Critical Analysis of Crocs Inc - Essay Example

This paper critically analysed and discussed the supply chain activities at Crocs Inc. in a very dynamic and competitive industry of foot wear production. The paper was critically evaluated the existing supply chain of Crocs in relation to its current performance and the every-changing market environment. Moreover it will try to explain possible reasons as to why the company is seen to be losing competitive advantage. The report was specifically structured to evaluate Crocs’ niche in the footwear industry and offered insights into possible shortcomings and improvement sections in the strategy adopted by Crocs over the years, leading to its current position among peers. The paper also described views on how this company can better their stand in the crowded footwear industry and end up being a stronger competitor to its key challenges in its business environment. The paper presented a number of models and theories for both the analysis of the prevalent systems at Crocs, and offered insights on how they can integrate into success and create a more stable company. The paper also portrayed different perspectives by providing postulations against vertical integration as strategy to gain competitive advantage. 1.0 Introduction Crocs, Inc. was initiated in the year 2002 in Colorado and is arguably one of today’s fastest growing brands and organisations at the world level. The company initially produced footwear for all age categories under the same brand and is now sold well in over 100 countries. The brand features a special kind of plastic that is softened by body heat of the individual wearing the shoe, resulting in high degree of comfort. Sales for the company jumped 256% in 2006 (Thompson, 2006). There has been much discussion about Crocs’ success and besides the popularity of its shoes, the major reasons for the enormous growth of the company has been its efficient chain supply management. Crocs, Inc. has shown that being flexible and being focused on digressing from the conventional norms of the industry, they could achieve more success and profits than their peers (Ashkanasy and Wilderom). This efficiency was the result of their Chief Executive Officer’s vision of satisfying customers by developing an ultra efficient process of production that would facilitate the company to make and supply at short notice, hence creating a competitive advantage in the industry. The Crocs supply chain has been revolutionary in footwear production but there is need to evolve in line with changes in the global industry environment. In the long run, a conventionally thinking organisation has no future. Alteration in technology, delivery procedures, customer demands, and legislative policies demand that a company focuses on its core competencies rather than venturing into all possible diversification schemes. 2.0 Industry analysis By the use of the Product Life Cycle (PLC) concept (Waters and Water, 1999), it is quite visible that the footwear industry as a whole is near saturation and this is likely to run for a long time. It is least likely that the demand for footwear will fall significantly but there are possibilities that with the development of cheaper and more durable products, the industry’s profitability will decline after some time. Using the following Five Forces Model analysis of the global footwear market, the following observations can be made. 2.1 Entry Barriers Entry barriers are engineered to elbow out potential starters from entering a market. These barriers seek to serve the monopoly powers of the incumbent organisations in that industry, thereby maintaining monopoly margins. Some known barriers include limit pricing, patents, cost advantages as well as marketing and advertising among others. This industry appears to offer relatively easy entry for new participants. The advantages of cost are fairly low with quite a large number of players locally and globally. However, it is worth noting that the manufacturers have significantly easy access to factors of production, particularly raw materials and have been able to attain economies of scale by the outsourcing production strategy. Capital requirements are not very demanding and the government policies are also not demanding. Companies are able to achieve ownership over designs and styles that work towards consolidating their gains from the industry. 2.2 Supplier Power The cost of inputs that are directly acquired through a supplier can significantly impact on the profitability of a company. In case the suppliers have a high bargaining power over an organisation, the company is theoretically less attractive and vice versa. What characterises a high bargaining power of the suppliers are availability of high valued undifferentiated products, differentiate their products. Other instances where rivalry would be high are when the buyers have a low switching cost and when competitors in an industry are up to aggressive strategies for growth. With the ease of entry and exit, several players in the footwear industry are in a cut-throat competition against each other to attain maximum market share and increase their revenues. However, the growth of the industry is sluggish and there is systematic pressure for organisations to lower prices. It is very difficult to achieve differentiation and low costs of switching imply that the consumer power is high and there is a risk of substitute knock-offs eating into the market share. 