-Read Case 7.1: Uniqlo and answer the given questions:

* 51 Case Study 7.1 Value of Coordination at UNIQLO We try to understand how UNIQLO perceives the value of supply chain coordination by reviewing the interview with a top manager at the company. How do you define the mission for UNIQLO? UNIQLO's brand mission is to become a global fashion brand to help every customer wear high-quality, low- price casuals. More specifically, UNIQLO aims to provide our customers with highly fashionable, high-quality basic casuals at the lowest possible prices whenever and wherever they want. In effect, UNIQLO endeavors to be the "Global #1 Casual Brand," by studying our customers incessantly and maximizing efficiency through low-cost management and direct integration of manufacturing with sales. How can UNIQLO achieve high quality and low price at the same time? we go ahead with production. Otherwise, we try to reduce the cost further until it satisfies our criterion. There are two main elements determining the manufacturing cost: labor and raw materials. We are saving labor costs by producing our products in places like China and Southeast Asian countries, where the labor costs are still relatively low. Currently we're making 60 to 70 percent of our products in China and the remaining in Southeast Asia or Eastern Europe. We have about seventy outsourcing plants as our key business partners, and are dispatching master team members to the local plants for active technological support. Master team members are retired experts with over thirty years' experience in the fashion and textile industries in Japan. Their mission is to transfer advanced technologies to our outsourcing First and foremost, from the early stage of product development and design, we try to make sure that our product meets not only the customers' fashion- related requirement, but also their expectation about an appropriate price. Once a new product is designed, we ask our manufacturing department to calculate the expected manufacturing cost. If the expected cost warrants an appropriate price, i.e., a price acceptable to our customers, partners and help them improve their quality and process management throughout the manufacturing processes. Although these outsourcing partners are not part of UNIQLO, they're strategic partners, who work with us very closely as if we're under the same roof. In fact, almost 70 to 80 percent of our partners have been working with us for ten to twenty years and over time have developed close relationships in terms of partial ownership sharing and transaction activities. Once UNIQLO clothes are made in the outsourcing plants, most of them are shipped to destination markets through sea, only 2 to 3 percent being shipped via air. We believe that the quality of raw materials determines the quality of clothes significantly. Also, the stable supply of raw materials is critical. We collect information from the market and industries, based on which we develop and supply materials by working with R&D, merchandising, and material planning teams along with our production plants in China. In addition, we try to develop new materials through strategic alliances with raw material suppliers. For instance, we worked with one of our strategic partners, Toray Industries, and developed the "Heat-tech garment, a functional new material that has superior attributes such as comfortable body fit stretch and heat protection. Another example is Kaihara Corporation. The company is the world's best denim manufacturer and also UNIQLO's strongest strategic partner, who has been supplying UNIQLO with high quality denim at surprisingly reasonable prices ever since UNIQLO opened its first ever urban store in Tokyo's trendy Harajuku area in 1998. For natural materials like wool and cashmere, our expert team with twenty to thirty years' experience visits actual farms in countries like Mongolia and Nepal, and directly makes deals so as to minimize the cost. Moreover, in order to secure a stable supply, we sign contracts with suppliers about two to three years ahead of the time we actually need the raw materials. Again, our expert team works on both developing new suppliers and managing the existing ones. from teenagers to customers in their late 30s. Zara tries to compete in the market through design and pattern diversification. On the contrary, UNIQLO seeks to appeal to the customers by offering diverse choices in colors and materials. For example, almost 60 to 70 percent of UNIQLO designs are basic clothes, with the remaining 30 to 40 percent being fashion-trendy products. Unlike other competitors that bring five to ten different colors to the market, however, UNIQLO offers clothes in ten to twenty different colors. In addition, we develop functional materials such as Heat-tech and leverage them to win over customers. As such, we pay much attention to new material development, where lots of relevant teams in the company get involved. That is, teams in charge of design, marketing, merchandising, and material get together and What is UNIQLO's primary target market? What is UNIQLO's strategy to be competitive in the target market? Our direct competitor in the fashion industry, Zara, is focused on young people in their 20s and 30s. But, UNIQLO tries to position itself as a family brand covering do intensive brainstorming. After the active discussion, the CEO makes a final decision for critical issues. After gathering key information about the market trend and customer preferences, UNIQLO holds meetings for new material and product development four to six times each year. store operations and sales, and inventory plans before placing raw material orders. Currently, we don't have a formal centralized control tower for such coordination. Each department or team reports its plan as well as assessment to the chairman and CEO, who makes the final commitment based on the consensus among submitted plans and assessments. That is, we're using an informal coordination process, where the chairman is closely involved. Once the plan is finalized and implemented, we trace inventory at each SKU level. Based on the inventory tracking, we either place additional orders for those under-stocked or offer price discounts for those over- stocked so as to minimize the leftover inventory at the end. What is UNIQLO's operations strategy regarding inventory management, forecasting, production planning, and so on? Inventory management is important to every company. UNIQLO is no exception. In fact, we make an extra effort to manage inventory, aiming to have zero left over at the end of the