source in the UK, enabling it to maintain its 'buy-British' marketing stance. Suppliers were however struggling to remain price-competitive, some had therefore opted to supply at least a proportion of M&S's orders from overseas facilities or buy-in virtually finished goods produced in low-cost manufacturing centers such as China. In order to comply with sourcing requirements, the garments were then shipped to the UK for finishing. Some of the consignment would then be returned to the region of origin for sale. The round-trip lengthened the delay before goods appeared in the shops, and in some instances added as much as 14 to an item that cost only 4 to make. The additional costs incurred, together with the strengthening pound, was forcing M&S to position itself much further up-market overseas than its middle-market positioning in the UK. MOVING MOUNTAINS AT MARKS & SPENCER Thus the company began to investigate the possibility of more localized sourcing and distribution. Within M&S supply chain managers were busily researching a new procurement system that would allow the retailer to buy goods in any country, in any currency, and to distribute them to the required retail destination on a minimum-stop basis. In the meantime existing logistics service suppliers were testing a number of cost cutting and service enhancing measures. Exel, for example, was experimenting with more economical ways to transport goods, vacuum packing clothing to reduce freight costs between the Far East and the UK and the UK and Hong Kong. RUMBLINGS OF DISCONTENT From the outside it seemed that things had never been better for M&S, but insiders knew that all was not well. In the spring of 1998 a new strategy department had been established within the company, with multiple firms of management consultants appointed to advise on all aspects of the business. A more in-depth review of the company's purchasing strategy began at around this time. So did persistent whisperings of dissatisfaction amongst some members of M&S's top management team. Within M&S concern had been mounting over the possible competitive threat posed by international niche retailers, such as the US-based Gap and Spain's rapidly expanding high fashion chain Zara. In response, M&S had made a conscious bid to become less concerned with classics and more overtly fashion conscious. For the forthcoming season (Autumn/Winter 1998) buyers and range collectors diligently studied the latest catwalk trends - where grays and black predominated - before adopting the color scheme. In May 1998 store managers were invited to Marble Arch, the company's largest London store, to preview the forthcoming season's collection. They were shocked by the 'sea of gray' that confronted them. The dowdiness of the collection was emphasized by M&S's dated merchandising techniques. In store, goods were still displayed en masse by product category, using huge racks each filled with a particular style and color of jacket, skirt or trousers. M&S's style contrasted badly with that of its innovative niche rivals, who preferred to present goods in sparse and attractive 'boutique-style' combinations, indicating to customers the way designers had intended the garments to be worn. MOVING MOUNTAINS AT MARKS & SPENCER The collection aside, other alarm bells had been quietly ringing within the company for some time, but senior management had so far failed to heed the warnings. M&S's own in-house data showed that although profits had risen relentlessly throughout the 1990s, other key business indicators revealed a worrying trend. In November 1995, 71% of customers had rated M&S positively for service and had 69% felt that the goods offered value for money. By March 1998, the figures had fallen to 62% and 57% respectively. Moreover, top management were as yet unaware that the withdrawal of children's clothing range from the smaller stores had coincided with a 4% drop sales. DISASTER STRIKES In the autumn of 1998 British retailing descended into a sudden recession. This time M&S did not come through unscathed. \"It's a bloodbath out there on the clothing front. I won't call it a retail recession, but business has fallen off a cliff...We all thought that sales would recover in September and October and in fact they have gone further south. The entire high street is on sale\". [Sir Richard Greenbury, November 1998iv]. The difficulties in the UK were compounded by currency fluctuations and the on-going collapse of some of the Far Eastern economies. Planned store openings in the Asia-Pacific region were promptly shelved. \"We made some mistakes with product ranges, but I don't think that many more than usual - but what we definitely did was buy too much, because we were supplying this huge footage expansion program and there is no point in embarking on a footage expansion and then not buying to support it. So all that happening at the same time - that obviously hit the bottom line\". [Sir Richard Greenbury, October 2000v]. Greenbury had been due to retire in 1998, but no successor had been named by November that year. With the news of the downturn in the company's fortunes, an unseemly battle for succession erupted amongst four of the company's top managers. In the event the bid for power by deputy chairman and joint managing director Keith Oats was quashed, and Greenbury was asked to remain in post for up to two more years so that an orderly succession could be arranged. Before the month was out another time-served M&S director, Peter Salsbury had been nominated to succeed Greenbury as CEO with effect from February 1999. Greenbury would continue to serve as non-executive chairman. The New Year brought trading figures that were much worse than everyone had suspected. Profits halved. \"We made mistakes. Of course we did. The biggest one was too much stock. We made the decision on winter stock levels in April and May when we were trading well and were increasing our selling space...We increased our buying by 10% for winter stock. It was the wrong call. The market wasn't there. None of us have ever seen the market turn down on us as fast as it did\".