Retail

Case Analysis: Polo Ralph Lauren

Polo Ralph Lauren is a powerful global player that has succeeded in an intensely competitive market, one characterized by fickle, fast-moving, unpredictable consumer tastes. The company offers products under the brands Polo, Lauren, Chaps, and Club Monaco, and designs and markets apparel, fragrances, home furnishings, and accessories. Yet Polo doesn’t actually manufacture any products itself; instead, it coordinates the operations of scores of licensees and more than 300 contract manufacturers in the U.S., Asia, and South America. The firm retails products through over 1,400 department stores, 2,000 golf stores, and 150 company stores in the U.S. alone, and has hundreds of authorized licensees worldwide. Polo operates in a demanding business. The sector is made more complex by the long lead-times in its design and production cycles, and by its reliance on a global supply chain. The fundamentals of demand in this market fluctuate constantly, driven by a broad range of considerations: fashion trends, seasonality, holidays, geography, gender, sizes, etc. Forecasting demand is made even more challenging by the choices available to customers, including material, color, texture, shape, functionality (right down to decisions about zippers vs. buttons vs. hooks!). To satisfy global customer demand, Polo must operate as a high-volume, highly distributed business. It must plan sales and assortments by store, by geography, and by the ephemeral nature of fashions. Since the fashion planning cycle is more often than not closer to eighteen months than six months ahead, the long lead-times for sourcing, shipping, and merchandising can sometimes outrun the tenure of the fashion itself.

Strategy

At the level of its strategy, Polo Ralph Lauren faces the question of how the company is going to maintain and build its already successful business. Unlike Frito-Lay, which consistently achieves profitable operations, Polo’s business is much more cyclical, and is therefore subject to wide swings in profitability. Recently, the company acquired Club Monaco in a bid to enhance its appeal to younger buyers, and doubtless it is constantly considering other acquisitions that would help broaden the company’s portfolio of products. Managers will consider if the company has gained the maximum possible strategic leverage from its combination of apparel, fragrances, accessories, and furnishings products. There are other questions. Should other product lines be introduced to extend the reach and value of the brand, as Martha Stewart has done? How well has the company done in predicting the combinations of styles, fabrics, and colors demanded by buyers in its various markets around the world? Where could it improve? Has the company compressed its cash-to-cash cycles to the fullest extent possible to minimize working capital requirements? These questions are not one-time questions in setting strategy; they are a continual part of strategic evolution, flexibility, and business success.

Supply Chain Execution

In retail fashion, supply chain management and planning are particularly tricky, mostly because of the seasonality and the inherent fickleness of the industry. Most important, the company must be able to correctly assess demand months in advance. If Polo should estimate too high, the company winds up with excess unsold merchandise, a condition that kills profitability. If it estimates too low, it leaves itself vulnerable to losing market share to competitive brands. The precision of this process is also impacted by the need to maintain sufficient inventory levels to match fulfillment as well as the short selling windows inherent in seasonal merchandise. Polo’s supply chain issues are further complicated by the company’s reliance on its network of overseas manufacturing partners, with all of the currency hedging, collaboration, and information exchange issues associated with extended supply chain operations. The following are the daily challenges facing the supply chain team at Polo:

Late deliveries to retail, lowering shelf life and risking price erosion
Wrong deliveries to the wrong places, which increases transportation cost
Size mismatches, leading to returns
Cumbersome tailoring at the store level, shortening shelf life and increasing possible returns
Lack of visibility of items in transit, customs, storage, and up-to-date status of customer orders, leading to customer service challenges
Matching demand streams from multiple seasons, which complicates decision making

The number-one goal for Polo is to maximize its retail sales at full price. Translated, this means that the critical success factor is a focused, high-velocity supply chain—notwithstanding the numerous constraints of the business. This supply chain must incorporate conceiving, designing, developing, manufacturing, transporting, and delivering the right combination of size, color, and style to the retail doors. The various entities involved in this global dance, both inside and outside Polo, include design, merchandising, production management, sales, customer service, suppliers, and the company’s wholesale and retail customers. The direct effects of making sure that the products are delivered in the right mix at the right time are

An increase in full-price sales
Reduction in retail returns
Reduction in excess inventory
Lowered transportation cost throughout the supply chain

What is critical for the all of the above to happen? Simply put, it is the visibility of data at the retail doors, day in and day out. It is the matching of sizes, colors, and styles between production and merchandising. It is the reconciliation of point-of-sale data, budgets, unit plans, and assortment plans. It is the integration of vast and various streams of data and being able to analyze clear demand patterns, with production capabilities, transportation schedules within the shipping window, and unfailing delivery to numerous warehouses and retail doors.