2.3 Buyer Power The footwear industry in general is highly competitive, and buyers have a wide choice of product designs, quality range, and image projection to choose from. This is a retail industry, thus the cost of changing suppliers is relatively low. There are also compatible products among competitors that may be priced lower, therefore buyers can easily shift patronage from one to the other based on price, particularly in the pendency of an economic crisis. Given that the buyer may easily elect to purchase other alternative footwear, or even to forego the purchase of new pairs of footwear when purchasing power dips, buyer power is relatively strong against the industry (Bhattacharyya, 2009; Gonzalez, 2009). 2.4 Competitive Rivalry The world footwear market is intensively competitive where both large and small players are pitted against each other. Competitive attributes for the industry center on product design, quality, product performance, price, brand image, promotion, marketing, and customer service. Key ingredients to enhancing market share are promotional efforts, unique marketing campaigns, and technical innovation (Bhattacharyya, 2009, p. 5). Competitors in the industry (rubber and plastic footwear) include Nike, Timberland, Deckers Outdoors, Adidas and Birkenstock. 2.5 Threat of Substitutes Substitutes that contend with the plastic and rubber footwear market demand include sandals, sneakers and casual shoes. The market is also replete with a wide pool of imitators, both legitimate and illegitimate. Ordinarily for the industry, substitutes are a viable threat; footwear is a relatively generic product, with the basic function of protecting the feet and facilitating walking and running; product differentiation beyond that would pertain to particular target markets such as athletes, children, and trend-setting young adults. 1-(Evaluation of porters five forces and apply to the company) In the case of Crocs, the foregoing industry analysis through Porter’s five forces model highlights the company’s vulnerability with respect to the ease with which it may lose market share to competitors and substitutes, and the weakness of its position with respect to suppliers and buyers. It may highlight its competitive advantage, however, in brand loyalty, comfort in the use of Croslite material, and cost leadership. The five forces discussed above reflect that competition in the footwear industry is not dependent on the larger players. They jointly indicate the competition and profitability among players. For Crocs in particular, Airwalk and Nothinz are just two of many companies that have developed products similar to those of Crocs, but priced some $10 to $20 dollars lower. While these imitators produce footwear that may have the look and feel of Crocs, they do not make use of Crocs’ patented non-marking and odour resistant Croslite material. 3.0 Supply Network 2-(Minimise this section and highlight few objectives with regards to Supply chain only and its usefulness.) Developing an efficient and responsive supply chain targeting cost reduction appears to be among the most vital components in this industry (Cox, 2003). Crocs’ core focus has always been superior supply chain coordination and to gather opportunities of differentiating its products from those already existing in the market. Illustration of Croc’s supply chain (Chen/Paulraj, 2004) Purchasing: Crocs management has developed a system of redundant accredited suppliers by which it is able to source materials at the lowest possible cost with highest quality, and a failure in one of its supply lines could easily be addressed by alternative suppliers. Crocs multiple production sites are able to minimize inventory and order costs by developing multiple supplier channels (Annual Report 2009). Production: The uniqueness of Crocs shoes and the overwhelming popularity of its products show that there is some time for Crocs to mature, notwithstanding the industry’s poor performance. The company appeared to have embraced a global logistics scheme because it stationed shoe manufacturing factories to take care of some markets. Its inventory systems were centralized and it had conceived a localization system, as well as generic levels of unfinished inventories, and small scale orders both from suppliers and distributors. Distribution: The most important element is that of efficiency in the supply chain and product delivery to the right destination and at the right time, that is spatial and temporal convenience delivery of products. Crocs stores are strategically located in developed markets and are increasing in emerging markets; however, the firm emphasized also on outlets and existing department stores as distribution conduits, to minimize its own overhead. 