[Peter Salsbury, January 1999vi] MOVING MOUNTAINS AT MARKS & SPENCER Salsbury later expanded his account of the series of events that led to the catastrophic drop in trade. \"When sales fell, we immediately reduced forward orders of product. This damaged the balance of ranges because, as popular goods sold out, we lacked the usual injection of fresh merchandise and still had to clear unsold goods. Hence drearier shelves and higher costs of clearance. Our classic merchandise was hit hardest...Further pressure came from the strength of sterling. This benefited our competitors, but disadvantaged us through our heavy reliance on the UK as a supply base\". [Peter Salsbury, Chief Executive, Marks & Spencer, May 1999vii]. Too much winter stock cost M&S 150 million, of which 90 million was lost from preChristmas sales, the remaining 60 million being the cost of clearing the excess stock. Some critics pointed to overpricing and poor service as the reasons behind the falling sales, others claimed that customers were unhappy about a drop in quality of some products. Retail analysts were also talking of a decline in product quality, putting it down to an increase in overseas sourcing. In 1983 the company had sourced 90% of its clothing in the UK, by 1994 this had slipped to 75% and then to an estimated 65% in 1998. THE SALSBURY ERA Salsbury officially moved into post in February 1999. The newly appointed CEO moved quickly, beginning with a cull of 25% of M&S's managerial cohort. Three members of the board, Derek Hayes who was responsible for Europe, Chris Littmoden his counterpart for North America and John Sacher, director of information technology and logistics, were amongst the first to go. Within three months the company had announced that it was reviewing all areas of its business. First suppliers were warned of the need to become more price competitive. Inevitably this would involve switching a greater proportion of production overseas. M&S had already indicated its intention to reduce UK sourcing to under 50% within the next few years, urging its largest suppliers to relocate production to low-wage economies, though insisting that ethical employment practices should be maintained. Sri Lanka had been identified by M&S as the preferred location, though South Africa and Cambodia were also seen as attractive alternatives. Dewhirst, M&S's oldest supplier was by now pressing ahead with plans to relocate vast sections of its manufacturing operations to Sri Lanka, Indonesia and Morocco, though this itself had highlighted inefficiencies in M&S's distribution system, for example, Moroccanmade goods were traveling to the UK via France before some were distributed back to France. However, the company was about to bring earlier laid plans to fruition. In the spring of 1999 it was testing a 72-hour air bridge system that would allow the company to lift product from its major distribution and storage centers to stores anywhere in the world within 3 days. Morocco was used as the test-site. M&S went on to announce plans to shift the MOVING MOUNTAINS AT MARKS & SPENCER balance of its overseas transport from 60% sea and 40% air to a predominantly air-based network. Air freight was an expensive option, but M&S planned to reduce prices by working with its largest suppliers to act as a single buying group in order to secure the best fares for their large-scale combined operation. The decision followed the successful completion of a test project in Sri Lanka where M&S had set up a warehouse near Colombo to act as a consolidation point for locally produced merchandise. By assuming the role of freight consolidator, rather than leaving each manufacturer to forward its own products, M&S had realized substantial savings. With 2.7 billion pounds worth of goods sourced outside the UK and 1.3 billion in non-UK sales, M&S was aiming to realize considerable efficiencies through its bold new distribution network. Next, M&S announced that it was to quit Canada after 26 years, having concluded that there was no other way to stem its losses. In Europe, the relentless rise of Sterling against the currencies of Britain's European neighbors was undermining M&S's plans for the region. The retailer knew it had to find ways to cut costs if it was to retain a viable presence in continental Europe. The news that some overseas operations were under review came as word filtered out that M&S had decided to conduct a thorough reappraisal of its global supply chain. The exact extent of the global supply chain was itself unclear as the UK and Irish operations were excluded. The