Victoria`s Secret Economic Environment

IntroductionThe apparel industry faces various supply chain challenges, many due to the fact that the major part of apparel manufacturing activity for the United States market has moved outside the country to low-labor-cost countries in the Far-East. Thus, due to long physical distances, apparel companies in the US are continuously challenged to quickly respond to changing trends, to reduce long lead-times, to execute collaborative product development with suppliers using effective communication and to ensure total supply chain visibility. Moreover, fickle consumer preferences and shortening of the product life cycles make the apparel industry very challenging from a supply chain perspective.The Victoria's Secret business provides a case study representative of most supply chain challenges faced by the apparel industry as a whole. Victoria's Secret is a multi-channel retailer selling its products through physical stores located throughout the United States, as well as through a colle ction of printed catalogs and an online shop. Its major product offerings lie in the category of intimate apparel, sleepwear, beauty, apparel, shoes and swimwear. For the purpose of this research, we focus on the intimate apparel segment of Victoria's Secret. Intimate apparel represents the largest portion of Victoria's Secret business and is sold through all the retail channels described above.Company HistoryAccording to company lore, after a disagreement with his father in 1963 over the operation of the family store (Leslie's), Leslie Wexner, then 26, opened  the first Limited store in Columbus, Ohio, with $5,000 borrowed from his aunt. Leslie Wexner's desire was to focus on moderately priced fashionable attire for teenagers and young women (Hoover's Online). The Limited went public in 1969 with five stores. Rapid development of large malls spurred Limited's growth to 100 stores by 1976.Two years later, The Limited acquired Mast Industries, an international apparel purchasing an d importing company. In 1982, Limited purchased Lane Bryant (a plus size brand) and Victoria's Secret (lingerie). In March 2002 the so called The Limited changed its name to Limited Brands. Limited Brands is currently focusing on its star players, Victoria's Secret and Bath and Body Works.Company StrategyThe company strategy has evolved over time. Prior to 1995, the company's strategy was primarily driven by a knock-off design, shop-and-copy system. During this period, the company's merchants searched for forthcoming fashion designs, all over the world, especially in Europe, and produced merchandise inspired by these designs. Their strategy involved speed sourcing of the products and selling them out even before the original brand could actually be launched. By the early nineties, there remained little competitive advantage in this approach, as the rest of the world had figured out similar ways to do business (Limited Brands Presentation, 2005), between 1995 and 1998, the company st rategically planned an overhaul, focusing on developing a distinct brand identity.The Limited became the largest employer of apparel designers in the world (as mentioned by a top executive). The company re-positioned itself to operate like an upscale consumer package company. With aspirations to be a large powerful brand that controlled its own retail distribution channels and seeking a consistent repeatable business, the company soon incorporated vertically integrated capabilities into its supply chain. In its quest to narrow its portfolio and create a distinct brand image, the company closed all of its poorly performing businesses, including the sale of its bank, and spun off or sold Abercrombie and Fitch, Lane Bryant and six out of seven Henri Bendel stores (Limited Brands Presentation, 2005).Financial PerformanceVictoria's Secret Business UnitWithin Victoria's Secret, all three channels – Victoria's Secret Stores, Victoria's Secret Beauty and Victoria's Secret Direct â₠¬â€œ are experiencing revenue growth as well as profitability. As of august 2013, Victoria`s Secret stores sales increased 3% on top of a 9% increase last year. Increase was primarily driven by strength in bras and panties. Victoria's Secret Direct, the catalog and online business, also experienced growth. Direct enjoyed a 3% increase in sales in 2013. The growth came from improved clothing assortment at more competitive prices and growth of its intimate apparel category, especially of panties and sleepwear.Direct now represents approximately a third of Victoria's Secret sales. A 2001 â€Å"share of drawer† analysis indicated that one-third of the typical customer's lingerie drawer comes from the Victoria's Secret brand. Most of the drawer, however, consists of daily wear lingerie products, of which Victoria's Secret is a relatively lower percentage. Thus, the trend for the new product introductions will likely be toward more pretty, yet every day, styles like the Body by Vic toria sub-brand, a line of everyday intimate apparel.Victoria's Secret StoresVictoria's Secret (VS) is the most profitable as well as the biggest revenue generating brand for Limited Brands. Its net sales for the year 2013 were $ 271 million correspond of 16.7% of the total % of sales. Victoria's Secret comprises 3 sub-businesses: Victoria's Secret Stores (VSS), Victoria's Secret Beauty (VSB) and Victoria's Secret Direct (VSD) network of stores. VSD sells VS lingerie, sleepwear as well as 3rd party brands in the categories of apparel, shoes and accessories through its online store and catalogs. This case study focuses on Victoria's Secret's lingerie business.ProductsVictoria's Secret sub-brands or collections can be said to focus on a central theme. For example, the most recently introduced Victoria's Secret sub-brand called ‘Pink† is a new collection of intimate apparel aimed at a 19 year old  woman (Limited Brands Interview, 2005), and the â€Å"Victoria† is t he new glamorous fragrance launched that build on its fragrance business. Each of these collections is offered in a variety of different styles based on the extent of coverage given by the bra, the configuration of