Supply Chain Issues Send Retailers To Drawing Board

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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 ( LULU ) 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 standards.

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.

Few Suppliers

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 adds.

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 management issues.

"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."

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," she says.

"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 times.

Managing Vendors

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 across suppliers.

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 Donadio.

She says certifying key people is crucial to keeping quality control and consistency of the standards that the retailer expects.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LULU

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