company's total store base had however swollen to 718 in 34 countries by this time. Several small specialist logistics consultancies were invited to pitch for the business against a handful of the big-name generalists. A.T. Kearney went on to win the contract for the global supply chain review in May 1999. As the lead consultancy in M&S's far-reaching review of business strategy, it was thought to be the most appropriate candidate. Following the announcement, suppliers were summoned to a meeting where they were informed of the nature of the consultants' mission - to review the international supply chain and to recommend cost-cutting measures - and their cooperation was requested. Kearney would be conducting a survey to determine how much of the clothes design and planning activities could be delegated to suppliers. The consultancy was also expected to tackle more basic distribution issues, such as the introduction of cross-docking for hanging garments at distribution centers. Other priorities would be to develop systems to support ebusiness. M&S had earlier announced its intention to begin selling products on-line by the end of the year. With consultants appointed to deal with the reshaping of the overseas supply chain, M&S's logistics team were able to turn their attention to an on-going review of its distribution arrangements for the UK and Ireland. In June 1999 it announced that two of it leading third party logistics suppliers - Exel Logistics and T&B - had formed a joint venture 'Joint Retail Solutions Ltd' (JRL) specifically to service M&S. The new venture allowed the former competitors to retain their existing business and win business from other rivals with a new five year contract. JRL's 250 vehicles would replace the fleets of all five of M&S distribution contractors, though responsibility for running of the distribution centers would MOVING MOUNTAINS AT MARKS & SPENCER remain as before. JRL would collect all boxed and hanging garments and non-food household items from suppliers, delivering them to distribution centers and then on to M&S's stores in the UK and Ireland. The agreement would allow M&S to squeeze out further costs and environmental benefits. In four years the retailer had already cut by 40% the number of trucks used to move clothing and general merchandise to its stores with, it was claimed, no reduction in service. The venture's formation was heralded as one of the few pieces of good news in an otherwise dismal year for M&S. THE RECOVERY STRATEGY Sir Richard Greenbury chose to retire in June 1999, on the eve of the annual shareholders meeting. Profits had plummeted and although Salsbury and his array of management consultants were pushing through the most radical shake-up in the company's history, rumors were circulating that M&S had become a take-over target. Salsbury outlined his proposed recovery program to shareholders in the company's 1999 Annual Report. \"We have four priorities for restoring the value of your shares: 1. We must create clear profit centers with simpler management structures, faster decision-making and distinct targets for shareholder value. 2. We must change the way we buy goods, both in the UK and overseas, by giving our selling and marketing functions more say in what we offer. 3. We must restore profitability overseas by reorganizing our local businesses to serve their local customers. 4. We must build on the success of our financial services business. In short we must aim every part of our organization towards the customer it serves\". The financial services business was one of the strongest elements in M&S's portfolio and the in-store M&S account card remained popular with 5.2 million account holders. 'Clear profit centers' translated into a fundamental reorganization of the business, into five distinct operating divisions - UK Retail, International Retail, Financial Services, Property and Ventures. For the first time the colossal UK retail business was to be managed as a whole rather than along product lines. Central management was to be 'streamlined' giving store and regional managers more control over operating decisions. Meanwhile, the organization's knowledge of its customers was to be pooled into a single central marketing group. The newfound customer focus catapulted marketing concerns up the management agenda. The new department would help to ensure: Better communication of M&S core values. MOVING MOUNTAINS AT MARKS & SPENCER Better presentation throughout the chain, by showing products with bolder, more coordinated displays. Better ranges at local store level with more consistent availability of popular items. Better use of customer information, whether from charge card and mail order databases or sales reporting systems, to target promotions more effectively. Spring 1999 saw the launch of a major advertising campaign to promote the M&S brand values. Regarding the issue of better presentation, M&S had at last decided to introduce more modern merchandising techniques. That year it began experimenting with the lowstock boutique-style displays at its new store in the Bluewater shopping complex in Kent, but soon found that it lacked the necessary expertise to make it work well. There, as elsewhere, stock availability had become a serious problem. Having been overwhelmed with unsold stock the previous season (Autumn/Winter 