The earnings announcement for Michael Kors’ fourth quarter of fiscal 2016 was more of the same from the struggling luxury retailer. Faced with decreasing revenue and the need to close 100-125 retail stores, Chairman and CEO John D. Idol called it a “challenging year, as they (we) continued to operate in a difficult retail environment with elevated promotional levels.”
Idol’s statement about business challenges closely followed his messaging from nine months earlier when he stated that despite increased product shipments, revenue declines were “predominantly being driven by lower prices because of promotional activity.” While multiple factors contributed to the revenue fall of more than 4% year-on-year, the line of thinking suggests that if pricing were held constant, then the increase in product shipments should correlate with increased, or at least stable, revenues.
From a supply chain perspective, that follows the logic that more inventory leads to better on-shelf availability. Extending that further, with product consistently available, then customers will buy it at the posted price, leading to better sales, and better company earnings. Historically, supply chains have been built for that type of functional and linear thinking, with spot optimization occurring to facilitate efficient product flow from a manufacturer to a distribution center, from a DC to a store, and so on.
However, as evidenced by the volatility in today’s retail marketplace especially, customer expectations have become more complicated than traditional economic and supply chain theory. Cost sensitive shoppers have become accustomed to promotional pricing and time sensitive consumers have come to expect two day shipping, (If not faster) and overall the perception of value is changing. To his credit, Idol also recognized this, stating that there was ‘confusion in the consumers’ mind relative to the value of the Michael Kors brand.”
Looking forward, Michael Kors intends to “take further steps to enhance the level of fashion innovation” and “enhance our store experience in order to deepen consumer desire and demand for our products.” Their transformation, and that of many others, is characterized within our report What is the Matrix when it says “the game today is all about charting a series of moves starting from your specific as-is situation with targeted tactical steps intentionally building strength in specific capabilities that matter to you.”
In order for the charting to be truly effective, it relies on honest introspection into today’s capabilities and an established investment strategy for how to bridge the gap between current and future state. Judging from the self-assessments that we received from the supply chain community regarding omnichannel demand and supply planning capabilities, that gap is substantial; 85% have identified themselves as having either weak technology, weak processes, or weakness in both process and technology.
Based on these survey results, (shown in the graphic on the left), mapping the path toward the desired future state often starts with a question of what comes first – the process or the technology? Initially, identifying one or another as the starting point may make sense, but nearly 63% of the responses from the supply chain community tell us that they’re already planning for investments in both (shown in the graphic on the right). This is especially apparent in those with one identified weakness, where those making investments in both jumps to nearly 80%.
Examples of companies that have paired process and technology investments together within their innovation strategy include:
- Stanley Black and Decker’s innovation continuum builds upon existing process strengths to segment ideas about how to implement new tools and methods to produce and distribute products.
- Brooks Running’s supply and demand matching processes were greatly enhanced by investments in technology that provided greater visibility into arriving shipments, and enabled real-time decision making
- Lenovo’s supply chain processes were already a key part of their success, but by enhancing their technology, they were able to strategically shift, implement capability improvements, and drive their supply chain performance to greater successes.
Each of these cases, and many more, are illustrations of the opportunity to advance supply chains beyond conditional thinking and capability development. It is obvious that market conditions and customer expectations are changing rapidly. To keep pace, supply chains must be capable of adapting both process and technology to a given moment. Even if one area of improvement is a logical starting place, the real question is not what comes first, but instead, how can we do both?