4.0 Company strategy Crocs began as a designer, manufacturer, distributor and brand manager of footwear for men, women and children. It started out with phenomenal growth because of the particular appeal of the molded footwear constructed out of the closed cell-resin, Croslite. At the beginning, the strong performance of the company was generated more by the appeal of the product rather than any strategic imperatives the company had undertaken. It was not long, however, before the economic crisis posed challenges to the Company’s leadership and tested the mettle of its management. Enhance the company strategy and include the value chain analysis. Following is Porter’s value chain model according by which the analysis will be guided: Source: provenmodels.com., http://www.provenmodels.com/26/value-chain-analysis/michael-e.-porter/ Firm infrastructure - The company’s infrastructure had flourished during strong growth by the establishment of manufacturing facilities throughout it operating regions, closer to its customers and suppliers. Human resource management – The company has adopted a policy of continuing training and staff development, and seeks to develop approaches that enhances employee engagement and a sense of equity with their work in the company. Technological development - There is continuing research and development of new product designs and other product lines to complement the present line up. Procurement – As mentioned earlier, multiple supply sources are explored and tap which are close to the manufacturing facilities and which affords the company enhanced negotiating power towards its suppliers. The foregoing thrusts were supported by the following organisational functions: Inbound logistics – The company’s sourcing, procurement and warehousing systems have been logistically coordinated and centralized to provide optimum and timely supply at the lowest possible cost. Shortages in one location can be met by supply in the nearest adjacent location, thus reducing chances of stock-out. Operations – Manufacturing capacities have been rationalised and consolidated to eliminate excess non-performing or underperforming facilities, thereby reducing fixed costs. Outbound logistics – Units in charge of warehousing of finished goods and distribution to outlets have likewise been consolidated and logistically centralized (coordinated) in order to move finished products faster down the supply chain to the outlets. Marketing and sales – Crocs has traditionally been higher priced than its competitors and substitutes because of the patented croslite material that makes up its footwear. Crocs continues to highlight this aspect in its sales and marketing efforts, and this aspect has been well received by the market, as evidenced by sales pickup as of 2010 (Crocs quarterly report 3Q 2010). Service – Crocs extends its services not to the user directly, but to its distribution and retail outlets, supporting the middleman via fast turnaround and delivery and quick recovery of returns. 4.1 Objective performance analysis 4.1.1 Quantity From the Company’s inception in 2002, it has experienced strong demand growth throughout to the end of December 2007. The Company had difficulty keeping up with the demand for footwear, to the extent that it embarked on a significant expansion of its production capacity, warehouse space and inventory in an effort to keep up with the clamour for its products. In 2008, however, contrary to the rising trend, a change in pattern exhibited a levelling off of revenues, such that yearend 2008 exhibited a decline in sales compared to 2007. Immediately, the Company realized that it had planned its production capacity for quantities far exceeding where the market is headed because of the economic crisis that peaked in 2008. In other words, planned production quantities did not reflect the market conditions, something the company did not perceive because it relied upon the trend experienced from 2002-2007 (Gonzalez, 2009). Consequently, the Company has large sums of money invested in its assets as of 2007, when the market softness set in. Return on Assets in that year reached 34%, but fell as the company accumulated more assets in the course of expanding its production capacity (Sodhi, 2010). 4.1.2 Cost 3-(Indicate the strategy pursued by the company such as cost leadership in a more defined manor) Initially, the Company pursued a strategy of aggressive expansion and market penetration (Annual Report 2009). The sudden market softness and drop in sales in 2008 due to the economic crisis caused Crocs to re-evaluate its policy of production capacity expansion, and restructured its operations. Before 2008 ended, the Company shut down redundant manufacturing facilities and consolidated its existing distribution centers. Equipment and molds representing excess capacity were abandoned, and manufacturing operations at the Brazilian manufacturing facility were discontinued. The company may in the future adopt a cost leadership strategy, but from its former aggressive expansion foiled by its major miscalculation in forecasted demand, all it can do is rationalize it cost structure by eliminating excess capacity – plants not producing at optimum capacity because of low demand. Steps were taken towards the elimination of over-capacity aimed at reducing the fixed costs carried by the company. Global distributions worldwide were consolidated and weaker-performing manufacturing sites and sales outlets reduced. Warehouse space was also reduced, and the global headcount of its workforce was slashed by about 2,000 employees in 2008 up to the first quarter of 2009. 