sales season. The first step is to try to minimize the mismatch between supply and demand by simultaneously establishing marketing, store operations and sales, and inventory plans before placing raw material orders. Currently, we don't have a formal centralized control tower for such coordination. Each department or team reports its plan as well as assessment to the chairman and CEO, who makes the final commitment based on the consensus among submitted plans and assessments. That is, we're using an informal coordination process, where the chairman is closely involved. Once the plan is finalized and implemented, we trace inventory at each SKU level. Based on the inventory tracking, we either place additional orders for those under-stocked or offer price discounts for those over- stocked so as to minimize the leftover inventory at the end. We have to do thorough pre-planning because we need to place initial orders in large quantities in order to enjoy economies of scale. Our strategic outsourcing partners are willing to accept a wide range of "initial" orders. For instance, we can place an order of 6 or 26 million fleece jackets as long as it is made once at the beginning of the production cycle. In that sense, we have a very high level of volume flexibility. However, we don't place additional orders once the initial order is placed. There is only one exception, i.e., we allow an additional order for core products with a strict condition that it is within 5 percent of the initial order. Of course, from UNIQLO's own perspective, it is more profitable to place additional orders after observing the market. But, it could destroy the trust between UNIQLO and our strategic suppliers regarding Why do the outsourcing partners cooperate with UNIQLO in order for the company to achieve high volume flexibility? What is their true motivation? the integrity of the original contract. Moreover, we may not be able to enjoy economies of scale for the additional orders, i.e., the unit cost for an order of 1,000 is certainly more expensive than that of 10,000. In principle, we had a Help yourself!" rule for our store operations. That is, our store employees don't provide close services to the customers, who are supposed to find what they want to buy. However, we realized that we cannot ignore cultural attributes unique to individual country markets such as China and Korea. Therefore, in certain markets, our store employees spend 50 percent of their time on helping customers at the store. For instance, we do fitting for jeans for free as part of our complimentary services to our customers. The question is indeed very critical to understanding the fundamental sources of UNIQLO's competitive advantage. But, I feel a little embarrassed to say that there is no grandiose secret here which other competitors cannot replicate. To sum up the essence of our competitive strategy, it is the trust" we build with our strategic partners. In particular, we have been committed to building trust regarding the risk involved with unwanted inventory. Suppose one of our competitors places an order of 10 million units and its outsourcing plant produces and delivers the order as requested. The company then sells the clothes in the market, but unfortunately 5 million units are unsold and become leftover inventory. Do you know what usually happens in the industry? The company returns the unsold clothes to the outsourcing partner for a refund. In this example, the fashion company doesn't take any risk related to leftover inventory. In fact, 100 percent of the risk is borne by the outsourcing company. Assume that the fashion company has bigger bargaining power and so the outsourcing company has to accept the deal. Now think about the next season. The fashion company anticipates a huge surge in the demand and wants to reserve a large capacity from its outsourcing partner. But, what do you think the outsourcing company's reaction would be? After experiencing the terrible situation when 100 percent of the risk is forced to be on the shoulders of the supplier, it is not very difficult to see that the outsourcing partner is much less willing to cooperate with its client, the fashion company. UNIQLO's strategy is exactly the opposite. If we place an order of 10 million, then we will pay for all of the 10 million units no matter what happens, i.e., whether the leftover is 1,5, or 9 million. We take full responsibility for the risk associated with ordering. Once we have made the promise and kept it, our strategic partners start to trust UNIQLO firmly and are always willing to accommodate our orders with the highest priority. Of course, in order to continue retaining this much trust, we always try to make sure that our initial forecasting is extremely accurate. Developing new and innovative materials is closely related to strategy, since our forecasting can be more accurate if we can generate the demand more actively by marketing innovative materials. Now you may see the virtuous cycle in place. We develop innovative materials and colors which appeal to the target customers. Through these active initiatives, our forecasting can be very accurate and our sales volume becomes large. Believing in our forecasting accuracy, we place a large order and can afford to honor our promise to our suppliers, taking full responsibility for absorbing any market risk. In turn, trusting our commitment, our strategic outsourcing partners accommodate our large orders, which are sometimes fluctuating in volumes. With this unwavering support from our suppliers, we can deal with uncertainty in the market demand and maximize sales without serious mismatch between supply and demand. Now we make a healthy profit in the market and increase our market share. As we grow, we open new stores in diverse areas and as a result our ability to sense the market improves. Our forecasting ability increases and our potential customer base expands. With all these positive forces and outcomes, we become even more capable of honoring our promises to our strategic partners. Now the virtuous cycle continues. Questions 1. Is it possible to pursue two goals, quality improvement and cost reduction, simultaneously? How has UNIQLO been able to achieve them together? 2. What was the role played by the company's coordination with its supply chain partners in achieving the goals at the same time? Source: Revised from B. Kim, "Quality Goals and Supply Chain Strategy in the Fashion Industry" (2013) 16(2) Qualitative Market Research: An International Journal 214242. DOI: 10.1108/13522751311317602. 2013 Emerald Publishing