They priorities quality and reliability; the supply chain is configured to produce in accordance with specification and without error. ECHO has a very atypical operations strategy compared with their industry peers. Unlike their “branded marketer” competitors they produce their own materials and manufacture 80% of their own products in factories around the world. Owning and controlling the entire value chain gives them huge flexibility and allows them to maintain the highest levels of quality. Leone et al. 990) state that operation strategy consists of the key decision areas concerned with the structure and infrastructure of operations: 1. 1 Structure Capacity: The majority of the manufacturing capacity is located in Asia due to the low rates of labor. However these facilities have long lead times and make the supply susceptible to changes in customer demand. There are no manufacturing plants in USA, which is one of Coco’s major markets. Process technology: This is a key asset to the company and the core of Coco’s product strategy was shoes based on “direct injection”.
Competitors tried to copy the erect injection technique, however, ECHO performed many small tasks differently throughout the process, which improved quality and made it hard to imitate. Its products in-house. The remaining 20%, mostly shoes with very thin soles, are outsourced, as they do not benefit from Coco’s core technology. Facilities: An independent configuration of global facilities with tanneries and fullest manufacturing facilities in Europe and Asia. Distribution centers are located in the major markets of Europe and United States.
The decision to open facilities in China is to access cheap labor and to serve the growing Chinese domestic demand. Research and development is primarily carried out in Denmark. Cost base: Due to the labor intensive nature of show manufacturing ECHO locate their production facilities in cheap labor countries. However there is then a trade- off in lead times and more stock must be held in local distribution centers, which increases working capital. See Appendix 1 for a full break down of supply chain facilities in each country. Page 3 of 13 1. Infrastructure Planning and control: Coco’s downstream retail shops ensure full access to customer demand data. This allowed them to plan and react to changes in demand and control he amount of inventory in distribution channels. Manufacturing control is achieved through benchmarking production and by having multiple production facilities so best practice could be shared between them. Quality: Quality is key to the company strategy quality. Quality management is maintained by having full control of the supply chain which allows ECHO to set quality standards much higher than they could expect from external suppliers.
Human resources: ECHO invests heavily in continuous training and education of its employees providing vocational training, career development and expatriation. Cosmologies, are carried out in Denmark, where they experiment with new materials, processes and technologies. Operational R&D is carried out in the foreign production sites where they streamline processes and optimism the use of materials. Procurement: Compared to their competitors this is a very minor part of Coco’s operations. They purchase raw hides for the tanneries and they outsource 20% of their shoes (those mainly with thin soles).
We assume that ECHO maintain a number of suppliers to increase competition and to mitigate redundancy issues. 1. 3 Global vertical integration A global value chain is strengthened by the fact that shoes are relatively light compared to their value, have few local differences, are not complex to produce and have a long lifestyle. Operating a vertical value chain has advantages: 1 . Owning retail stores ensures access to consumer demand forecasts 2. Direct interface with customers helps with new product development. 3.
Full control over the level of quality 4. Maintains shoe knowledge within company But also has challenges; 1 . Synergy advantage is only realizes if each discipline is performed better than competitors 2. The wide span of competencies required can dilute the focus of the company 3. Requires high investment and working capital levels 4. Increased costs of transporting materials around the world 5. A complex interlinked logistical process Page 4 of 13 A weakness of vertical integration is that it reduces the number of suppliers you can choose from (I. E. O must choose a company owned supplier), this lack of competition can lead to and increase in inefficiency. ECHO cleverly utilities multiple factories and tanneries to encourage internal competition and to keep quality high. 1. 4 Further operational execution examples . 4. 1 Manufacturing facilities Manufacturing in Asia provides low cost labor and the Slovakian facility serves the European market. ECHO made the Portuguese unit more high-tech and this seems to deviate from the low cost labor strategy as its very capital intensive, this facility could be merged with the Danish facility. . 4. 2 Training centers The establishment of an education centre, research centre and the ECHO business that 80% of the company’s leader should be recruited internally. 1. 4. 3 Faster lead times ECHO required faster lead times to serve the promising Russian market and the 3-4 eek transportation time from Asia was not acceptable. So a production facility was opened in Slovakia close to this new market, which also served to create extra capacity, and reduced the risk of delays from Thailand. 1. 4. Production cycle The speed of production is dependent on the flexibility and adaptability of the production system and the availability of the raw materials. Coco’s tanneries in Europe and two adjacent to manufacturing facilities in Indonesia and Thailand enable ECHO to control: Efficient leather processing The quality of the leather produced Faster production of the leather Coco’s global supply chain ECHO fully integrated value chain from cow to shoe’ means managing global operations . 2 Tanneries, manufacturing and distribution functions are owned, managed and run by ECHO.