4.1.3 Flexibility The Company enjoys a measure of flexibility by resorting to network-based suppliers and distributors, thereby allowing for the distribution of risks. The agile systems presented in the following diagram, while standard in the footwear industry in general, likewise affords Crocs a measure of flexibility in production in its various systems. On the other hand, Crocs still has problems in the flexibility and timeliness of its market forecasts that affects its capacity planning, a problem it hopes to resolve by improving its information systems. 4.1.4 Quality Buyer power appears to be well within the company’s ability to deal with, because the marketing approach is focused on a defined target consumer (2009 Annual Company Report). The customers are specifically catered to, and the brand affinity for Crocs is particularly strong in the target market; despite prices remaining at slightly higher levels than the competition, even in the emerging markets where the company is making a name for itself, the demand remains strong, indicating a relatively high price elasticity of demand. 5. Core competencies Croc is able to successfully differentiate from its rivals because of the unique attributes of its Croslite material which was developed by Crocs Canada. This enables the Company to offer its market an innovative type of footwear distinctly different from other models presently offered by competing shoe manufacturers. Crocs was initially design for water sports enthusiasts, however a wider than intended market base found the design’s comfort and functionality appealing. This has allowed the Company (Crocs, Inc., Colorado) to expand commencing 2004 with the acquisition of Crocs Canada and its manufacturing operations, product lines, and rights to trade secrets for the Croslite material. This allowed for the greater economies of scale afforded by size, for which the Company decided to go public in 2006 (2009 Annual Company Report, p. 3). 6 Inventory management The following financial ratios were developed by Bhattacharyya (2009) from Croc’s financial performance from 2004 to 2008: 2008 2007 2006 2005 2004 Inventory Turnover 3.40 1.40 1.78 1.67 2.97 Receivables Turnover 20.43 5.54 5.40 6.15 4.16 GMROI 1.64 2.00 2.32 2.13 2.63 (Gross Margin Return on Investment) Bhattacharyya reports that the inventory turnover for Crocs is lower than the comparative figures for its competitors (5.0 for Deckers Outdoor, 4.3 for Nike, 4.7 for Timberland, and 5.6 for the Industry median). This is indicative of the relative efficiency of the inventory management of competitors against that of Crocs, which means that Crocs may be having problems with its inventory management despite its best efforts to reduce inventory, and may thus be incurring a higher level of carrying costs than its competitors. The problems it suffered in 2007-2009 are not, to be sure, exclusive to the Company; this is the classic “bullwhip effect” which has affected a majority of companies at the start of the unfolding crisis (Gonzalez, 2009). With a GMROI consistently higher than 1, the Company is able to dispose of its inventory at higher than cost. Currently, Crocs has expanded its market not only in the U.S. but in 100 countries worldwide. Products sell through domestic and international retailers and distributors and directly to end-user consumers through webstores, Company-operated retail stores, outlets and kiosks. The flexibility of Croc’s marketing system has allowed it to exploit a wide range of distribution channels including department stores as well as traditional specialty retail stores for footwear (2009 Annual Report, p. 2). 7 Risk management Croc’s 10-K Annual report submitted to the Securities and Exchange Commission declares that management is addressing the following risk factors (top five are given): Current economic conditions may adversely affect consumer spending and the financial condition, results of operations, and cash resources of the Company and its retailers. The Company may be unable to successfully execute its long-term growth strategy or maintain its current revenue levels. The popularity of Crocs footwear may not grow as rapidly as it has in the past and may decline further, impacting negatively on their sales and result of operations. Failure to accurately forecast demand may cause the company to have excess inventory to liquidate of have greater difficulty filling consumers’ orders. In 2009, the company sold a significant amount of inventory sold at low or no cost that has contributed to the gross margin during the year; this may not be replicable in the future. (These referred to so-called “impaired inventory” – roughly 8.3 million pairs of footwear – referring to inventory the market value of which was estimated to be less than their cost. Although the inventory was written down, they sold for a price higher then expected, thus generating additional profit margins. This is a one-time occurrence that impacted positively on profit.) (Croc’s 2009 Annual Company Report, pp. 15-16.) It will be seen that the greatest dilemma faced by the company has to do with the accuracy of forecasting demand, in order to timely adjust the company’s manufacturing capacity. It planned to address this by implementing a new network of information systems that are designed to support several areas of the business, including warehouse management, order management, retail point-of-sale (2009 Annual Company Report). Furthermore, Crocs is considering reducing risks of overcapacity by streamlining through negotiation with capable 3P manufacturers to outsource non-core manufacturing activities, as well as geographical diversification and product development for untapped markets that may carry lower costs (Bhattacharyya, 2009). 