An Analysis of H&M’s Operations Management

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Introduction

The industry fashion has a strong competitive element where hundreds of small, medium, and large companies attempt to sell clothes to the customers and gain their share of the market. The Swedish brand H&M is among the most well-established players in the market, which maintains more than five thousand stores in seventy-four countries worldwide (“Market overview,” n.d.). According to its official annual statement, in 2019, the H&M group, the brand’s parent company, reported twenty-four billion dollars in net sales (H&M Group, 2019). This makes the company one of the industry leaders and requires it to have a professional operations management team to source materials, manufacture its products, and deliver them to stores efficiently.

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This paper will address three important areas of H&M’s activity, namely, its approach to operations management, the significance of supply chain coordination for its success, and the brands’ technological solutions. The case study demonstrates how the Swedish brand seeks to offer its customers modern but affordable clothes by employing a team of designers. It also discusses H&M’s inventory problem with unsold goods, which occurred despite its efficient supply management. Finally, the paper shows that the utilization of new technologies, namely artificial intelligence, by the company helped it better understand its customers’ needs.

Operations Management and Operations Strategy of H&M

Operations management is an essential aspect of any company which is tasked with producing goods and selling them to the end-user. Operations can be defined as a set of processes in the spheres of manufacturing and service utilized by companies in order to turn raw materials into products (Jacobs and Chase, 2018). Every company engages in different procedures using the resources available to it to create goods and services which are provided to the customer. Thus, operations management is about ensuring delivery of products and services by managing resources which create them (Slack and Brandon-Jones, 2018).

It is the main task of any business to produce its goods and services in the most efficient manner utilizing as few resources as possible to potentially earn the highest profit. All large companies must have a clearly-defined strategy which will allow them to gain a better position in the market. Operations strategy constitutes the decisions and actions which are responsible for achieving the short-term and long-term objectives established by the company’s main strategy. The correct approach to operations plays a major role in businesses” success and their ability to attain a competitive advantage.

H&M is a large corporation, and the reliable system of operations management is a factor which is necessary for the company to work, as well as to produce and sell its goods to customers effectively. The industry of fashion is particularly competitive, and being successful in it means having a concrete strategy which can help the brand gain an advantage in the market. In H&M’s case, the basic strategy is manufacturing and selling clothing items at a low price. Moreover, the clothes produced by H&M have to be trendy in order to attract clients, and to do it, the company focuses on developing designs which are inspired by the products of the high-fashion brands.

People who cannot afford buying expensive clothes from exclusive fashion houses but still want to look stylish are the primary clientele of H&M, and satisfying their needs is the task which requires excellent operations management. Thus, the Swedish brand’s operations strategy implies cutting the production costs, creating designs which constitute analogs of the expensive clothing items, and providing a large variety of products in stores.

The first stage of the H&M operations is the creating of new designs, which is approached carefully and taking into consideration all of the current fashion trends. The company has to act quickly and pursue shorter lead times in order to be the first in the market to offer products to customers. Moreover, every year, H&M releases from twelve to sixteen new clothing collections and refreshes them every week to provide customers with an extensive selection of items (Remy, Speelman, and Swartz, 2016).

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The company understands that staying competitive in the fashion industry implies being flexible and constantly adjusting to the changing demand of the public. It employs a team of hundred designers at its head office in Stockholm who are engaged in researching the emerging trends and translating them into actual products (Peterson, 2014). In some instances, the period between the creation and approval of a clothing design and delivering it to the store can take as little as two weeks. This shows that the operations strategy used by H&M is based on the principles of maximum speed and flexibility.

The company does not have its own factories and instead relies on partners, which means that it has to maintain a strong network of suppliers, which will be addressed later in the paper. Another important aspect of H&M operations management concerns its store design, which is efficiently used to attract customers and encourage them to buy more products. The brand realizes that its clients are mostly young individuals and uses modern styles popular among its primary audience (Arrigo, 2018).

Stores usually utilize large spaces and two floors, which are occupied by racks and shelves with different types of clothing and footwear; this allows customers to browse and try products. H&M also offers clothes which are limited in number or put on display only for a short period of time, which motivates people to visit the store frequently. The company is also committed to sustainability and collects its customers’ clothes to recycle them and turn them into new products. Thus, in its stores, H&M focuses on offering its clients a large number of options and relies on an operations strategy of low-cost and fast production.

Supply Chain Management of H&M

Supply chain management is another key factor in the operations of large companies, the one which often determines whether the business will be successful or not. Essentially, supply chain management covers a variety of spheres, including collaboration with suppliers and other third-party services, planning and designing the ultimate routes of delivery (Zijm et al., 2019).