the bra strap or even its entire silhouette.Overall, the products carried by Victoria's Secret Stores can be divided into 3 broad categories: Launch Fashion Products, Non-Launch Fashion Products and Basic Products. About 60% of units in store are basic, 25% non-launch fashion and the remaining 15% are launch products. Basics consist of products which sell all year round and have styles and colors which can be sold in all seasons and for the most part, never go out of style. Beige Dream Angel's bras, white and black bras from the Body by Victoria collection are examples of basic products.Fashion products are loosely defined as items with styles, colors or silhouettes which typically sell for one season (1 season = 6 months) and then shift to regular replenishment. Launch p roducts are fashion items which are heavily promoted and may even announce the introduction of a completely new category. These products involve special planning and are typically launched two times per year, in spring and fall. An example of a highly successful recently launched product is the new The Close-Up ®. The company also engages in about fifteen annual reconfigurations of its stores also termed as â€Å"floorsets†. A floorset may or may not involve a launch.Customer SegmentsVictoria's Secret Stores is trying to be the dominant, young, sexy and sophisticated lingerie and beauty brand in the world. Victoria's Secret serves a wide range of customers with varied psychographics and demographics. On a household income scale, the VS customer loosely lies between 30-75 percentile ranges. With presence in almost all major malls in the United States, VSS aspires to become a destination brand, which means that a customer would be tempted to visit the malls just to see the VS store. With the Pink ® sub-brand, the space Victoria's Secret is trying to fill as â€Å"young and casual†, a category which had been previously overlooked  by Victoria's Secret.Pink was developed in response to the fast growing Abercrombie & Fitch brand, which was once a part of The Limited. Out of the three key words describing the overall target customer above, â€Å"young† is the most important. The goal is clearly to target a young demographic. Finally, the company sees VS as an â€Å"aspirational† brand, and as such, older women may be encouraged to buy Pink  ®' products as well, as a 40 year old is likely to aspire to look like 30 rather than to look.Demand Forecasting and PlanningOn the demand planning and forecasting front, the Catalog and Web businesses are governed by separate strategies. This is primarily because the drivers of demand for the two channels are different. For the catalog, the demand forecast is mapped against the curve of the pr oduct life cycle from the point the catalog is mailed to when 98% of the product is sold. Moreover, circulation of printed books is the primary driver of sales. Within a catalog, dynamics related to location of the display of product, and to the model selected for the display, are sales drivers. Once Direct has visibility as to the actual product layout of the catalog, it re-forecasts the demand several weeks before it is mailed, and subsequently adjusts its purchase orders.For the web, on the other hand, the forecast is based on individual item performance on an hourly, daily or weekly basis. One of the key metrics that Direct uses to monitor its sales is given by the Net-Growth Ratio. This ratio measures for every $1 of demand generated, how much was generated for sales after accounting for returns, cancellations and failure to fulfill back-orders. Victoria's Secret Direct, especially the catalog business, has additional levers in the way that offer a wider breadth of fashion asso rtments. This is because the marginal costs of carrying fashion versus basics product in Direct is governed by different dynamics in comparison to stores, as the stores have huge fixed costs due to real-estate.Moreover, it is possible for Direct to leverage assets between the catalog and web operations such as common photography. About 400 million catalogs are mailed in a year; approximately one fresh book a week having anywhere between 60 to180 pages and including between 250 and 600 items. About 95-98% of the Direct products are sold in US. Semi-annual sales are  tied together with Victoria's Secret Stores and a sale period is comprised of 8 weeks, requiring approximately 8 mailings during this time (Limited Brands Interview, 2005). Last, but not the least, if a product doesn't perform well in one media, it is not introduced in the other.Sourcing and ProductionVictoria's Secret Direct utilizes the Mast network, as do the Victoria's Secret Stores. Direct is able to maintain accur ate data about customer preferences and buying patterns due to the online nature of its business. It is therefore able to quickly translate this information to its vendors, making it much more responsive to changing customer needs than the Victoria's Secret Stores. This allows Mast to adopt a sourcing strategy based on the vendors' ability to deliver smaller and more frequent orders. Smaller orders mitigate risk of over-stocking and frequency allows the company to react closer to the demand and to get the right product out to market in time.Distribution and FulfillmentOn the distribution front, Direct uses its own distribution center in Columbus, Ohio, separate from the Victoria's Secret Stores' distribution center. Both web and catalog share this DC. The process of picking in distribution centers is different from stores, as these products are picked as single items based on orders, whereas in the Victoria's Secret Stores' operations the products are picked and shipped in cases. Th e average time it takes to get to customers is about two days. The online business is well integrated to inventory systems at the DC level, but is not integrated with Victoria's Secret Stores. With only about 15-20% of overlap in SKUs between the stores and Direct, this is not an immediate need (Limited Brands Interview, 2005).Direct keeps a close watch on its inventory and maintains fairly accurate item levels as well as order level data. For example, the current percentage