8 Six sigma analysis using 5 whys The Six-Sigma analysis involving the Five Whys technique is a systematic method of asking five “WHY” questions in succession and being guided by the specific answers thereto. It is a variation of the classic Work Study approach that involves asking Why, What, Where, When, Who and How. The aim of this exercise is to try to discover the root cause of a problem and therefore be guided in adopting the appropriate solution (Basu, 2009). It is deemed appropriate for the purpose of determining the problem of Crocs, because at first blush Crocs appears justified in its expansion of production capacity by blaming the discrepancy on the market. However, there are systemic reasons for the failure of Crocs to realize the direction the market was about to take, in order to pre-empt any error in forecasting on their part, for which the 5 Whys should be effective in threshing out. The principal problem faced by Crocs in the recent past manifested itself as a sudden drop in sales in the year 2008 ($721,589,000) compared to 2007 ($847,350,000). This figure further plummeted in 2009 ($645,767,000), representing a nearly 25% attrition in revenues from the 2007 high. This shall be the take-off point for the 5 Whys analysis this paper shall do for Crocs, with answers based on the SEC 10-K report filed by Crocs and the annual company report. Problem: Revenues had fallen significantly for the past two year. (1) Why: Because market demand had fallen, and distributed fixed costs rose commensurately. (2) Why: Distributed costs rose because the company had acquired excess production capacity within 2006 and 2007, thereby raising fixed costs. (3) Why: The Company had acquired increased productive capacity that turned out to be excess from the requisite level, because of miscalculations in the forecast of production targets. (4) Why: The Company miscalculated its forecasts for production because it relied on past trends in sales which had registered strong growth in sales quantity year-on-year. (5) Why: The Company relied on sales trend to forecast production as an error; it should have included economic scenarios in its forecast. It may be argued that the 2008 crisis was unforeseeable, but there have been indicators as early as 2007 concerning financial market weaknesses and volatility in the employment market, that should have alerted the Company to at least postpone aggressive capacity expansion because of the implications of the rising lay-offs and unemployment rate on its customers’ disposal income. 9 4 V’s of Crocs The Company’s operations may also be assessed using the 4 V’s of operations systems, and may shed light on the present system’s attributes. Operations systems that produce high volumes of products and services usually result in high repetition of tasks because of the efficiencies obtained by mass production and assembly line techniques, calling for a higher level of systematization and lower unit costs. This creates economies of scale for mass-producing company. However, it should be noted that as per the diagram below, high volumes would normally entail low variety, low variation in demand, and low visibility. Low variety operations indicate lower flexibility in meeting customers’ needs; low variation indicates a relative unchanging demand; and low visibility implies long waiting tolerances (Bamford & Forrester, 2010, pp. 5-6) 4-V’s Diagram for Crocs Operations The red line cutting across the four V’s indicates the assessment of Croc’s operations. The explanation follows: a. Volume of demand Demand for Croc’s has been traditionally high, as given that it rides out the poor demand due to the economic crisis, demand for its footwear products is expected to return to strong levels, albeit with a slower demand growth due to maturity in the market. b. Variety in operations The high demand for Crocs is based on its patented Croslite material, and in that sense is relatively defined with a lower level of variety in design. The company has been seeking added flexibility and variation in its product designs and in the geographical regions it is targeting, eyeing further penetration of the emerging markets, but the fundamental manufacturing processes involving the use of Croslite material remains the key production process. There is foreseen continued high standardization in the production of Crocs footwear. 