Page 5 of 13 Rawhide’s Germany France Denmark Finland Netherlands Thailand Indonesia Portugal Slovakia China United States Outsourcing Thin soled products 2. 1 Tanneries Coco’s rationale for owning tanneries are their high demands on quality and lead times; they operate one tannery in the Netherlands and another two adjacent to manufacturing facilities in Asia. Locating tanneries close to manufacturing facilities means materials have less distance to travel and demand can be closely matched to supply.
However the majority of the rawhide’s originate from Europe so have the additional cost to be shipped to the Asian manufacturing sites, which means ECHO are vulnerable to changes in transportation costs and it also increases the length of the working capital cycle. 2. 2 Manufacturing ECHO operate worldwide manufacturing facilities to achieving labor cost savings and to spread risk. Each production site specialties in a core competency (such as reduction of shoes or uppers), which allows for workers become expert at a particular part of the production process, which increases efficiency and lower the costs of production.
The technology and knowledge intensive manufacturing functions (such as R&D) are located in Europe whereas the labor intensive manufacturing is located in lower cost Asian countries. The downside to this configuration is that it may be harder to find high quality employees that match Coco’s European values in Asia and also co-ordination the flow of information, materials, and people is much more difficult as the distance from corporate quarters increases. Locating manufacturing far away from retail markets increases lead times due to the inventory traveling time but also because of increased inspections and compliance at border crossings.
ECHO had two main distribution centers one in the USA and one in Denmark, which feeds 26 sales subsidiaries. The majority of inventory travels through the distribution centre in Denmark, however only 6-9% of production is sold in Denmark so it then has to be shipped to the local distribution centers, some as far away as Japan. This extra travel increases lead times and costs and introduces a trade-off in terms of ERM of the cost and speed of transport methods; sea and road shipping is much more cost effective but slower and air transportation is very costly and should only be used for emergency shipments.
Coco’s global manufacturing facilities do not always match the retail markets it serves. In 2004 Coco’s main retail markets were USA, Germany and Japan yet the majority of the production and distribution took place outside of these geographies. While we expect the Page 6 of 13 majority of manufacturing to be completed in low cost countries, in order to react to large changes in demand some manufacturing should take place close to large, important markets. 2. 4 Drivers and trends in the industry There are two main trends in the industry: 1 .
Shoe brands are moving towards an outsourcing manufacturing model 2. The speed of consumer market trends is increasing Coco’s competitors mainly outsource their production to manufacturing experts and use their extra resources to develop specialized sales and marketing competencies. In contrast ECHO need to develop a broader range of competencies that encompass manufacturing, materials, distribution and sales, which mean that they will not have the marketing strength of their competitors. Branding is important in consumer markets and global brands are created by large marketing budgets.
Coco’s integrated value chain requires large capital investments in manufacturing facilities, which means less capital to spend on marketing. As a brand it has huge awareness in Denmark (99. 4% brand recognition) but internationally this is much lower. Other benefits of outsourcing production include lower costs, a larger choice of suppliers and cheaper redundancy by having a network of suppliers. However their competitors also face downsides such as the substantial resources required to scrutinize the supplier network, monitor quality and maintain supplier relations.
It can also make companies more vulnerable to the price increase in raw materials. In today’s trend-driven consumer markets certain categories of shoes (such as trainers) are seen as fashion items, so the number of styles and new styles per year are more important than quality. 3 Therefore the higher levels of quality that ECHO provide are an extra cost that is not valued by the customer and provides no competitive advantage. 3 Supply chain risks and mitigation strategies We have focused on risks with the highest priority index and then discuss some dictation strategies that try to balance the risk reduction/reward trade-offs. Key Probability Cost of Mitigation High Medium Balancing capacity and inventory Impact Ezra only manufacture their clothes to worn 10 to 1 5 times, as they believe that after this the item will be out of fashion. The focus is on variety of their clothing lines and a reduction in quality. 4 The priority index is the severity x probability of occurrence x probability of early detect