Case Study Altimus Brands

C239 Study Altimus Brands: Managing Procurement Risk On February 1, 2011, Bozo Natale, head ofFinance and Operations atAltimus Brands in London (UK): received the latest monthly report and, as he feared= costs ofpurchases had increased again. He knew that by the end ofthe month he would have to present recommendations to the board. He convened a meeting with his team ofbuyers to prepare the recommendations focusing on RoclcyMountain. their topselling brand. ALTIMUS BRANDS Altimus is a family-owned business With a global presence in the footwear sector. The company owns a portfolio ofse'ren premium footwear braids, marketed in some 120 countries and in 2010 reached 13 in in sales. Altimus operates aboim 230 retail outlets worldwide. but it also sold its products through other channels. Although the company name is rarely recognized by people outside the industry: its brands were well known aroundthe world and considered the company's most valuable assets. To maintain and develop the value of its brands: the company relies on four core competencies: mutation, design, quality mid supply chain managemait. For many years manufacturing has not been central to the business; in fact they were one ofthe pioneers in sourcing 'oni Asia, where they had been operating since the 19605. It was precisely for this reason that Enzo believed the selection, management and development of supplias were key success factors. THE GLOBAL FOOTWEAR INDUSTRY impact of the Economic Situation The footwear market had been badly hit by the recession and many retailers and producers had gone bankrupt, with the survivtng players ghting for market share. Although the management team at Altimus expected that consumer condence would start to improve, weaker wage growth and the possibility of future job cuts= particularly in Europe. could lead to consumers remaining cautious for longer. The global market for premium footwear brands was dominated by Europe and North America= although developing economies were becoming Increasingly important, Production= on the other hand, tended to be concentrated in developing economies such as China1 Brazil: \"remain; Thailand, Indonesia1 India and Bangladesh, With only small pockets of producers in countries like Italy, Spain and the USA. Trends in Footwear Sector Traditionally there were two collections per year (Spring-Summer and AntwanWinter) and hundreds of new models were destgned and produced every season However there was evidence that competition was shiing to a \"Fast fashion" model led by companies like Zara and HM, which introduced more collections per year. Some companies were talking about 13 collections per year; one every four weeks. Technologies were also changing constantly= both in terms of materials and production processes. \"This continuous change makes it very diicult to manage the supply chain" said Enzo. Corporate Social Responsibility (CSR) and inparticular ethical issues such as iir trade, child labor: use ofsiveat shops were a growing concern for companies in the footwear and clothing sector Companies with strong brands such as Adidas, Burbaq, Gap and Nike had found themselves as central protagonists in major sandals: usually the result ofethical Violations by direct or indirect supplies [n recent years, global initiatives such as the Global Compact, promoted by the UN= and the Ethical Trading Initiative (ETD were launched to promote ethical and responsible business practices. ALTIMUS' SUPPLY CHAIN Supply Chain Strategy and Structure Altimus, like many other companies in this sector, acted as a supply chain integrator It managed the suppliers, who manufactured the shoes; it coordinated the logistics through third party logistics providers (3PL5); and it controlled the distribution channels (see Exhibit 1). Enzo believed this approach allowed exibility in terms ofproduction capacity and required no investment in production assets. However, he also recognised a major limitation was that the control of manufacoiring cosm remained outside the boundaries of the organization The only leva's they had to reduce production costs were price negotiations, product specication and supplier switching. EXHIBIT 1 Altimus' current supply chain for RockyMountain. Altimus had focused its supplier development efforts in the Far East. Enzo believed this strategy had served them well over many years and they had developed close collabormive relationships with. their suppliers in this region. However, increasing costs of supplies, caused mainly by high ination rates in some countries, had forced Enzo to review the company's supply base to see if cost could be reduced. Also, the EU introduction ofantiduniping dirty for footwear om China and Vietnam was having an advuse impact on product margins. page 497 At the meeting Enzo and his team had decided to focus on RockyMountain, their top bread which was representative ofthe portfolio. Based on experience they estimated that demand for the RockyMountam brand for the following year would range between 375 and 425 thousand