H&M Group, a Swedish clothing retailer with 4,300 stores globally at the end of 2017, has a major problem: US$4 billion of clothes that it can’t sell as a CNN article suggests.
The board seems to be a bit paralyzed over what to do about this problem.
- They are afraid that if they deeply discount the products, they will erode the value of the brand.
- The cost of carrying the inventory has been a significant drain of profits: 28% for the first half of the year
- Investors aren’t impressed with the financial performance of the company
- The company might sell in markets that respond to sales both in-store and online
- The company might sell products in markets where they have no existing presence
- The products could be donated to charity or recycled–scrapped
H&M Group is a distributor of mass produced products. They order products based on a forecast and have products shipped to stores. They hope and pray that actual consumer demand will consume the products. When the products aren’t consumed, the mass producer is faced with the options described above.
The problem starts with the forecast. Every forecast I’ve ever seen from sales is high–way high– when compared with actual results. Sales wants to be sure that they don’t miss a sale due to not having the right size or color in stock. The supply chain folks are, in effect, the engine room of the ship executing to what the organization has forecast. The engine room may have little visibility to the consumption–they simply have to ensure that the product in the stores aligns with the forecast. And, to get lower unit costs, they may be making significant commitments for product that can’t be cancelled. That’s how US$4 billion dollar excess inventory comes into being.
Finance has to reserve for excess and obsolete inventory. This reserve ultimately impacts the bottom line. H&M Group’s actual reserve amount is far in excess of the amount reserved. That’s why the board is stuck about what to do about it. I don’t know about you, but I’ve never had $4 billion in signature authority.
H&M Group has a serious process issue that can’t be addressed within individual silos. The current solution is to get as much inventory on hand as possible and deal with any fallout later. The operations side may be working under a misguided metric of trying to achieve lowest unit cost, not inventory optimization. That’s not a process–it’s a formula for accruing US$4 billion in excess and obsolete inventory.
What we have traditionally done in Silicon Valley when faced with a negative issue is “swallow the toad” at year-end or the end of a quarter, get the bad news behind us, and move on. All the programs the H&M board is considering will take time to execute, may or may not achieve the desired result, all the while the excess inventory will continue to be a drain on profits.
It’s time to “swallow the toad.” This problem isn’t going away. Due to poor processes, it may well get worse.
Thought for the week:
“A man should swallow a toad every morning to be sure of not meeting with anything more revolting in the day ahead.” ― Nicolas Chamfort
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Dave Gardner is a management consultant, speaker, blogger and author based in Silicon Valley. He's been in the front row for the birth and evolution of Silicon Valley, the innovation capital of the world. Since 1992, Dave Gardner has focused on making the complex simple around people, process and technology. He can be reached through his website, www.DaveGardner.biz, or via phone at +1 408-475-7068.