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  • for this case: any errors are our responsibility!

    1

    Guccis agile supply chain1

    Professor Corrado Cerruti, University of Roma Tor Vergata, Italy

    and 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 in

    the fashion business. In addition to the core Gucci brand, the Group incorporated other leading

    brands such as Yves Saint Laurent, Sergio Rossi, Boucheron, Bottega Veneta and Balenciaga together with designer brands such as Alexander McQueen and Stella McCartney (exhibit 1).

    Leather goods, and in particular bags and accessories, represented the traditional core business

    of the group, with a growing presence in ready-to-wear clothing and shoes. The major

    distribution channel is directly operated stores (DOS), which contributed roughly 50% of Group

    turnover. Gucci is a global company, with Europe accounting for just over 40% of sales: the

    USA, 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 II

    to become internationally known as a luxury brand. In the 1970s, arguments and legal disputes within the Gucci family brought about a rapid decline in fortunes. At the end of the 1980s the

    company - in spite of the entry of the Arab investment group Investcorp was in poor shape

    financially. 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. This

    painful experience not only aimed to cut costs and locations, but also to build a modernised

    company. Thanks to the cheerful contributions of Creative Director Tom Ford, it also built a renewed brand. Within a five year period, De Sole together with Tom Ford as stylist, Renato

    Ricci as head of human resources, Bob Singer as chief financial officer and James McArthur as

    director 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 to

    return to positive earnings and then to finance a strong acquisitions campaign and moved

    towards the present multi-brand configuration. The major acquisition was Sanofi Beaut. This

    company owned YSL licences and comprised two major divisions: YSL Couture for Yves Saint

    Laurent ready-to-wear and YSL Beaut 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 information

  • John Ray for Gucci mens wear.

    2

    fashion and accessories division accounted for the largest part (54%) of group revenues, and of

    the margins (240%). However, the newly acquired brands allowed the group to nearly treble its sales 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 new

    management team led by CEO Robert Polet was set up. PPR started investing in Gucci in March 1999 in order to help Gucci management to face up to a hostile takeover bid by LVMH, one of

    its strongest competitors. On September 10th 2001, following a settlement with LVMH, PPR

    increased its interest in the company to 53%2. In April 2004, following a strategic investment agreement 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 Euronext Amsterdam 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 still rooted in Florence, and in the craftsmanship strengths of the Tuscany region. All of its traditional leather production (bags and accessories) was carried out in the Florence region by a network of more than 600 small to medium sized firms. While the re-launch of Gucci Group was led by Tom Ford and its successful commercial future depended heavily on the collections

    designed by the new creative directors3 , part of Guccis success has also been due to its ability

    to deliver promises made at fashion shows, respecting both strict delivery times and high quality standards.

    The need for an agile supply chain is crucial in the fashion business because a high variety of articles 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 key business processes in the fashion business, we focus especially on the Gucci supply chain. In

    addition to a successful marketing effort in repositioning its brands and collections, Gucci has

    been able to restructure its supply chain to achieve agility, while preserving its traditional craftsmanship.

    Key business processes in the fashion business

    Fashion activities are centred on seasons and collections. Traditionally, a company in the

    fashion business presents at least one collection in both of the classical seasons (winter/autumn

    and spring/summer). Most fashion companies - while keeping the official accounting and

    legal/fiscal reporting according to the fiscal year - focus management accounting and control

    mainly on seasons. Seasons are the key reference point for evaluating company competitiveness

    and profitability. Results each year are in effect the sum of the contributions of the collections

    for 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 womens wear and accessories and

  • 3

    Each season a fashion company needs to re-invent itself by renewing around 60-80% of its range. The manufacturing process cannot be planned in advance in detail, as only a small

    proportion 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 and

    finishings can be very different from those originally planned. Supply chain agility is important

    in 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 small

    quantities (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 plans

    updated as the sales campaign unfolds.

    Exhibit 3 shows key stages in collection preparation and production planning, and how they

    interface with budgeting and control

    1. Collection preparation

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

    - prototypes: unique elements aimed to express the fashion/style of the new collection that

    can 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 of

    the 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 while

    automatically generating the bills of material. The CAD system can also define part of the

    production cycle - the fabrics cutting phase. In the prototyping phase the goal is to achieve a mixed yet balanced set of offerings for a new collection. The stylist has to look at fashion trends

    and at the previous parallel season sales statistics in order to select prototypes that match the

    market target. Moreover the stylist and the product manager have to manage all the elements that determine the standard cost. For example, they have to balance cost of leather, fabrics and

    accessories with the cost of manufacturing cycle. Where necessary, these costs can be tuned by

    transferring production to subcontractors in a region with lower costs, or by substituting specified materials with lower priced ones. After an analysis at the level of the single item, the

    whole collection is revised in order to establish a balanced offer for the sales campaign in

    terms of target prices, standard costs and gross margins - with the goal of achieving the overall

    season 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 define the indu