There's nothing like a glitch in the supply chain to wreak
havoc with a retailer's business.
One broken link in the chain from production to the transport
of goods can lead to product shortages and lost sales.
Look no further than the supply chain issue that recently
stretchedLululemon Athletica (
) to the limit. The yoga retailer said last Monday it found
certain recent shipments of its black Luon pants and crops had an
unwanted level of sheerness that fell short of its high
It pulled the affected pants from its shelves over the St.
Patrick's Day weekend.
The shortage will cost Lululemon. For the full year, it
expects $57 million to $67 million in revenue lost due to the
product recall and other costs, resulting in a 25-27-cent
decrease in earnings per share.
The fast-growing retailer has faced supply chain strains in
the past as it's struggled to keep up with product demand. The
problem, say analysts, is it's stretched too thin when it comes
to suppliers and quality control.
Lululemon relies on too few suppliers for products that are
very specialized, says Brian Sozzi, chief equities analyst at
independent researcher NBG Productions.
Lululemon's specialized products are the company's "claim to
fame," and the reason why its customers are so loyal, he says.
They're also the reason it can charge premium prices, he
The company is moving to address its recent mishap. It has a
team on-site collaborating with its longtime manufacturers to
identify the root cause of the sheerness problem.
"The process for creating Luon is complex," said CEO Christine
Day on the March 21 fourth-quarter conference call. "We had
already begun putting more stringent specifications in place on
the production of the Luon, and we will be redoubling our efforts
in this area."
The company declined to comment further.
Lululemon isn't alone when it comes to facing supply chain
"Everyone has them, even big companies," said Sterne, Agee
& Leach analyst Sam Poser. "But I don't think it's a supply
chain issue per se. It's a sitting-back-on-your-laurels issue and
saying, 'We're doing it well enough.' Usually these issues are
symptoms of some sort of complacency. It happens to the best of
Companies get in trouble, he adds, when they're not constantly
improving upon where they are with supply chain management.
Retailers can't afford to be complacent.
Supply chain management -- managing the production, logistics
and transportation of goods -- has always been important to
retailers. But today's very challenging and complicated retail
environment has made it more crucial, says Megan Donadio, a
retail strategist with consulting firm Kurt Salmon.
With retailers selling via multiple channels -- brick-and
mortar stores, mobile devices and the Internet -- consumers'
expectations have changed and they want "instant gratification,"
"Some of the supply chain issues have always existed, but
they're becoming more glaring," she said. "Retailers need to be
able to react more quickly, and they need to have goods when they
say they're going to have them."
With retailers selling through three points of distribution,
they have a lot of supply chain risk that wasn't there two or
three years ago, adds Sozzi. How do you assure good supply?
"Good supply chain management comes down to having a true
partnership with key suppliers," said Donadio.
She says that means working together and planning capacity in
the factories, which can help reduce costs and reduce lead
Another tip from Donadio: "You must actively manage your
vendors and not let them manage you," she says. "That's the real
key to a good supply chain strategy."
When mapping out a supply chain strategy, retailers need to
make sure they have enough suppliers to handle disruptions and
mitigate risks, while also ensuring they're not spread too thin
They also need to have a consistent base of suppliers, she
adds, that aren't changing every season. She says retailers
should have different "levels" of suppliers. That means having
key "premium" suppliers that handle a sizable portion of the
volume, and key "opportunistic" suppliers for specific
technologies or capabilities or to fill order gaps and provide
additional capacity when needed.
In terms of quality control, a lot of very "savvy" retailers
will either have some of their people on-site inspecting
merchandise or they "certify key people -- and only these people
-- at the supplier level to inspect the goods so they can
understand the quality expected by the retailer, says
She says certifying key people is crucial to keeping quality
control and consistency of the standards that the retailer