1998/9) the retailer had put much tighter controls in place, but these were reducing availability of goods to individual stores. Consumers could pick up the jacket they needed, but often found that the matching trousers were unavailable in store in the size required. The company emphasized that it was willing to order items on request from the store's designated stock at the warehouse or from other stores. But customers were looking for immediate availability. \"In the past, if a shop had run out of something I needed, I thought it was my fault for getting there too late. Now I'm not so tolerant. I expect stores to rearrange themselves so they're always ready for me\" [M&S Customer, May 2000viii] Within M&S poor buying decisions were attributed to a lack of communication between customers and the senior managers responsible for purchasing decisions. Consumer requirements and all aspects of branding were being examined by one or another of the 34 management consultancy firms working for M&S during this period. One of the consultancies had conducted consumer focus group sessions as part of the marketing strategy review, revealing huge demand for more women's clothing in larger sizes. Analysts wondered out loud as to why M&S had had to resort to focus groups to reveal this fact. \"I can't believe that they don't know what is selling and what isn't...Why should they be going to focus groups? What is wrong with their systems? That should be telling them that they need more of the larger sizes\" [Retail Analyst, July 1999ix]. The sizing issue resurfaced again the following week at M&S's annual shareholders' meeting when, to the horror of the board and the delight of the assembled press, one angry investor mounted the stage. The smartly-dressed middle-aged woman proceeded to berate the board over the sizing of their women's clothing and the state of its lingerie range. She informed them and the 2,600 watching shareholders that she had been unable to find clothes to fit her at M&S and that the blue suit she was wearing had come from high street competitor. After urging the board to fire its design team she went on to share her views on M&S's lingerie range, comparing it to that of M&S's arch rival BhS. MOVING MOUNTAINS AT MARKS & SPENCER \"When are you going to realize that women in their fifties don't have the same waistline as they did when they were 18?...Your underwear is boring, too. I may be 52, but I like my underwear sexy. And BhS underwear is a darn sight more sexy\" [Teresa Vanneck-Surplice, Shareholder, July 1999x] The meeting was seen as a watershed. Profits for the year to April 1999 had fallen 41% on 1998 and the hoped-for recovery was no-where in sight. Figures for the first quarter of the new trading year (April -June 1999) were even worse, showing sales of clothing and general merchandise down by almost 13%, the biggest drop in the company's 115-year history. The share price had halved in less than a year. European sales were still falling and with Sterling strengthening daily against the Euro, a rationalization of the store base in Continental Europe had become inevitable. M&S decided to close its loss-making stores in France, Germany and Austria. France would retain a small clutch of stores in the most prestigious locations, while the German operations were to be trimmed back to two. In Austria M&S would maintain only a token presence in Vienna. The continued strength of Sterling was also leading to an even greater emphasis on off-shore sourcing. \"A major issue and an important key to improving our product values, both at home and abroad, is sourcing more of our requirements in those parts of the world with costcompetitive advantages, particularly if the value of Sterling remains high. We are addressing this issue mainly through the overseas investments of UK-based suppliers, but also the many world-class manufacturers anxious to provide us with high quality merchandise\" [Annual Report 1999] ECONOMIES OF SCALE \"Our challenge is not to buy more efficiently, but to buy more effectively - to reorient our vast supply structure so that decisions are driven by what customers actually want. ..But we are also pursuing cost savings. Restructuring has enabled us to bring greater efficiency and flexibility to our supply chain, particularly in clothes and home furnishings. We now source more goods abroad and we are setting up a sophisticated global network for distributing goods between factories and stores. Once again our long-standing relationships with suppliers have borne fruit as we eliminate duplicated functions and co-operate to exploit economies of scale\" [Peter Salsbury, Chief Executive, Marks & Spencer, May 1999xi] M&S had always been a mainstream mass-market retailer, but the management team was mindful of consultants' reports suggesting that the UK clothing market was becoming polarized. High volume, low-price warehouse clubs and discounters were doing well, so were the higher priced low-volume designer labels. In between, the middle market was reported to be in terminal decline. Early in July 1999, reports began to leak out into the press that M&S would be lowering prices of its core product range for the forthcoming season (Autumn/Winter 1999) by MOVING MOUNTAINS AT MARKS & SPENCER between 5% and 20%. The reports were well-founded and M&S was looking to its