A demand-driven supply chain and best-in-class sourcing are central to Ralph Laurens restructuring plans

A demand-driven supply chain and best-in-class sourcing are central to Ralph Lauren's restructuring plans

An overhaul of its supply chain is at the heart of restructuring plans revealed this week by Ralph Lauren's newly-appointed CEO Stefan Larsson, including a new test pipeline, shorter lead times, reduced inventory and a focus on fewer styles and more on-trend merchandise.

The overhaul of its activities will also see the luxury retailer close more than 50 stores and slash its workforce by around 8%, which it says will result in annual cost savings of around US$220m. But the company also expects to incur $550m in restructuring and inventory charges as a result of the changes by the end of fiscal 2017.

Larsson, who was named CEO in September last year unveiled details of his 'Way Forward Plan' during the company's investor and analyst day on Tuesday (7 June).

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The former president of Gap Inc's Old Navy division, and 15-year veteran at Swedish retail giant Hennes & Mauritz (H&M), outlined four "engines" to deliver sustainable, profitable sales growth for the business, including a systematic and repeatable way of building a stronger assortment, demand driving the supply chain, best in class sourcing, and a multi-channel distribution and expansion strategy.

Speaking to analysts, he said the company must ensure "every single product in the assortment has an intent." He added: "Every product has to either be a test, it has to grow or it has to be optimised or re-invented – and if it does not qualify it needs to leave the assortment." 

Testing, re-inventing, and re-inventing through testing becomes a cycle that will lead to a stronger assortment, Larsson advised, and one that is connected to the next steps: a demand driven supply chain and best in class sourcing.

Sell more with less

Key to the turnaround is improving supply chain speed, and the company intends to reduce lead times from 15 months to nine months alongside the introduction of an eight-week test pipeline that will enable it to plan inventory based on demand. "The whole idea is to sell more with less."

The biggest driver here is to work differently, stepping away from a handover model that moves along the chain from design to merchandising to sourcing to marketing to sales and instead create "cross functional teamwork."

Next "is to stop thinking about it as if its one lead time. It's not one lead time, the 15 to 9 is a very important change, because [it] brings us to a place where we can actually start to plan [based] on what we sold. So we plan spring [based] on what we sold that spring."

While "there are some things that you need to commit nine months out, other things you need to commit some six months out, some three," the continuous eight-week test pipeline should highlight likely winners and losers and cut excess inventory – and discounting  – to as low a level as possible.

In terms of sourcing, once Ralph Lauren has a systematic repeatable way of building a stronger assortment, it can connect to a demand driven supply chain with much shorter lead times and develop best-in-class sourcing. 

A highlight here will be to strengthen the collaboration with its supplier base in Asia. "The suppliers are really advanced and have a lot of knowledge. We have to get even closer to them and leverage that knowledge," Larsson explains.

Drive down costs, drive up quality

Other measures underway include fabric platforming for flexibiility – buying large quantities of fabric up-front for "icon" products and adding different treatments, washes and finishes in response to trends – and multi-step buying where instead of "making a big buy and taking a big bet" the order is split into several smaller portions that "improve our accuracy when it comes to matching demand and supply".

Larsson notes: "There is an overall focus in sourcing that needs to continuously drive down costs and drive up quality at the same time. The collaboration with our partners, our suppliers will be key and it is something we will start every three months, every six months [to] find opportunities to drive quality up and cost down."

He also emphasises: "One thing that I want to be very clear on is that best in class sourcing is not all about speed; it's about optimising quality, optimising price, it's about flexibility. So our best in class sourcing strategy will drive to us optimising those four."

Also in the pipeline is a focus on innovation: "You either lead or you go home." 

The company will channel its attention towards its three biggest labels: Ralph Lauren, Polo and Lauren. The company will also work to align its distribution strategy with how today's consumers want to shop across channels. "Our expansion and distribution strategy will...develop the right strength in wholesale, online and retail so that will be a big improvement and that's also where we will bring in best in class knowledge."

Larsson's focus on Ralph Lauren's supply chain had been widely expected by analysts who last year predicted his first task as CEO would be to tackle "low hanging fruit" such as supply chain enhancements, inventory realignment and cost management.

New CEO likely to focus on Ralph Lauren supply chain

The need for change gathered impetus earlier this year after the US apparel giant lowered its full-year outlook and posted a 39% decline in third-quarter net profit as sales slipped 4% to $1.9bn.

Looking forward

In terms of its outlook, the company now says it expects first quarter revenues to decline at a mid-single digit rate, and that sales for the full year are set to drop by a low double-digit rate as it reduces its inventory levels, closes stores and takes the weak retail traffic in the US into account.

Performance is then seen stabilising in fiscal 2018 and growing a smaller, more profitable base in fiscal 2019, with improving operating margins in both years. In fiscal 2020, the company will target market share growth and a mid-teens operating margin.

Separately, the company is also strengthening its leadership team  – including the addition of Coach Inc's chief financial officer Jane Hamilton Nielsen and a new head of supply chain.

Ralph Lauren taps Coach CFO among new leadership hires