Its importance is evident from the fact the effective management can considerably reduce costs, for example, by choosing the partners which provide the best quality of material for the lowest price. It is also responsible for the speed of operations since the effective coordination of lead times can eventually streamline organizational processes, improve efficiency and help the company its goods to customers faster than the competitors.

This is especially important under the current circumstances in the majority of markets where people are no longer willing to wait for products of particular brands and easily switch between various options. Thus, supply chain management becomes a significant force behind modern companies, which can potentially bring them a competitive advantage if they adjust it to function efficiently.

As mentioned earlier, H&M does not own any manufacturing facilities, which means that the company has to utilize its partners’ services, which help it produce the goods. The decision to avoid building and maintaining its own plants is reasonable since it allows the fashion brand to be flexible and not allocate large resources to hire and train the staff. Moreover, during certain periods of the year, H&M does not need to produce any clothes, and if the company had its own facility, it would have to pay workers despite the lack of manufacturing activity. Thus, the Swedish brand relies on its numerous suppliers, namely, eight-hundred partners, the majority of which are located in Europe and Asia (“Production,” n.d.).

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Success in the fashion industry is particularly dependent on a company’s ability to deliver new clothes to customers in short periods of time. Therefore, the primary task of H&M is to establish efficient supply chain management to ensure a fast and uninterrupted flow of products from the facilities of its contractors to the company’s distribution centers and stores.

Apart from speed, one of the major factors in H&M’s operations is costs, which have to be kept low for the company to produce affordable goods. This significantly influenced its decision to outsource its manufacturing activities to suppliers from both developing nations in Asia and European countries. The plants based in China and Bangladesh allow H&M to effectively manage its resources allocated to production since the brand does not spend much money due to low labor costs in these countries. While, the facilities in Europe are responsible for clothes which are more expensive, in line with the relevant fashion trends, and can be made on short notice (Jain, Maheshwari, and Rathore, 2019).

Nevertheless, despite the fact, the Asian suppliers are used by H&M in order to manufacture large quantities of products and decrease costs. It causes the lead time to increase, which happens because H&M’s main distribution centers are located in Europe. Consequently, the company utilizes contractors from countries such as the Netherlands to gain a capacity to respond to emerging trends quickly, yet it significantly raises the final price of the articles of clothing.

The use of the two types of suppliers allows H&M to address different customers, those who are ready to pay extra for an exclusive item and those who seek to buy quality garments cheaply. This ultimately grants the company its competitive advantage in the market since it makes the brand able to provide solutions to all clients. Additionally, such manufacturing practices give the company an opportunity to be flexible when making decisions concerning product design operations.

Nevertheless, the long lead times for the products manufactured in Asia and other developing countries which are located far from the distribution centers entail significant inventory problems for H&M. The company developed a strategy to compensate for the long periods of production and delivery by ordering the factories to start working in advance so that the goods would reach the stores on time. Yet, the current fashion industry is extremely volatile, and many of H&M’s clothing designs become outdated by the time when customers can finally buy them.

This led to serious issues with the company’s inventory management, and in 2019 it had more than four-billion-worth of products sitting in the warehouses without any prospect of selling them (Paton, 2018). Moreover, the growing popularity of online shopping and the emergence of new brands also contributed to the decrease in the customer’s demand for H&M’s products.

The Use of Artificial Intelligence and Other Technologies by H&M

Technological advancements help businesses improve their operations, contribute to their success, and often constitute a considerable part of a company’s competitive advantage. Currently, artificial intelligence (AI) is one of the most quickly progressing spheres, which already brings many benefits to corporations which choose to utilize it to better their processes. According to a recent study, AI-based systems can increase cost and time efficiency, reduce the risk of human error, determine customers’ preferences, and maximize sales (Soni, 2020). The number of companies adopting AI is growing every year, and H&M is one of them.

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The Swedish brand has its own AI department, which helps the company introduce new technological solutions to different operations and improve its performance. H&M’s in-house team uses AI to analyze large arrays of data in order to determine the customer demand and to assess the viability of placing new stores in certain locations. According to Errol Koolmeister, the head of AI, this approach motivated the company’s decision to open more than four stores in central Manhattan (“Flying high with AI,” 2019).

Moreover, the brand utilizes AI to forecast the demand for its products in the future by collecting data at the point of sale and then, based on certain trends, makes decisions. The primary source of data for the company is the receipts on sales and returns, which allow it to track transactions which take place in every store (Mahmoud, Tehseen, and Fuxman, 2020). This system is beneficial both for the brand and the customers since it helps the company sell more clothes and ensures that the most popular offers are always available.

After introducing the new AI solution, the company detected that its previous strategy concerning the selection of clothes in certain cases was completely different from the customers’ needs. For instance, in one store, the staff believed that the clients were most interested in casual and basic apparel for both adults and children. Yet, the AI-based analysis demonstrated that the primary customers of the store were women who preferred items which were more in line with the current trends (Chaudhuri, 2018).

