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Modern Supply Chain Could Boost Profit At M&S

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British high street stalwart Marks & Spencer (M&S) hit an eight year profit low this quarter, as its clothing sales continued to slide. Profits were down 14 percent to $851.6 million – the worst showing since 2005. Clothing sales were down 4.1 percent, but the main damage came from $152.3 million worth of one-time charges, including $113.6 million worth of bond buybacks.

The bad news comes as the firm is wrapping up the reinvention of its supply chain and is making big changes in marketing strategy. This is the seventh consecutive quarter of falling clothing and homeward sales, putting pressure on CEO Marc Bolland.

Modernizing the supply chain is a big part of his strategy for changing the firm’s course. 75% of product and 95% of suppliers will be on the new system by the end of the current financial year, which should improve intake margin by almost $68 million per year.

M&S is in the midst of consolidating its distribution centers from over 100 to just 3, located in the North, South, and Center of England. This will enable them to cut port to store times from as long as two weeks to as little as one day. At the same time, the chain is dividing up its sourcing mix into core, seasonal, and fast track products. They are deploying different strategies for each range.

Core products will make up about 30% of the mix, including volume lines like underwear and their signature cashmere. Already, the firm has been able to cut the price of its cashmere sweaters, while increasing weight and detail, on the added efficiencies.

The company has been “pulling our scale” together, according to sourcing head Krishan Hundal, reducing the level of complexity across the business, increasing visibility by creating one buying and sourcing model, and shifting production to more cost-effective regions.

Seasonal ranges will make up 60% of the mix, including products like swimwear. The firm has started testing these products online before rolling them out company-wide, a move that is expected to reduce discounting by $1.5 million per year.

The company moved production of dressing gowns to Turkey from Sri Lanka, in a move that emphasized speed to market. They were able to test 22 different colors before choosing the best performing ones, which increased sales by 11%.

Finally, the firm’s Limited range will get fast-tracked, cutting time from design to shop floor, which currently takes as long as eight weeks. These logistical improvements will require a systems overhaul that is making the whole company more responsive, according to Hundal. Agility and flexibility are the watchwords of the day.

This and other similar moves will help improve the bottom line at the firm, which has suffered along with Great Britain’s economy, and has relied heavily on food sales (which make up just over half of its gross revenue) to compensate for declines in the clothing and home goods product categories.

Hundal admitted that the firm has underinvested in its supply chain in the past, but the firm is fixing the damage. A recent report from the British Centre for Retail Research indicates that continued austerity and the rise of online retailing could increase pressure on firms that fail to modernize, as the total number of stores in England is expected to fall by 22% by 2018.

By cutting lead times and increasing visibility, M&S is positioning itself to function more like Macy’s, with a strong omni-channel platform that will allow it to sell all categories through all channels. This will help stave off the negative effects of greater web sales in the U.K.

The reduction in lead times will also allow the company to reduce inventory by 33% and cut logistics costs by 40% – big savings in tough times, and news that shareholders should be glad to hear.

Despite falling profitability, finance director Alan Stewart says that the board has the full support of its investors. Stewart said, “The clear message they give us is: ‘Don’t be distracted from the strategy and transformation.'”

The firm is betting big on its winter collection, which CEO Bolland has called a, “step in the right direction.” They received strong accolades from fashion press, and the new supply chain improvements should help the firm deliver in appropriate quantities, appropriate styles, in a localized way.

Hundal says, “It’s about having great in-season availability, mitigating and taking out the risk of some of our seasonal product.”

M&S stock is at its highest level since January 2008, but the firm is holding the dividend flat.

 

 

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