Sourcing Journal spoke with Stephen Denning, author of the recent book The Leader’s Guide to Radical Management: Reinventing the Workplace for the 21st Century. Denning’s book, available through John Wiley & Sons, discusses the changes coming to global organizations as companies seek to become agile competitors, and build virtual organizations— a process he calls Radical Management. Denning looks at Spanish firm Inditex, parent company of Zara and Massimo Dutti, and also at Hong Kong sourcing leader Li and Fung as case studies for the success of these new techniques.
What exactly is radical management? How does it apply to the garment industry supply chain?
SD: Firms like Zara and Li and Fung have solved the problem of how to get disciplined execution with continuous innovation. They solved that with a set of practices, which are evolving, customer driven, customer focused, and able to deliver it in short cycles. Was the customer delighted by it? If so, do more. If not, change course.
When researching this book, I found many big organizations struggling with change. They would be successful in implementing change, but it wouldn’t solve their problem. A few companies had developed techniques that made it much easier and agile for them to cope with this new environment in which the customer is the boss.
What’s changed? Why is now the time for radical management?
SD: There’s been a massive shift in power in the marketplace from the seller to the buyer. Globalization and the web are mainly the cause. Customers can instantly get reliable information about what is available, and they can interact and collaborate to find out even more. This dramatically changes the balance of power in the marketplace.
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Why does this matter for sourcing companies? Our industry seems immune from these changes.
SD: The trends I’m talking about are changing things for everybody. Organizations operating in the old mode are dying faster and faster. The rate of return on assets and investor capital is 1/4 of what it was in 1965. It’s down to just over 1%. There’s a crisis in the private sector to stop this calamitous decline. Some old companies will stagger on, but a lot of them just won’t make it.
The only sectors not affected by this are things like defense and health, where government regulations are propping up the existing industry.
What do Inditex and Li and Fung do different?
SD: Li and Fung and Zara are responding to this need in two quite different ways.
Zara is customer driven. They’re focused on what’s happening in the marketplace, what customer’s want, and how to deliver small changes rapidly.
The way they lay out their factories, the design team is right in the middle of the factory, so that the whole process of learning from the manufacturers and vice versa is horizontal.
Their supply chain is mostly based in Spain. 25% is in other parts of Europe, and 25% is in Asia. They send very simple things to Asia. Anything that is tricky, they do in Spain, which is not a low cost area. What they’re gaining is the interaction between the design team and the manufacturer, which is critical to producing these high quality goods at an affordable price.
The factory managers can communicate problems, which builds a manufacturing influenced design process. That way, they can continuously innovate and get to a better result.
What about fast fashion?
SD: They’re not at the bleeding edge of fashion, but their people follow what is happening at the edge, and their organization means they can get similar goods to market faster than, say, Christian Dior, at a lower price.
Their model works best in Europe because they are based in Europe. To replicate this model in China or the US, they would have to have a design team that is closer to those markets. For their model to work, they have to be basically competitive on price, but it’s more important for them to be competitive on speed. Also, their quick product turn means less discounting, so they can set a correspondingly lower price point.
Why don’t any US firms operate on the Inditex model?
SD: US firms tend to focus on cutting costs above everything else, and that’s one element, but the other two elements – how can I add more value, and how can I get that value to the customer sooner, tend to get lost in the shuffle. The new way of thinking is to focus on these things and figure out how to do more of it.
Keeping costs down in very important, but it’s also crucial to give at least similar attention to adding value. Time turns out to be a huge factor in delighting customers. If you can get the same thing sooner, that’s huge.
How can companies make this part of their culture?
SD: One big element is changing the goal of the organization. The basic idea in a buyer’s world is that if you can delight the customer, you can make money. Structurally, you have to be thinking about how to implement horizontal communications and interactions – not top down or command and control based.
What about Li and Fung? They’re a sourcing firm, not a retailer. How does this apply to them?
SD: What Li and Fung does better than anyone else is orchestrate factories, so they can perform better than they ever could individually. Each factory engages in increasing specialization, so that they can create more and more value for the Li & Fung network. Pieces of garments come from many different factories, each highly specialized. The ultimate outcome is the best product for the end customer — be that a brand, label, or consumer – at a given price point.
What does this look like organizationally?
Their network is a modular, and based on relationships. It has a short timeline, in the sense of being about particular product at a particular time, but it is relational in the sense that the network itself is long lived. Member firms stay in the network for years.
Agility in this context works in a counter-intuitive way, with a “30:30 rule”. When a firm starts working with Li & Fung, they say, “We will guarantee to take at least 30% of your output from your factory every year. But we will never take more than 70%.”
This means that the participating companies are learning not only from their own eco-system. They also learn from partners up and down the value chain.
Why not just take all the high quality production, and accelerate your supply chain down the line?
For one thing, the 30:30 rule is an exercise in trust building, which is essential for the network to function well. Li & Fung wants the member companies to have a certain amount of independence and feel that they can branch out. They also want the factories to learn from competitors who are looking at the world slightly differently from themselves.
What can a firm do to implement these ideas?
It requires acknowledging failure, not covering your backside, moving away from a big bureaucratic model and admitting that visible failures are inevitable and desirable, and that’s the price of being more productive and valuable. That’s just an example of how it can be a whole culture shift, and just taking a page out of the playbook doesn’t work very well.
You also need to craft long-term relationships. Firms that are in this mode are ideal for working with other firms that are in this mode, since they value that. Ultimately, you’ll make more money.