pairs per month. They hoped demand would continue growing aer that but they did not have a scientic way of estimating demand further into the future. Supplier Evaluation Their evaluation centered on four mippliers. three of them were estabhshed suppliers and one was a new potential suppher. Yu Van was a factory located in Vietnam which had been supplying Altimus for almost nine years and in 2010 it supplied the company with around 52 percent oftheir products for the RockyMountain brand. Jaz Nit/i, in China, had been supplying them for a. decade and in 2010 produced 32 percent oftheir requirements. For Rina/lg in Indonesia had hem supplying than for only three years. and by 2010 they were supplying almost 16 percent of the products. Fnomow was a potential new supplia' located in Bangladesh, and although this alternative appeared to be cheaperthan all their current suppliers, the team was reluctant to take a major riskwith them. The criteria for evaluating suppliers included several quantitative factors such as tow] cost, ination rates, duties: capacity. However, the team believed that many of the risks could not be assessed. quantitntnely and decided to use a sample qualibitive scale to indicate ifa particular risk was Low, Medium or High (the results ofthis evaluation are presmted in Exhibit 2). EXHIBIT 2 Sourcing alternatives, Factory 'l Van Ja' [in Far Byung Footnow Country Vietnam Chin Indonesia Bangladesh Labor cost per pair$ 1.50 3.60 2.70 1.10 Overhead cost per pair 5 2.40 3.40 2.70 1.00 Ex Factory Tent Cost per pair $ 17.00 25.00 16.50 1 5.40 Plioe Labor ination 15.0% 50% 7.0% 10.0% Overhead'inatiun 10.0% 2.0% 4.0% 7.0% Capacity Pairs per nmmh 0005 400 250 1-25 50 Years woeed withtactory 9 Years 10 Years 3 Yeas 0 there EU Duty Landed Duty'is 80% 8.0% 4.5% 0.0% Anti-dumping dany 'K. 100% 16.5% 0.0% 0.0% R'sks Delivery on time Low Low Low' Med Communication Low Low Law Med Countrywisk Low Law Med Med Pr'nduct Quality Law Low Law Med Development capability Low Law Med High One risk Erizo and his team did not directly evaluate was ethical standards. The buyers had differurt perceptions and options about each of the fuur suppliers and could not reach a consensus. They believed their long term partners represented a lower risk but they draught that by marking closety with any of the suppliers they could resolve ethical issues in a relatively short time. Ultimately they decided not to include ethical standards as arisk. Enzo's Concerns Enzo was aware that restrucnn'ing the supply base could have detrimental effects if not managed correctly, Simply going for the cheapest supplies around the world was not a viable almative as there wae many other factnrs to consider, such as quality= capacity, product development capability and respect for ethical standards, His team had been working for years with some of the suppliers to develop their capabilities and he feared changes to the supply base could waste all this hard worlc destroy crust with the suppliers and expose the company to risks. One particular concern for Euzu \"as the issue of ethical sourcing. He knew the CEO was very sensitive about this and the cumpany had a very clear ethical policy that emphasized business should be conducted honestly= fairly and with respect for people, their dignity and their rights. Altimus also participated in the Ethical Trading Initiative (ETD and subscribed to its nine principles (see Exhibit 3). To ensure these principles were respected, the company conducted its own reviews of the suppliers and worked with than to resolve any issues that arose. This meant that any ethical iningments by supphers wae unlikely to be picked up by the media or press, EXHIBIT 3 Principles of the ETI base code. 1. Employment is freely chosen. 2. Freedom of association and the right to collective bargaining are respected. 3. Working conditions are safe and hygienic. 4. Child labor shall not be used. 5. Living wages are paid. 6. Working hours are not excessive. 7. No discrimination is practiced 8. Regular employment is provided. 9. No harsh or inhumane treatment is allowed. Enzo's Recommendation Enzo knew a recommendation would be required for the board meeting at the end of the month. Reducing costs was a major consideration, but his dilemma was how to reduce the cost of supplies without exposing the supply chain to major disruptions and risks. The meeting with his team provided him with most of the information required to prepare a recommendation for the board, but he was still pondering about the right balance between costs and risks. Discussion Questions 1. Why is this company a supply chain integrator rather than a manufacturer? What are the resulting advantages and disadvantages? 2. Evaluate the costs and risks of the four suppliers. Do this subjectively and also develop a weighted scoring model to evaluate costs and risks. 3. Which supplier(s) do you recommend to meet their demand requirements and why? 4. How should the suppliers be monitored during the year regarding ethics, quality, on time delivery and other criteria