suppliers for the necessary cost reductions. The retailer began notifying them that they would be required to relocate a substantial proportion of their M&S production capacity overseas. It also announced its intention to reduce the number of suppliers. \"The supplier changes will mean a big reduction in the number of suppliers M&S deals with, as it attempts to give fewer suppliers longer - and cheaper - production runs\" [Peter Salsbury, Chief Executive, Marks & Spencer, November 1999xii] Amongst those to be dropped at short notice was William Baird, one of M&S's 'big four' suppliers. Baird made lingerie, men's wear and women's coats for M&S, ranking fourth in terms of volume behind the company's other core suppliers, Courtaulds Textiles, Dewhirst, and Coats Viyella. Between them the four companies supplied more than 60% of M&S's clothing stock. Baird, the least exposed of the big four (selling only just over 40% of its output to M&S, against Dewhirst's 90%) had publicly criticized M&S clothes buying systems, alleging that they were riddled with inefficiencies. Baird's managing director David Suddens had recently been quoted in the London Standard as saying that there was \"a crazy duplication of effort within the retailer\"xiii. There were also claims that clothing orders that could have been turned around in four weeks were taking eight months to reach M&S showrooms. More damaging still, was a statement accompanying Baird's interim results: \"The difficulties at Marks & Spencer have given rise to much media comment...Our customer's reaction to win back its leading position and reaffirm its reputation for value had had a severe short-term impact...The reduction in orders placed by Marks & Spencer, plus a significant lowering of retail prices and its desire to improve its own margins, have rendered much of our UK manufacturing capacity unviable\". [William Baird, Statement of Interim Results, September 1999] M&S had always operated on the basis of two clothing collections per year, using massive scale forward planning to place orders with a few favored suppliers approximately nine months ahead of the season. In contrast, rivals the Gap, Zara or Swedish chain H&M's fashion-savvy buyers worked on quick turn system. The Gap, for example, had 14 'seasons' per year with stock changes every three weeks. M&S was at the time considering shifting up from two to four seasons for its main collections, and hoped to reduce lead times to around three months. In between the retailer planned to liven sales up a little with aggressive shortterm price promotions and the launch of important new apparel ranges. In November 1999 it announced the forthcoming launch of its premium-priced 'Autograph' collection, a 'club class' range of designer clothing. Designed by some of the most prestigious names in British fashion, Autograph would be available in only 13 specially refitted stores in the UK and three in continental Europe. To emphasize the limited edition nature of concept, new capsule collections would be introduced every four to six weeks. Autograph would be on sale from March 2000. In the meantime, M&S introduced the 'Salon Rose' lingerie collection. The range was a marked departure from the safe but \"boring\" styles for which M&S had recently become too well known. Designed by specialist lingerie company Agent Provocateur, the range of sheer and lacy underwear in racy styles and colors MOVING MOUNTAINS AT MARKS & SPENCER was designed to please younger customers (and Mrs.Vanneck-Surplice). The high margin range offered consumers the designer look in a huge range of sizes, with a single bra available in sizes from 32AA to 40DD, all at a fraction of Agent Provocateur's usual prices. Salon Rose was well received by consumers, but M&S's results for the half year to November revealed that clothing sales had gone from bad to worse, down 6% on 1998. Meanwhile customer satisfaction surveys showed that only 45% of customers rated M&S positively on service and 43% on value for money. Speculation intensified that M&S was ripe for takeover. The situation was made worse by the storm of bad publicity surrounding the closure of Baird's UK factories. M&S expressed its regret that its new sourcing policy would inevitably mean factory closures in the UK, but stated that it had no choice if it was to deliver better value to both its customers and shareholders. By January 2000 M&S was sourcing roughly 50% of its clothing and general merchandise outside the UK. Sourcing director, Joe Rowe confirmed to the press that the intention was to increase imports further, possibly taking them as high as 75%. However, Rowe voiced his opinion that the proportion should not extend beyond 75% of the entire product range. Some product areas such as hosiery and some lingerie (where labor costs were minimal) would likely continue to be UK-sourced, others such as blouses and knitwear would be mostly imported. 