Dapiran, Peter. International Journal of Physical Distribution & Logistics Management. Bradford: 1992.Vol.22, Iss. 6; pg. 7, 5 pgs
Abstract (Article Summary)
The Benetton, the Italian-based fasion designer and manufacturer, was formed in 1965, initially manufacturing for other retailers. In 1968, it opened its first 3 stores. A year later it took its first global step and opened its first retail shop outside Italy. It now has over 6,000 retail stores in more than 83 countries on every continent. Benetton's strategy is a truly global one. The same garments are sold throughout the world through the same small boutique-style shops, merchandised within strict corporate guidelines, and supported heavily with print media using identical advertisements worldwide. Benetton provides an example of an organization which has truly grasped the meaning of integrated logistics across national boundaries. Lessons to be learned from Benetton include: 1. developing a logistics vision; a complete understanding of the strategic importance of logistics to the enterprise, 2. evaluating the possibility of using the concept of postponement, 3. increasing reaction speed and reducing cycle times, and 4. developing a clear understanding of the distribution channels of which the organization is part.
Full Text (3552 words)
Copyright MCB University Press Limited 1992
THE MERCHANTS OF VENICE
The seed of the Benetton phenomenon was sown in the late 1950s when three brothers and a sister merged their flair for fashion and their business acumen. Current chairman, leading light, and one of the founding siblings is Luciano Benetton who, with sister Giuliana and brothers Carlo and Gilberto, turned $2,000 and a global vision into a multinational empire in less than 20 years.
The Benetton story has the added charm of the rags to riches theme found in fables. Luciano and Giuliana started work early in their childhood to maintain the family, following the death of their father. In her spare time Giuliana liked to knit brightly coloured jumpers which she designed. In the late 1950s Luciano convinced her that he could sell the brightly coloured garments, which are still the company's distinguishing mark, to local stores in the Veneto area of northern Italy. It is said he sold his accordion and young brother's bicycle to buy their first knitting machine.
The head office, main plant and distribution centre are located on the outskirts of Treviso, 20 km north of Venice, where the Benettons were raised as children.
The Benetton company was formed in 1965, initially manufacturing for other retailers. In 1968 it opened its first three stores. A year later it took its first global step and opened its first retail shop outside Italy.
The growth has been relentless with a five-year period in the 1980s during which one store a day was opening somewhere in the world.
In 1987 Benetton faltered when it diversified into the financial services business. At the time. the move seemed a natural extension into an area in which it s already heavily involved through its lease and financial arrangements with its suppliers and retail outlets. The diversification proved inappropriate and, in 1989, the company sold its merchant banking interests and refocused, literally, on its knitting.
Conscious of the problems which can beset a rapidly growing organization, it has managed its transition to a mature, professionally managed global marketer through judicious hiring of outside professionals.
It now has over 6,000 retail stores in more than 83 countries on every continent. These outlets sell the 60 million garments manufactured each year. In 1977, 2 per cent of sales were to markets outside Italy. By 1986. this figure had swelled to 61 per cent of which 40 per cent went to other European countries and 15 per cent to North America. The proportions are similar today with total sales in 1990 reaching $1.7 billion.
A recent analysis of the overall performance of the top European companies has ranked Benetton third after Glaxo and Reuters Holdings.
Benetton detractors have often labelled its global products as the fast food of fashion--McFashion as it has been called. This is not the barb it may appear to be. Indeed, Luciano Benetton himself distinguishes between the artisan fashion of Italy and France, of the likes of Armani or Chanel, and what he refers to as his industrial fashion. It is precisely the ability of Benetton to understand the key success factors underlying the McFashion business which gives it its competitive edge.
Benetton's strategy is a truly global one. The same garments are sold throughout the world through the same small boutique-style shops, merchandised within strict corporate guidelines, and supported heavily with print media using identical advertisements worldwide. The strategy is to brand a "total look"--from the colour co-ordinated garments to the ambience of the small stores --rather than individual products.
Early print advertising concentrated on displaying the colourful Benetton garments being worn by its youthful target market the models always multiracial and multinational. They underlined the Benettons message of world peace and racial and national harmony. The United Colors of Benetton, the company's current corporate banner, is as much a political statement as it is a fashion statement.
The social agenda of the Benetton family now extends to such issues as AIDS, environmental problems and overpopulation. All are addressed through their company's advertising campaigns.
Their advertisements do not now feature clothes, in common with many other fashion houses such as Esprit and Anne Klein and, instead, the models have been replaced by startling images which have created vocal public outcry.