of service level that Direct operates shows an 88% in stock and 12% back-order at the item level. This level of data integrity allows Direct to be much more responsive than Victoria's Secret Stores and  as a result allows them to make dynamic changes to order quantities, pre-packs and size-curves based on latest selling patterns. In contrast to placing large orders with Mast, as do Victoria's Secret Stores, Direct can thus place smaller and more frequent orders. Moreover, Direct doesn't require excess inventor y for the purpose of its floor and window displays as do Victoria's Secret Stores.Goals and ChallengesAs a part of the INSIGHT project, Victoria's Secret Direct is working closely with its production team to create a library of fabrics and raw materials to make a choice matrix such that lead times can be reduced dramatically. They are also a part of the same initiative to reduce concept to market lead times from 72 to 40 weeks.The challenge for the company is in the area of returns. Currently, returns amount to approximately 25% of demand and are primarily driven by the Swim and Apparel categories; however, a considerable part of returns are put back in stock. These are products which are in reasonable condition to be resold. The return rate for lingerie is negligible. One of the challenges that Victoria's Secret faces overall is in the category of fringe sizes. Fringe sizes are the ones which are on the tail-end of the demand curve and whose demand patterns are harder to predict. C ustomers looking to buy these sizes typically feel the need to try them on before purchase.If these products are carried by Direct, there is potential for reduced customer service levels. On the other hand, if Victoria's Secret Stores decides to carry these sizes to provide better customer service, they will be faced with challenges of less predictable demand patterns for these sizes, leading to over or under stocking of product. Therefore, the company has to work a delicate tradeoff between providing better customer service levels and the subsequent financial impact of this service. A survey about multi-channel retailing tactics used by retailers, conducted by Forrester research, showed that 87% of retailers allowed purchases made online to be returned to stores.Limited Brands fully integrated Victoria's Secret with its Direct business. This involves large logistical challenges for the brand but have a  positive impact of customer satisfaction levels as the customers are able to return goods purchased online to Victoria's Secret Stores, and are even able to order products in stores which they purchased online and have them delivered to their house with no additional cost.Victoria's Secret's Supply Chain FrameworkVictoria's Secret's business strategy has evolved from a shop-and-copy system to a branded concept, that of selling innovative, technologically advanced products at reasonably high profit margins. The Victoria's Secret brand is positioned to be the dominant, young, sexy and sophisticated lingerie and beauty concept, targeting young customers who appreciate the value of possessing innovative lingerie. At the same time, the company is somewhat risk averse.It does not rely solely on its fashionable bra launches for all of its sales. It distributes risk by having a mixed assortment of fashion and basic goods. However, having this mixed assortment adds complexity, in that the brand has to operate two supply chains; one for each of these types of products . Below I underlined the operating model, operational objectives and important tailored business activities that drive sustained competitive advantage within the Victoria's Secret supply chain and align with the overarching business strategy.Complementary Operating ModelThe operating model at Victoria's Secret Stores is to achieve desired brand recognition through innovative product development, glamorous bra launches and high shelf availability of its products. Most of the Victoria's Secret Stores' new product introductions are offered in both fashion (items with less predictable demand) as well as basic (stable demand) styles. This mix of fashion and basic items helps Victoria's Secret to distribute risk, to ensure profitability and to offer compelling value to customers. The company identifies that there is not a single all-in-one supply chain solution for both of these categories of products and therefore it maintains two different types of supply chains for each.The supply chai n for Victoria's Secret's fashion items is driven by â€Å"Speed-to-Market† to ensure responsiveness. This is reflected in the company-wide initiative to shorten its â€Å"Concept-to-Market† calendar. This supply chain is further governed by a sourcing strategy that requires a set of suppliers with an excellent record of product innovation, value-adding capabilities and no minimum volume requirements. Due to the prioritization of speed over low labor cost, these items are made in the most capable factories in the world, wherever they may be, and are consistently air shipped to the company's distribution center in Columbus, Ohio.On the other hand, the supply chain for Victoria's Secrets basic items is driven by factors like asset utilization and supply chain efficiency. As a result, basic goods are manufactured in vertically integrated factories which provide close control over capacity utilization and productivity. These factories run at full capacity and provide econo mies of scale (Limited Brands Interview, 2005). Mast holdings have an equity stake in two of Limited Brands' largest factories in India and Sri Lanka. This is a strategic decision in order to maintain tighter control and better supply chain visibility.Operational ObjectivesThe help of Limited Logistics Services (LLS), Victoria's Secret has drafted a Service Level Agreement that defines various performance metrics for services to Victoria's Secret Stores. This agreement also defines the role of the Victoria's Secret Stores in successfully meeting these objectives. The performance metrics are divided into three broad categories as defined below.Customer ResponseThese metrics are customer-focused and