Incremental changes on a smaller scale can actually lead to major results in improving the company’s ability to provide clients with the goods they desire. The use of artificial intelligence in the fashion retail industry can shape brands’ design and production decisions. This allows companies to discontinue manufacturing those products which are no longer in demand and focus on making those ones which are desired by the clientele.

In addition to analyzing the clients’ demand with the help of AI, H&M also uses automation at its facilities, which ensures that the speed of delivery of the goods is constantly improving. In 2018, the company introduced new automated warehouses, which guaranteed that the majority of the European clients would have a chance to receive their H&M product on the next day after ordering it (Arthur, 2018). This decision is particularly relevant for the company since, as it was mentioned earlier, it experiences serious problems with its inventory management. Such technological solutions can be the right choice for the brand to prevent manufacturing goods which will not be bought by clients.

Moreover, H&M also implemented RFID, which utilized together with algorithms, provides customers with a selection of clothes based on their previous choices. Thus, H&M aims to offer its clients more personalized services to better respond to their needs.

Nevertheless, despite all the innovations integrated into the business processes, the Swedish company still has a problem with adjusting to the trend of customers shifting towards online shopping. For many years, H&M pursued a strategy of opening brick-and-mortar stores in various locations worldwide, but the numbers show that this approach might not be reasonable in this technological age. In 2020, the company’s executives decided to slow the process of introducing new stores and use them as logistical hubs where online shoppers can collect their orders (Milne, 2019). This shows that the brand realizes the importance of Internet transactions in the future of fashion retail and is ready to change its strategy to be more customer-oriented.

Conclusion

H&M is a Swedish clothing brand which seeks to provide its customers with affordable products, which is achieved through strong operations and supply management and use of technologies, yet the company still has problems. Its approach operations management focuses on reducing costs and making trendy clothes, which becomes possible because of outsourcing and a large team of designers. Moreover, a significant role in the company’s operations strategy based on the reduction of expenses is played by its efficient supply chain management, which utilizes the help of eight hundred partners.

Nevertheless, the company faced a serious problem of unsold inventory, which was attributed to a large number of outdated designs and the popularity of online shopping. Recently, the brand made a strategic decision to change the function of its stores to serve as hubs where people can collect their orders made on the Internet. The company also invested in artificial intelligence technologies, which helped it track customers’ demand in different locations and be able to better understand which products people want it to make.

Reference List

Arrigo, E. (2018) ‘The key role of retail stores in fast fashion companies: The H&M case study,’ in Chow, P. et al. (eds.) Contemporary case studies on fashion production, marketing and operations. New York: Springer Publishing, pp. 121–138.

Arthur, R. (2018) In-depth: H&M puts tech at the heart of action plan to turn the brand around. Web.

Chaudhuri, S. (2018) ‘H&M pivots to big data to spot next big fast-fashion trends‘. The Wall Street Journal. Web.

Flying high with AI: dealing with data the best possible way. (2019). Web.

H&M Group. (20019) Annual report 2019. Web.

Jacobs, F. R. and Chase, R. B. (2018) Operations and supply chain management. 15th edn. New York, NY: McGraw-Hill.

Jain, S., Maheshwari, K. and Rathore, M. S. (2019) Fast moving H&M: An analysis of supply chain management ‘, International Journal Of Advance Research And Innovative Ideas In Education, 5(4). Web.

Mahmoud, A. B., Tehseen, S. and Fuxman, L. (2020) ‘The dark side of artificial intelligence in retail innovation,’ in Pantano, E. (ed.) Retail futures. Bingley: Emerald Publishing, pp. 165–180.

Market overview (n.d.). Web.

Milne, R. (2020) ‘H&M aims to reshape stores for digital age,’ Financial Times. Web.

Paton, E. (2018) H&M, a fashion giant, has a problem: $4.3 Billion in unsold clothes. The New York Times. Web.

Peterson, H. (2014) How H&M churns out new styles in just 2 weeks. Web.

Production (n.d.). Web.

Remy, N., Speelman, E. and Swartz, S. (2016) Style that’s sustainable: A new fast-fashion formula. Web.

Slack, N. and Brandon-Jones, A. (2018) Essentials of operations management. 2nd edn. London: Pearson.

Soni, N. et al. (2020) ‘Artificial intelligence in business: From research and innovation to market deployment,’ Procedia Computer Science, 167, pp. 2200–2210. Web.

Zijm, H. et al. (2019) ‘Operations, logistics and supply chain management: Definitions and objectives’, in Zijm, H., Klumpp, M., Heragu, S., and Regattieri, A. (eds.) Operations, logistics and supply chain management. New York: Springer Publishing, pp. 27–44.

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