Some years ago double page advertisements, which featured only multicoloured condoms, were banned by some US magazines. More recently, advertisements which showed a black woman breast-feeding a white baby caused a furore amongst American blacks. The banned advertisements were replaced by the far more innocuous images of parrot sitting on the back of a zebra or multiracial Pinocchio puppets.
The most recent campaign included an advertisement featuring a photograph of a newborn baby still attached to the umbilical cord. The advertisement was displayed as a poster in London. A burst of 800 complaints from the public in less than a week caused the Advertising Standards Authority to ban the poster but not before it had raced to the top of the UK Marketing magazine's top ten list of spontaneous recall advertisements.
Although Benetton claims the provocative advertisements are not designed simply to attract free publicity, it does not deny that the attention is welcome. The advertisements are designed to be noticed and provoke reflection on the social issues of concern to the Benettons. The baby advertisement was described as "a documentary-style bit of social reality" symbolizing "the beginning of life how all human beings come into the world in the same way". The advertisements also seem to be effective in selling clothes.
Benetton operates in a highly competitive, mature industry characterized by a fickle consumer base demanding an increasing variety of products. The market is volatile and risky. Competitive activity can render one's product fines unfashionable overnight. Product life cycles are planned to be short to maintain consumer interest. In fact, Benetton plans for eight fashion collections on top of the two basic fashion seasons--that is, a complete change of product lines ten times a year. The logistics system needs to operate at a high level of competency to support this incessant pace.
BENETTON HAS THE WISDOM
The strategic responses in such an environment are complex. The successful marketer needs the vision and the skills to manage diversity. On the one hand it needs to meet the demands of fashion--the rapidly changing needs of the customer. Hence, it needs to develop flexibility and speed. On the other hand, to compete in the "industrial fashion" stakes, it needs to maintain high levels of efficiency. Benetton has learned how to rapidly and constantly adapt to changing consumer tastes while gaining efficiency through economies of scale.
It has done this by clearly understanding the role of logistics in supporting the core business strategy.
The linchpin of this support is information systems technology. Information technology links the market place with the manufacturing process. Electronic Data Interchange (EDI) allows Benetton's agents in each country to regularly transmit orders to Benetton's head office. This knowledge of the market updated every 24 hours allows Benetton to carefully track and react to demand by manufacturing only those garment styles, colours and sizes required. Communications technology has allowed Benetton to "eliminate the filters between the customer and production" and to link the customer directly to the factory.
But the rapid transfer of information by and of itself, is not the key factor for success. The key factor is how to use the information technology to integrate the supply chain and maximize the value output.
Benetton has been forced to innovate in the manufacturing process to take advantage of the market knowledge made available through EDI. Communications technology has been integrated to CAD/CAM systems to give Benetton the speed and flexibility which it needs to compete effectively in the fashion market.
As Benetton has said, in comparing itself to its competitors, "many can get the knowledge but only we have the wisdom to be able to use it to create the competitive edge".
KNIT NOW, DYE LATER
Computer-aided design (CAD) of garments along with computerized garment cutting and assembly is the secret to a fast and flexible manufacturing operation.
The process starts with in-house garment design using sophisticated CAD technology. Video disc storage of all past clothing ranges allows designers to call up previous styles and colours. State-of-the-art on-line software allows designers to create designs using 250-colour palette screens. Data representing these designs can be transferred directly to computer-controlled garment cutters cutters and knitting machines. In theory then, garment design to manufacture can take as little as a few hours.
The garment assembly is carried out by subcontractors. Any fabric and garment dyeing is carried out by Benetton while subcontractors are again used for finishing operations.
Clothing manufacture is a mix of high technology and high labour. By retaining ownership of the high technology production elements, Benetton can take advantage of the economies of scale inherent in volume manufacture. By subcontracting the labour intensive operations it sheds the high cost elements to small family owned enterprises having lower cost structures. These cost benefits flow on to Benetton.
Traditionally, the manufacture of clothing starts with the dyeing of the yarn followed by the knitting of the garment. The problem inherent in this sequence is that the knitting process is slow--so that to meet customer service expectations requires high levels of inventory of finished garments.
The likely result of the traditional approach, as anyone who has been responsible for managing inventory will know, is that invariably the desired colours will be out of stock while there are excess inventories of the unpopular colours. In a market characterized by very short product life cycles, this mismatch of inventory and customer demand cannot be corrected using a traditional manufacturing approach. The typical result is the end of season mark-down.
The obvious answer technically is not a simple one and involved Benetton in process innovation. The solution was to manufacture the garments from the bleached yarn and delay dyeing until information on the preferred colours became available through EDI.