9.3 Variation in demand Up until the year between 2007 to 2008, the Company has enjoyed relative low variation in demand; however, due to the weakness in the economy, demand dropped significantly. While the trigger can be traced to external (economic) causes, this volatility underscored the fact that Crocs should be expecting its strong demand to level off and its market to expect other designs while maintaining its desired features (e.g., the comfort of Croslite material). The Company will have to gear up for variation in the design of its product lines, to enhance its own production flexibility while keeping market demand interested in its products. 9.4 Visibility of transformation The manufacturing process involved in the production of Crocs products is actually not visible to the customers; however, the process itself is not a matter of secrecy since the procedure involved is relatively established in the rubber and footwear industry. In this sense, the transformation process is rather open and not subject of industry secrecy. Furthermore, the high profile of Croc’s in the market has necessitated disclosures of its manufacturing processes given the one-time controversy of health implications attributed to its products (Croc’s 2009 Annual Company Report). 10 Recommendations There are no assurances that the production environment shall not change, therefore “the challenge is building supply chains that are robust enough to withstand a broad range of scenarios” (Gonzalez, 2009). Companies, Crocs included, should also build in sufficient provisions for forward visibility in order to detect and recognize economic changes and variations in supply chain activities that are beyond its control, so that they can take pre-emptive corrective actions in those activities that are within their control. Further recommendation is also made in exploring other product designs, as well as other product items, which Crocs can employ to enhance its flexibility; that is, where demand for one product falters, another product could be played up that the market may find more attractive during the slow season. It should be noted that apart from its flagship footwear, the company also manufactures other accessory products such as caps, shirts, socks, hats, backpacks, kneepads and kneelers (Bhattcharyya, 2009); however it still remains heavily reliant on footwear. Finally, as already noted earlier, Crocs products are largely manufactured in-house (2009 Annual Company Report). While this may lower quality and cost concerns related to outsourcing during strong demand, it concentrates the risks of production entirely within the Company. Crocs should therefore consider farming out non-core activities that support its main marketing effort, in order to minimize exposure to asset investment, lower fixed costs, and distribute the risks during times of low demand. 11 Conclusions From the overall standpoint, Crocs, Inc. possesses the potential for sustained growth despite lacklustre performance in the years 2007-2009. Preliminary assessments for the year 2010 indicate that the slump has been corrected and demand is beginning to rise (3Q 2010 Quarterly Annual Report). Crocs could take advantage of the economic recovery by instituting cost efficiency measures and production flexibility during the coming expanding market, in order to prepare itself for a possible market correction after the initial surge. The evolution of supply chain practices which the company is undertaking (exploring new suppliers and outsourcers, developing new distribution channels, enhancing production processes, etc.) will enable the Company to more resiliently take advantage of the strong market demand that may be expected while gearing itself for the unexpected twists and turns. Its greatest challenge is to develop robust systems that may more adequately address its maturing status, contending with product design development to retain the interests of its present customer base, while penetrating new emerging markets in order to spur new demand. References: Ashkanasy, N M & Wilderom, C. (2000) ‘Handbook of Organizational Culture and Climate’. SAGE, Thousand Oaks. Bamford, D & Forrester, P (2010) ‘Essential Guide to Operations Management: Concepts and Case Notes’. John Wiley & Sons, Hoboken, New Jersey. Basu, R (2009) ‘Implementing Six Sigma and Lean: A Practical Guide to Tools and Techniques’. Butterworth-Heinemann, Oxford. Bhattacharyya, A (2009) ‘Discussion on CROCS: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage’. Copenhagen Business School. 16 March 2009. http://www.docstoc.com/docs/7720101/Supply-Chain-OM Collins, E (2009) ‘GSCLG Leader Profile: Ed Collins’, Global Supply Chain Review. Accessed on 12th March 2011 from: http://www.gscreview.com/mar08_gsclg_l_profile_ed_Collins.php Crocs, Inc. Annual Report 2009 http://quote.morningstar.com/stock-filing/Annual-Report/2010/12/31/t.aspx?t=XNAS:CROX&ft=10-K&d=8a984d9de865ff05936bd95a23b9c041 Gonzalez, A (2009) “Crocs: From Revolutionary Supply Chain to Almost Bankrupt,” Logistics Viewpoints. 6 June 2009. Accessed 12 March 2011 from http://logisticsviewpoints.com/2009/06/22/crocs-from-revolutionary-supply-chain-to-almost-bankrupt/ Harrison, A., Christopher, M. and van Hoek, R. (1999) ‘Creating the Agile Supply Chain’, Institute of Logistics & Transport, UK Thompson, S 2006 ‘Crocs’. Advertising Age, 00018899, 11/13/2006, Vol. 77, Issue 46. Sodhi, M. (2010) ‘A Long View of Research and Practice in Operations Research and Management Science: The Past and the Future’. Springer, London. Read More