95-100% of men's shirts would be coming from overseas. The economics of manufacturing shirts in the UK were becoming untenable when costs were compared with Asia (see Appendix B for comparative costings). Rowe's defense of M&S's reluctant retreat from UK manufacturing came as former supplier William Baird announced that its business had plunged 93.5 million into the red, having taken an exceptional charge of 103 million to cover the closure of its M&S clothing division. Two years earlier Baird had 21 factories in the UK, 20 of them dedicated to supplying M&S. Five factories had already been closed, as production was shifted to three facilities in Sri Lanka. Of the remaining 16, some - including a newly-opened 4.2 million bra factory in Somerset - would likely be taken over by rival suppliers, though most were likely to close with a loss of 4,500 jobs. Baird's business with M&S would be more or less concluded by October 2000. It was planned that the bulk of the work would be transferred to the retailer's other three core suppliers. However one of them, Courtaulds Textiles, was having problems of their own. Courtaulds was the biggest supplier of women's underwear and hosiery to M&S, which bought more than 30% of the supplier's output and had been doing so for more than 50 years. In February 2000, it too had also become a bid target after turning in poor end of year results. Sales of its hosiery and underwear to M&S were down 17% on the previous year and profits were down 60%. Top management readily admitted that it had lost control of its key M&S business for several months in 1999 as it struggled to deal with the move to overseas sourcing (goods and materials) on top of its efforts to integrate Clairmont Garments, a company it acquired in 1998. MOVING MOUNTAINS AT MARKS & SPENCER BUYING AND THE DEMAND-SIDE The changes in M&S's supply strategy were followed by a reorganization of the company's buying operations. The UK retail division (M&S's largest), was reorganized into seven 'Customer Business Units' - Womanswear, Lingerie, Beauty, Menswear, Childrenwear, Home and Food. Integrated buying, marketing and selling teams were set up within each customer group. \"Where before, for example, a dress might pass between separate groups for buying, selling and distribution, now all these functions are united - together with the relevant finance, IT and personnel - into one ladieswear unit\" [Annual Report 2000] Together, the changes in buying and logistics processes were expected to yield savings of 450 million per year by 2002/3 - 400 million of that from general merchandise (clothing, household and gifts). \"Why ask two manufacturers to make nearly identical sweaters? Now we use one and avoid duplication. Why buy T-shirt cotton separately for ladies, men's and children's wear? Now we use one fabric supplier and save millions of pounds a year. Why have ten managers approve a collection and why maintain five layers of interface with a supplier? Now we've cut overhead to make swifter decisions. Simpler operations bring efficiency, flexibility and value... ...We're speeding up how we buy. Rather than ordering just twice a year and well before each season, we now buy throughout the year- distinguishing between core and non-core merchandise, and ordering up to a third of more fashion-driven lines during the season itself...By dramatically reorganizing our buying processes we will nearly halve the average time it takes to get stock from factory to customer\" [Annual Report 2000] Despite the drive for greater efficiency, by the spring 2000 there was still no real sign of improvement in M&S's clothing business. Meanwhile, M&S had acquired a new chairman, Luc Vandevelde. Mr. Vandevelde, a Belgian, was the former managing director of the French supermarket group Promodes, where he had become a leading light in the ECR Europe movement. Following Vandevelde's appointment further concessions were made in terms of marketing and customer service. In continental Europe, a small separate buying operation was to be set up. It would be encouraged to use knowledge of local consumer tastes and be allowed to source some products locally. Many of the company's other directors had by now also been replaced and the new executive team were anxious to update M&S's staid image, commissioning a new company logo and embarking on the company's first ever TV advertising campaign. The hope was that this would lure disaffected customers back into the stores. Sales were reported to have rallied slightly, but no one was expecting anything but more bad news when the annual results were announced in May. Profits were down again on the previous year to 557 million, excluding a 22.3m loss on the sale of property. For the first time ever the dividend MOVING MOUNTAINS AT MARKS & SPENCER to shareholders was cut. Another round of top management redundancies accompanied the announcement, sourcing director Joe Rowe was among them. Vandevelde and his everchanging team were still grappling with the difficulties of reorganizing the buying operation. Chief executive Salsbury stepped down after the shareholder's meeting in July. On a more positive note plans were outlined for the roll out of new 'concept stores'. 