This reversal of traditional logic brings its rewards:
* cost savings by delaying addition of expensive dyestuffs;
* better customer service by matching supply and demand;
* increased sales by having customer desired stock available; and
* fewer write-downs for the same reason.
This delayed dyeing process is an example of the principle of postponement. Postponement suggests that value should be added in the supply chain as late as is consistent with meeting customer needs.
THE ROBOTIC DISTRIBUTION CENTRE
The $50 million distribution centre (DC), is more accurately described as a giant robot. The storage area alone of the DC measures 170 metres long b 80 metres wide by 20 metres high; a third of this height is below ground level to minimize the impact on the surrounding landscape, in keeping with the Benetton concern for the environment. Twenty loading and unloading bays service the building.
Inbound garments from the production areas arrive below ground level. The garments are already packed in one of two standard boxes which are barcoded and pre-addressed to customers. The barcoded cartons are delivered by high speed conveyors from the receipt bays to rail-guided transporters in the storage area. Each transporter can transfer up to 24 cartons at a time to and from the racking. Simultaneous put-away and retrieval occurs to maximize efficiency.
The storage zone has a capacity of 250,000 boxes sorted randomly. The DC handles 12,000 boxes a day. equivalent to 6,000 consignments a day, representing some 60 million garments a year.
The high level of automation allows the DC to operate on three shifts with six operators to a shift. Shipment is directly to one of 6,000 retail stores in 83 countries. Distributors, wholesalers and regional centres are not used. To achieve high levels of response all exports are airfreighted.
IMPROVED SERVICE AND LOGISTICS SAVINGS
During the transition from founder-managed organization to maturity, functions and processes need to be formalized and the ad hoc decisions and structures appropriate in the growth stage need to be reviewed.
The logistics functions are not immune from this process. The breathless pace of establishing a global network of shops left a wake of unco-ordinated and unintegrated movement activities. A raft of carriers, freight forwarders and customs brokers had been used to move the product, often with the not unexpected result of having the product arrive without matching paperwork and with subsequent delay in product delivery to the stores. The poorly integrated activities resulted in low service quality at a high cost of distribution.
An analysis showed Benetton that economies of scale were possible in the freight-forwarding function. In a joint venture it established WIDE (Worldwide Integrated Distribution Enterprise) to manage the international forwarding and customs clearance functions. WIDE was first established to manage the North American product movements. This organization deals directly with air carriers--eliminating a level of freight-forwarded intervention. EDI technology allows Benetton to transmit documentation ahead of consignment arrivals. to allow speedy clearance through customs and onforwarding to the retail outlets. These functions are managed or performed by WIDE.
The result of this rationalization was a 55 per cent reduction in physical distribution costs and a reduction in lead times to the USA from 22 days to seven days.
Benetton operates using a blend of in-house expertise and outsourced resources throughout the value chain. Benetton was involved in partnership arrangements (nothing more than a version of the Italian extended family) long before the term strategic alliance became fashionable. Manufacturing, for example, is carried out with the help of 450 subcontractors.
The third-party manufacturers receive production planning support, technical assistance and quality control support. It is not unusual for Benetton to provide financial assistance to encourage contractors to equip with specialized machinery for special effects and to have' Benetton help financially when the equipment is no longer required. Without this encouragement, the contractors would not have the motivation to change their technology. It is also not unusual for Benetton to encourage employees to convert internal processes to externally contracted ones and so assist employees to become self-employed entrepreneurs.
In return, Benetton demands exclusivity. This is essential to ensure that Benetton always has capacity available to handle peaks and to be able to co-ordinate effectively these external production units.
These independent labour cells give Benetton high levels of flexibility compared with a comparably sized in-house unionized labour force. Simultaneously, lower labour costs accrue given the cost structures of family-owned businesses.
The risks and rewards are evenly shared with such an arrangement. It also appears that no need is felt to formalize such relationships with a legal contract.
Analysts believe this blend of high labour cost third-party and high-technology in-house operations gives Benetton a manufacturing cost structure comparable with Asian producers.
Benetton describes itself as "vertically de-integrated". This is the process of centralizing those processes which add the highest value and decentralizing the rest.
This mix of third party and in-house operations extends to functions other than manufacturing--always outsourcing when in-house economies of scale cannot be obtained and where quality and customer service will not be jeopardized. The use of subcontractors has also allowed Benetton to maintain its rapid expansion rate without the need for massive capital and labour force investment,
The purchasing function is centralized in-house given the economies inherent in large scale buying. Benetton is one of the largest wool buyers in the world and at one stage was contemplating establishing a wool scouring plant in Australia.