Domain Processes & Decision Structures

The critical driver for Polo’s business success is having the right product at the right time in the right place—then ensuring that the supply operation delivers that product with sufficient efficiency to earn the desired rates of return. Key considerations for achieving business success revolve around knowledge of the market, inventory management, distribution, and customer care. Knowledge of the market involves being able to accurately predict future demand and having the right products manufactured. Maintaining optimal but not excessive inventory means being able to fulfill customer demand without unnecessarily tying up working capital and warehouse space. Getting the right product to the right locations at the right time means being able to move products to specific locations, and being able to readjust deliveries in response to shifts in consumer buying patterns. Customer care is particularly important in a consumer-driven business. It is the retail “moment of truth.” Handling exchanges and returns in a manner that ensures a high degree of customer satisfaction and loyalty while minimizing customer abuse (e.g., wearing an item to a special event and then returning it, or purchasing an item on sale and attempting to return it at list price) is a tricky balancing act. It must take into account the lifetime value of the customer. Further complicating the decision structure is the fact that it will almost always be a retail employee, not Polo’s corporate managers, who will make such point-of-sale decisions. So there are numerous processes to consider and decisions to make. They extend from opening a line to walking models along the catwalk. They reach from creating samples to managing orders and coordinating with suppliers. They involve the contractors managing retail analysts who assess buyer relationships to the merchandisers; they involve managing returns to sewing budget plans with merchandising projections and assortments. They extend all the way to calibrating replenishment based on point-of-sale data while upholding the integrity of the brand.

IT Infrastructure

Polo’s IT infrastructure must efficiently support a far-flung global operation with significant real-time data acquisition, analysis, and distribution requirements. Delayed or inaccurate information can have devastating consequences for the company’s overall business performance. Polo’s IT platforms must be flexible enough to handle the manner of new business needs and uses of information while also operating in informational relationships with a wide range of supplier, retailer, and distribution systems around the world. Imagine the vast ecosystem of people who either touch Polo goods or deal with information flows. Consider the global network of contractors—coordinating design, production, and delivery. The need is first and foremost informational. Consider the logistics entities, the innumerable handoffs, the suppliers of raw materials and numerous planners. The infrastructure must support a sea of information that flows globally, across various hardware platforms, and various software applications, through numerous protocols, and then eventual agglomeration and analysis by various entities. The purpose of an effective infrastructure is to ensure transparency in supply and demand information. In this model, a pair of khaki pants, at size 36 x 32 men’s with zippers and loops but without cuffs can be seen by all streams of demand, by store, by unit. In this model, the company knows what quantities are currently produced and what is in transit. It knows what is in inventory in different warehouses, what is being returned, what has been returned, and why. It knows the revenues, profits, costs, and margin implications of its current situation. And it strives to understand what trends are emerging by geography, by store, by style, by size, by color, and by brand, all on the basis of this comprehensive visibility in the company’s information systems. To meet these complex business challenges, Polo relies on an integrated information system. Senior management is able to execute highly targeted marketing campaigns and product development initiatives, while closely monitoring its extended supply chain. To optimize product placements and reduce distribution costs, Polo constantly monitors its sales at all its stores and wherever Polo products are sold. Point-of-sale information is fed through powerful analytical systems to determine what products are selling in multiple stores and geographies. Polo integrates customer information across multiple transaction systems, and provides brand managers with timely information about customer preferences and buying behavior. As a result, Polo has its fingers on the pulse of the movement of its products, not only in all its selling locations, but in monitoring all shipments, all receipts, and all inventory in transit. In the entire flow from designing, budgeting to sales, assortment planning, and merchandising, all the way to sourcing from all over the globe, and extending to customer service and deployment, Polo strives to amalgamate every relevant piece of information in a timely manner. In the highly competitive international markets for apparel, fragrances, home furnishings, and accessories, Polo Ralph Lauren can clearly differentiate itself and command higher margins because of the quality of its information systems. At Polo, information is sewn first and clothes later!