25 selected stores in the UK would be given a thorough makeover before Christmas 2000. The stores were an extension of the merchandising approach used to launch the Autograph range, which was also to be rolled out in the new stores. Different lighting, signage, fittings, stock assortment and displays would make the stores seem sleek, spacious and inviting. Gone would be the bulging racks of trousers and skirts, instead the stores would be showing smart coordinated outfits, sparsely displayed. Inventory levels would be minimized to maintain the ambiance of spacious exclusivity, with usually just one of each stock keeping unit on display. In keeping with its modernist ambitions, M&S's was also pouring time and effort into building its home shopping activities. With its mail-order catalogue business becoming established, its Internet shopping activities had gone live in November 1999. By Christmas 2000, the company planned to have 3,000 products available through its website - nearly half its total range. Upbeat news about M&S's forays into cyber space were however overshadowed by more immediate concerns surrounding on-going problems with the clothing ranges. M&S summer sales started on the 23rd of June, only a few days earlier than usual, but it immediately fuelled speculation that the retailer was overburdened with stock. When the sale commenced, bargain hunters found the whole Autograph range was marked down by 40%, adding credence to rumors that the range was not selling as quickly as hoped. Shortly afterwards the company announced that it intended to open a string of sale outlets in wellappointed 'designer' retail villages. The first three stores, to be known as 'Marks & Spencer Outlet', were due to open in November 2000. A spokesperson for M&S explained that the decision was related to changes in its approach to buying, which has seen the introduction of new ranges more frequently. The stores would provide a channel to sell off previous seasons' ranges and slow-moving stock - clearing stock faster and more seasonally - rather than storing it all up for twice-yearly sales. MESSY DIVORCES At the annual shareholders' meeting in July 2000, directors confirmed that the company was still experiencing problems with its supply chain. Clothing, footwear, and gifts accounted for most of the reported drop in sales partly, it was admitted, due to poor availability. One core supplier, Courtaulds, had already gone public over the difficulties it had experienced in shifting production overseas. In planning the moves few had stopped to consider the possible impact of political upheavals and local wars on the relocation plans. Nor had they anticipated a shortage of available freight capacity, or of textile import quota. The issue of quotas became a major problem when managers discovered that Sri-Lanka (M&S's favored location) had used up its entire annual textile quota by June. MOVING MOUNTAINS AT MARKS & SPENCER Then there were the difficulties arising from attempts to switch suppliers over to FOB (free on board) terms of supply. M&S had hitherto bought from its suppliers on a DDP (duty delivery paid) basis with an agreed price per item. But the shift to overseas sourcing suddenly meant that M&S needed to know far more about the breakdown of costs for each garment. Some manufacturers were also reluctant to abandon existing transport agreements and switch to M&S preferred transport suppliers. Supplier relationships were becoming more strained than ever. Jilted supplier William Baird was now suing M&S for breach of contract, even though, like most of M&S's longest standing supplier relationships, Baird had no formal contract with its key customer. A preliminary hearing of the case went before The High Court in London in June 2000. The Court ruled against Baird's claim that the 30-year trading between the two companies constituted an implied long-term contract, but ruled that the supplier's 53.6 million compensation claim based on good faith should proceed. Baird's claim was backed by former M&S chairman, Sir Richard Greenbury. \"The special partnership relationship was at the very heart of the way we did business with our suppliers and a fundamental part of that philosophy...Indeed, it was clearly understood that once a major supplier to M&S, always a supplier - unless the manufacturer's performance was considered to be poor, in which case high-level meetings would be arranged to discuss the situation. Continuity of business was the necessary context for M&S's significant and meaningful relationship with its suppliers\" [Sir Richard Greenbury, Spring 2000xiv]. By July word had seeped out that M&S was again wielding the axe amongst its UK suppliers. More were to be dropped and the remaining ones told to shift additional capacity overseas. They were also instructed to reduce the prices of garments already ordered for the forthcoming season. According to industry observers, Barry Morris, M&S's clothing director had telephoned each of the company's main suppliers to tell them that a new pricing regime was to be introduced the following week. \"This is contrary to what they always said they stood for. It shows that all their values have vanished and that they no longer treat suppliers as partners\" [Anonymous Supplier, July 2000xv]. Analysts calculated that the price cuts could cost the larger suppliers up to 1 million each. M&S argued that it simply had no choice but to seek financial cooperation from its suppliers in its efforts to give its customers better value. However reports immediately appeared in Sunday newspapers claiming that clothing executives at M&S had met that same week to discuss whether retail prices should go up 20% on the forthcoming womenswear collections. \"The suppliers are outraged because M&S is not using the money to reduce prices for the customer and drive up sales - which would be good for everyone. They are doing