It is fairly typical for companies to be too small for some activities such as international transport and too large for others such as labour intensive finishing and hence there is a cost advantage if such activities are performed by a third party.
At each step of the supply chain Benetton has taken a conscious decision about whether to process in-house or subcontract bearing in mind cost, flexibility, speed and service.
Benetton works through a network of 85 agents around the world. Agents in each country are responsible for recruiting the retailers, showing the fashion collections, processing retailer orders, selecting retail sites, carrying out training and, importantly, feeding market intelligence to Benetton. For this they receive commission, usually around 4 per cent, based on sales in their territory.
Although often called franchises, the retail outlets are more accurately described as licensees. The licensees, unlike a franchized arrangement, pay no fees or royalties. This neatly allows Benetton to sidestep the often restrictive franchise legislation in many countries. Licensees must agree to stock and sell only Benetton products, merchandise and display the garments according to Benetton guidelines and also follow price guidelines.
For Benetton the stores are not simply outlets for their garments but information probes measuring the level of customer acceptance of the Benetton "look",
In true partnership mind set, the key desirable qualities of the licensees are their commitment to Benetton and their ability to expand the market.
The global EDI network used to keep Benetton in touch with the world is used to provide support to the agents. They have access to information about what is in production, in the DC or in transit, Licensee billing and credit status is also made available to the agents.
In sum, then, the strategic outsourcing decisions look as follows:
* CAD/CAM design, cutting, knitting, dyeing: high tech, high capital, scale economies possible: do in-house.
* Garment assembly, finishing: no scale economies possible, large high cost labour force needed which could reduce flexibility: outsource to sub-contractors.
* Raw material purchasing: scale economies possible; do in-house.
* Mass distribution: scale economies possible, fast cycle times needed to meet customer expectations with minimal inventories: do in-house.
* International transportation: scale economies not possible with Benetton volumes: outsource to international carriers.
* Freight forwarding: scale economies became possible with increasing volumes, service improvements possible: change from outsourcing to in-house through joint venture.
* Global communications network: scale economies not possible with Benetton volumes: outsource to GE Information Systems.
* Retail stores: high capital needed, potential labour cost and motivation problems, high customer service levels needed: outsource to licensees.
The speed and flexibility of the entire system is such that it is capable of filling a retail shop replenishment order mid-season within two to four weeks. This includes the time to manufacture the garments. Mid-season ordering is beyond the capacity of most fashion businesses. This is possible with minimal inventories by manufacturing only what is ordered. In addition, this is possible only with the aid of information technology, flexible high speed manufacturing, high speed distribution and an organizational structure capable of handling this.
SOME LESSONS FROM BENETTON
There are a number of lessons we can learn from the Benetton example:
(1) Develop a logistics vision, what Benetton describes as a 360 degree vision; that is, a complete understanding of the strategic importance of logistics to the enterprise. The focus should be on customer satisfaction and on how each functional area can be integrated to deliver that satisfaction. The competitive advantage for Benetton lies in its ability to effectively integrate the components of the value chain. We should aim to acquire Benetton's "wisdom".
(2) Evaluate the possibility of using the concept of postponement. This is a cost and risk reducing strategy effectively adopted by Benetton.
(3) Increase reaction speed and reduce cycle times. Time management has been highlighted as one of the key competitive strategies for the 1990s. Cycle time management is not simply a case of doing things faster but necessitates redesigning operating processes and, if necessary, the organization. Process review can lead to shorter cycle times by changing from sequential to simultaneous operations and by reducing the number of delaying interfaces.
(4) Develop a clear understanding of the distribution channels of which the organization is part. Benetton's analysis led to a channel design involving licensed retail stores and the abolition of all the intermediaries typically found in the garment trade.
(5) Develop a customer-oriented manufacturing process; one which is flexible and responsive to customer demand.
(6) Understand the customers' total need. The Benetton product is clearly more than just the garment.
(7) Determine the right blend of in-house competences and outsourcing.
(8) Use appropriate technologies to measure customer demand, develop fast response times, flexibility and responsiveness to the market.
Benetton provides us with an example of an organization which has truly grasped the meaning of integrated logistics across national boundaries. Benetton has created for itself a borderless world. It has linked 180 raw material suppliers, 450 manufacturers and 6,000 retailers to deliver 60 million garments a year to satisfied customers in 83 countries. To the consumer the Benetton product may be a fashionable "look" but the real Benetton product is nothing less than integrated logistics.
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