Supply chain improvements to save Billabong $30m
Billabong sees AUD30m (US$21m) in potential annual profit improvement from its global sourcing and logistics initiatives
Australian surfwear company Billabong says it is “making good progress” in its turnaround efforts after posting its first full year profit since 2011 – and has now set its sights on yet more savings from supply chain improvements.
In fact, chief executive Neil Fiske says the company has identified AUD30m (US$21m) in potential annual profit improvement from its global sourcing and logistics initiatives.
But he adds: “While we will begin to see benefits in financial year 2016, the lead times in the business mean the benefits will take several years to be fully realised.”
Fiske, the ex-Eddie Bauer boss hired two years ago when Billabong accepted a long-term funding package from private equity firms Centerbridge and Oaktree, has been focused on driving a seven-part turnaround strategy focused on “fewer, bigger, better, focus on the core, brand authenticity and integrity, quality products, quality distribution.”
Part of this effort has involved exiting a number of underperforming brands and shifting the focus onto its core business – which includes the “big three” brands, Billabong, Element and RVCA.
But as Fiske told analysts on the firm's earnings call last week, a key underpinning is a “supply chain configured for speed, quality and lower costs; globally driven, regionally responsive; build it once, build it right, get scale, and pay as you go.”
Of the AUD30m worth of improvements identified, AUD20m is seen coming from a global sourcing capability built to focus on quality and cost, and another AUD10m from its logistics operations.
As far as the first is concerned, “we’re advancing against our objectives and starting to see significant savings in key categories,” Fiske reports.
Billabong has so far restructured its Hong Kong operation, and formed a global sourcing organisation for the first time in the company's history. And last September it hired two industry veterans – Randy Royce as vice president of global supply chain, and Kitty Ho as vice president of global sourcing – to build its capabilities under the leadership of COO Jeff Streader.
In addition to this, “we have narrowed our vendor base dramatically by more than 50%, so that we are more meaningful to them and as a result get better quality, innovation and cost,” says Fiske, adding: “We are also showing up as one organisation with major scale, not a collection of regions and brands each doing business on their own. We are still early in the game but I’m encouraged by what we are seeing. Much of the opportunity is yet to be tapped.”
Regional decision-making and fragmentation – instead of having one coherent global network – was also weighing on the company's global logistics and distribution costs.
“When we benchmarked ourselves versus other industry players a couple of years ago, we found that we were 100 to 150 basis points too high,” says Fiske. “In FY16, we will begin the implementation of a project pipeline, a phased overhaul of our logistics system based on a global redesign of the network.”
The company's targeted AUD10m in annual cost reductions here, along with quality improvements, will likely come from shifting quality assurance (QA) back to source and shortening lead times through more direct shipping instead of using regional distribution centres.
“We are setting up two consolidation centres, one in China and one in Singapore, so that we can ship directly to our customers’ store and distributors where possible.” These centres will be run by third-party logistics provider APL Logistics, and test shipments are due to begin later this calendar year.
As part of its network redesign, Billabong will be closing its distribution centre in Montreal, downsizing its Australian DC, and improving the productivity of its European operation.
Emphasising that “everything we do starts with the brand mindset,” Fiske says that in addition to sourcing and global logistics, omni-channel and 'concept to customer' are other priorities.
“Omni is the most transformational. It will become our new operating system, our way of doing business. It is built around one singular focus; the way the customer wants to shop.
“We have strong conviction that the winners in this rapidly evolving consumer landscape will be seamlessly omni: wholesale and retail, bricks and clicked anytime, anywhere, one brand experience.
“We know that multichannel shoppers are worth two to three times the value of the single channel shopper and we’re putting them at the centre of our strategy.”
Moving to a seamless omni-channel experience should be helped by its recent investment in the Netsuite cloud-based platform, which is integrated with the JustEnough planning and allocation system, “giving us a step function improvement in our ability to plan, buy, and manage assortment in a multichannel environment.”
The first implementation will be with the Billabong brand and Australian retailer Surf Dive ‘n’ Ski towards the end of FY16, with other brands and retail banners to follow in FY17.
Concept to customer
Pulling this all together, from the start of design to delivery of product to the customer, is 'concept to customer', the process that integrates the merchant front-end, sourcing and pipeline initiative.
“Our goal is to be faster to market to be able to respond to market trends, winners in our assortment and changes in order pattern. Earlier this year, we were unable to fully capitalise on an upswing in orders due to our long lead times. We are still buying too much of our merchandise essentially blind without visibility to forward orders.”
Improving speed to market will not only accelerate topline growth, it will lift margins as the company reduces its exposure to markdowns.
“In order to get that speed, we have to have much tighter coordination with our narrowed vendor base, capacity management and visibility across the supply chain globally, and a very disciplined product development process, led by our merchant front-end.”
Again, the Billabong team has been the first to implement both the merchant front-end and concept to customer processes, with Fiske suggesting improvements in both initial and maintained product margins are now starting to flow through the business, particularly in the US and Europe.
“However, as we have said previously, this is a long lead time business and it will take time to realise the full potential,” explains, adding: “I am confident that we are well on our way.”
Full-year figures back this up, with Billabong bouncing back from an AUD233.7m loss to a modest AUD4.2m profit, helped by an 8.8% rise in pre-tax underlying earnings to AUD65.7m and a 2.6% rise in revenue to AUD1.05bn.
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