it just to push up their own profits ...M&S is getting margin greedy rather than concentrating on having the right product in the stores\" [Anonymous Informant August 2000xvi]. MOVING MOUNTAINS AT MARKS & SPENCER For Coats Viyella this was a step too far. Having already sustained heavy losses on its M&S clothing business, it announced that it was to end its 70-year relationship with M&S. Coats was operating in 63 countries around the world, but the call to move more production overseas, like the news of price cuts, had come at very short notice. Around 80% of Coats' business was for M&S, but after consideration the supplier decided that it would not relocate existing facilities overseas to meet M&S's requests. The retailer would have to switch the work - including the Salon Rose and some parts of the Autograph collection - to another supplier. \"The business can make money, but for us to try to get it to that point would take considerable time and investment...It's not a sensible thing for us to do. Moving production overseas is a very long haul \" [Kazia Kantor, Finance Director, Coats Viyella, September 2000xvii]. Courtaulds was also reportedly reviewing its position, it and Dewhirst were both believed to be resisting the price cuts. In September 2000, M&S announced that although changes in buying practices had improved margins in some parts of its clothing business, sales of womenswear and lingerie were still depressed. The problem was particularly acute within the lingerie business where, despite favorable reactions to the new ranges, sales had fallen due to poor availability. Something had to be done about the supply chain problems, the question was what? ASSIGNMENT Having recently joined the company's global logistics team (with responsibility for its clothing range), you have been asked to familiarize yourself with the supply chain situation and prepare a summary report for the new director of logistics. The document must identify key areas for attention and offer your suggestions as to how they might be taken forward as part of the on-going reorganization of the company's global logistics. In particular, you are asked to address the following questions: 1. Why are M&S in this predicament? Has increased overseas sourcing helped or hindered their marketplace performance? 2. Given that costs must be reduced, how can M&S capture the potential benefits of low-cost sourcing whilst still improving responsiveness? 3. Is the current 'one-size-fits all' approach to supply chain management strategy the best way forward for the company or are there better alternatives? 4. Advise M&S on how a total end-to-end supply chain strategy might be developed. MOVING MOUNTAINS AT MARKS & SPENCER TABLE 1. MARKS & SPENCER: RESULTS 1992 -2000 T/over m Profit before tax m Earn.s per share Div. per share 1992 1993 1994 1995 1996 1997 1998 1999 2000 5,828.7 5,949.7 6,543.7 6,809.9 7,233.7 7,841.9 8,243.3 8,224.0 8,195.5 588.9 736.5 851.5 924.3 965.8 1,102.0 1,069.4 634.6 534.9 13.5p 18.0p 20.9p 22.4p 23.3p 26.7p 29.1p 15.8p 13.2p 7.1p 8.1p 9.2p 10.3p 11.4p 13.0p 14.3p 14.4p 9.0p Source: Marks & Spencer MOVING MOUNTAINS AT MARKS & SPENCER APPENDIX A. MARKS & SPENCER RETAIL OUTLETS - MARCH 1997. Marks & Spencer Number of stores Marks & Spencer Franchises Brook Brothers Number of shops Shops opened in the year to Number of stores 31 March 1997 United Kingdom 286 Austria Belgium 3 Bahamas France 20 Bermuda Germany 1 Canary Islands Netherlands 2 Channel Islands Cyprus Republic of Ireland 3 Czech Republic Spain 6 Hong Kong 8 Finland Canada 44 Gibraltar ---------- Greece TOTAL 373 Hungary Indonesia Israel Malaysia Malta Philippines Portugal Singapore Thailand Turkey Total Vienna, Austria 3 5 Tenerife, Canary islands 1 Limassol, Cyprus* Prague, Czech Republic 3 Budapest, Hungary 4 8 Jakarta, Indonesia 1 Rechovot, Israel Oporto, Portugal 5 Singapore 1 9 Bangkok, Thailand Istanbul, Turkey 2 5 * Relocated shop 7 2 2 shops 2 6 6 7 6 6 -----85 USA Japan Total 112 61 -------173 Stores opened in the year to 31 March 1997 USA Cherry Hill, NJ Chevy Chase, MD* Clinton, CT Commerce, GA Dawsonville, GA Denver, CO Houston, TX Los Angeles, CA Miami, FL Orlando, FL Paramus, NJ* Philadelphia, PA** * Relocated store ** 2 stores, 1 relocated Japan Fukuoka Fuchu, Tokyo Hokkaido Kanagawa Sendagaya, Tokyo 2 stores Kings Super Markets Number of stores USA 20 MOVING MOUNTAINS AT MARKS & SPENCER APPENDIX B COST COMPARISONS FOR SHIRTS - FAR EAST VS UK element of cost Far East UK comments raw materials 1.65 1.81 for lowest cost fabric source , duty is payable on fabrics into EEC. labour/manufacturing overheads 0.88 4.20 UK wage rates 175(39hours) v Far East 13 (48 hours) freight 0.16 0.00 the UK costs, include warehousing,discount of 4%, and UK overheads for: UK costs / manufacturers profit 1.56 0.37 design , technical and admin , and manufacturer's profit. in the UK cost the manufacturer will make no profit sell to retailer 4.25 6.38 retail price 10.00 13.00 retail price - vat 8.51 11.06 retailer margin 4.26 4.68 50.06% 42.33% retailer margin % retail margin reduces to 42% to maintain the margin the true price would be 15 , but because the market is price sensitive this price would be totally uncompetitive. MOVING MOUNTAINS AT MARKS & SPENCER ENDNOTES i Kate Rankine, \"Mama's got a brand new bag for her M&S lifestyle expectations\