customer-facing. They include a set of distribution metrics as well metrics related to store performance such as responsiveness, floor-set, business priorities, new stores, Value Added Services (VAS), meeting cadence, reporting, and air shipments.EfficiencyThese are internal metrics. They are productivity and cost-related and include a set of metrics at the manufacturing as well as distribution center level such as Auditing/Cycle Counts, Through- Put, Network Productivity, DC Metrics, DC Throughput, and Store Throughput.Asset Utilization These metrics are also internal-facing and largely focus on maintaining economies of scale. They include: Capacity Utilization and Inventory Turns.Objectives Balancing FrameworkThe focus placed on each of the metrics mentioned, varies by whether the product is basic or fashion. For example, in the category of basic products, asset utilization metrics like capacity utilization and efficiency objectives like supply chain costs and productivity carry more weight than responsiveness. The factories making these products run at full capacity with two shifts per day to efficiently deliver these products to market at minimum possible cost of production. These products generate moderate margins for the company in comparison to the fashion pro ducts.On the other hand, in high-margin product categories of fashion goods, particularly in highly promoted launch-related fashion goods, which are most often a result of innovative product development and have relatively short-product-lifecycle of just one season, responsiveness metrics are seen to carry more weight overall. The focus in this model is to increase in-season product availability to reduce lost sales and maximize margins.Tailored Business ActivitiesAt the operational level, there are a set of three tailored business activities that provide significant competitive advantage to the Victoria's Secret supply chain and place Victoria's Secret in a unique position in comparison to its competitors. These activities are aligned to the overarching strategy, which is to deliver an assortment of innovative  fashion products and less risky basic products. The first tailored activity emanates from the company-wide open innovation model. The decentralized design culture within V ictoria's Secret adds unique capabilities to its supply chain design.Product Innovation can come from the supplier, from in-house development or through design inspirations from external concepts. This creates the possibility of inter-company operating ties with outside suppliers. For example, if Limited Design Studios in New York initiates a design concept, it can go to a preferred supplier to be further developed and even changed. This relationship during the design process adds flexibility, which is hard to replicate.The second tailored activity has to do with the sourcing model that Limited has adopted as a whole. The presence of Mast Industries as a wholly-owned subsidiary of Limited Brands is of tremendous value to the company. Mast carefully selects its vendors based on capabilities to manufacture and deliver fashion versus basic products. Mast works with a set of vertically integrated factories as well as raw material suppliers to create a product that is hard to replicate.V ertical integration helps the company to control the production process from fiber to garment. On one hand, this leads to greater manufacturing efficiency required for producing basic products, which generate relatively lesser profit margins than fashion items. On the other hand, vertical integration also helps to speed the product development process essential for new and fashionable products.Finally, the role of Limited Logistics Services' (LLS) â€Å"shared service model† in the smooth operation of its supply chain is indispensable. As mentioned earlier, the Service Level Agreement with each of its brands, including Victoria's Secret, not only defines the detailed performance metrics but also defines the role of each brand in order to carry out the objectives on time. LLS consistently benchmarks itself against outside logistics providers and has been able to provide higher service levels to its brands at competitive costs. The dynamic ability of LLS to constantly evaluate and re-evaluate its performance against external agencies, helps Victoria's  Secret to stay ahead of the competition. In its logistics design, LLS incorporates the fact that whether a product being delivered is fashion or basic.For example, in most cases, fashion lingerie is air-shipped from Asia to Columbus, OH and basic products are ocean-shipped. This is because the fashion products, which have relatively higher margins, are less expensive to transportation costs per unit. Fashion and launch products may also have to go through a customized value-added service process in order to cater to the requirements of the individual stores to which they are shipped. These value-added services are performed at the DC level and the company claims to perform them more cost effectively and efficiently than an outside third party logistics provider. MarketMonopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one a nother (that is, the products are substitutes, but, with differences such as branding, are not exactly alike). In monopolistic competition firms can behave like monopolies in the short-run, including using market power to generate profit. In the long-run, other firms enter the market and the benefits of differentiation decrease with competition; Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities, which the company Victoria`s Secret fit perfectly.The â€Å"founding father† of the theory of monopolistic competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition. Joan Robinson also receives credit as an early pioneer on the concept. Monopolistically competitive markets have the following characteristics: There are many producers and many consumers in a given market, and no business has total control over the market price. Consumers perceive that there are non-price differences among the competitors' products. There are few barriers to entry and exit.Producers have a degree of control over price.