Supply+Chain+OM

8/8/2019 Supply+Chain+OM

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COPENHAGEN BUSINESS SCHOOL

FULL TIME MBA 2008-2009

09

OPERATIONS MANAGEMENT & SCMDiscussion on CROCS: Revolutionizing an

Industrys Supply Chain Model For Competitive

Advantage

Atanu Bhattacharyya

CPR-030178-4095

Prof : Carlos Mena & Andrew White

Date of Submission March 16, 2009


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Supply Chain and Operations Management Term paper (Crocs, Inc)

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Abstract

This paper discusses the case titled Crocs: Revolutionizing an industrys supply chain

model for competitive advantage. Crocs, Inc. is a rapidly growing designer,

manufacturer and retailer of footwear and other accessories for men, women and

children under the CrocsTM

brand. The company was established in the year 2002 and

showcases a strong dominance in the foot wear Industry. The case provides an broad

perspective of key features and traditional supply chain practices followed in the

footwear industry and consider impact of Crocs, Inc alternative supply chain model

on its financial performance as against its competitors. Growth platforms and logistic

pipeline adopted by Crocs Inc are briefly discussed to highlight the reasons why and

how Crocs evolved its supply chain practices. The discussion ends with SWOT analysis

of Crocs, Inc supply chain practices and considers recommendations for dealing with

future growth objectives.


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PAPER TOPICS

CONTENTS PAGE NOS.

Introduction

Key Features of the Footwear Logistics Pipeline

Competitive Scenario: Financial Analysis and Comparison

Growth Platforms Adopted by Crocs

What Crocs did to manage its logistic pipeline?

Why Crocs transformed Agile Systems to Quick Response Systems?

Strategic View of Crocs Business and Recommended Way Forward

Conclusion

References

Exhibit A

Exhibit B

Exhibit C

Exhibit D

4

4

5

7

9

12

13

15

16

18

19

20

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Introduction

Crocs, Inc. is a rapidly growing designer, manufacturer and retailer of footwear for men, women and

children under the CrocsTM

brand. The company was established in the year 2002 and guided by the

enlightening vision of its CEO-Ronald Snyder. As a company Crocs, Inc showcases a strong dominance in the

foot wear industry and its branded shoes feature Crocs proprietary closed-cell resin, CrosliteTM

, which

represents a substantial innovation in footwear. The CrosliteTM material enables the company to produce

soft, comfortable, lightweight, superior-gripping, non-marking and odor-resistant shoes. These unique

elements make Crocs footwear ideal for casual wear, as well as for professional and recreational uses such

as boating, hiking, hospitality and gardening. Apart from footwear the company also produces other

accessory products such as caps, shirts, socks, hats, backpack, kneepads and kneelers. With over 14

distribution channels, and nine manufacturing plants spread across the world has enabled the company to

successfully market products to a broad range of consumers. The product line has over 31 different models

aimed at different target groups, ages and gender and sells in more 90 countries across the world. The

company bases its processes on customer requirements, and the supply chain is driven by demand. The

benefits of such a system are reduced inventories and improved levels of service. Crocs has vertically

integrated its value chain to reap benefits of the approach and has grown impressively in the last few years.

But now in times of economic downtime the company faces huge losses and pays the price for its timed

strategies. There exists no business which does not face the cyclical behavior of the market and Crocs is no

exception. This case attempts to delineate Crocs journey as of now and suggest the way forward built on

successful practices adopted by well timed strategic organization.

Key Features of the Footwear Logistics Pipeline

Footwear is a fashion product which typically encompasses any product or market where there is an

element of style which is likely to be short-lived. Generally, a traditional player outsources all of its

production to countries with lower wage rates while focusing on distributing and retailing those goods. This

is due to the fact that the global footwear industry is highly-labor intensive rather than capital intensive.

Considering the dynamic nature of the footwear industry, where inventory pile up and end of season sale

constantly erode bottom line profits, the way to cope with uncertainty is to improve the quality of focus.

But what should one focus on and is it really possible to accurately predict market demand? Well since it is

always difficult to accurately predict market demand, perhaps the best approach would be instead to find

ways to focusing on reducing lead times or time to market, which would reduce margins of error. And this is

exactly what Crocs seems to be doing by vertically integrating its value chain through capital intensive

investments. There are essentially three critical lead-times that must be managed by any organization that

seeks to compete successfully in footwear markets:


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Time-to-Market How long does it take an organization to identify an opportunity and present it to the

market? Companies who are slow to respond to this may suffer in two ways. Firstly they miss a significant

sales opportunity that probably will not arise again. Secondly, suppliers and retailers realize that when the

order finally arrives late in the market place, demand has gone down and profitability is reduced. New

thinking in manufacturing strategy which has focused on flexibility and batch size reduction has clearly

helped organizations reduce time-to-market. The use of highly automated processes such as computer aided

design (CAD) and computer aided manufacturing (CAM) have revolutionized the ability to make product

changes as the season or the life cycle progresses.

Time-to-Serve How long does it take an organization to record a customer order and deliver the product

to complete customer satisfaction? Traditionally in fashion industries orders from retailers have had to be

placed on suppliers many months ahead of the season. Nine months was not unusual as a typical lead-time.

Clearly, in such an environment the risk of both obsolescence and stock-outs is high as well as the significant

inventory carrying cost that inevitably is incurred somewhere in the supply chain as a result of the lengthy

pipeline.

Time-to-React - How long does it take an organization to adjust the output of the business in response to

volatile demand? Ideally, in any market, an organization would want to be able to meet any customer

requirement for the products on offer at the time and place the customer need them. However, a further

problem that organizations face as they seek to become more responsive to demand is that they are

typically slow to recognize changes in real demand in the final market place. The challenge to any business in

a footwear market is to be able to see real demand or what consumers are buying or requesting hour-by-

hour, day-by-day. Because most supply chains are driven by orders (i.e. batched demand) which then are

driven by forecasts and inventory replenishment, individual parties in the chain will have no real visibility of

the final market place. The fundamental problem that faces many companies - not just those in fashion

industries - is that the time it takes to source materials, convert them into products and move them into the

market place is invariably longer than the time the customer is prepared to wait. This difference between

what might be called the logistics pipeline and the customers order cycle time is termed the lead-time

gap. Conventionally, this gap was filled with a forecast-based inventory - there was no other way of

attempting to ensure that there would be product available as and when customers demanded it. These

lengthy supply pipelines often result in revenue losses in the final market.

Competitive Scenario: Financial Analysis and Comparison

Globally the world footwear market is intensely competitive, pitching large and small players alike against

each other. Principal tools of competition within the industry include product design, quality, product

performance, price, brand image, promotion, marketing, and customer service. Unique marketing &

promotional efforts and technical innovation have become key ingredients in setting up the battle for a pie

of the footwear market. Many of the competitors in the rubber and plastic footwear segment are Nike,


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Timberland, Deckers Outdoor, Adidas and Birkenstock. Along with a range of sandals, sneakers and casual

shoes that Crocs must compete against, its success has now witnessed an array of imitators. Airwalk and

Nothinz are two companies that have developed similar products that sell for $ 10-$20 less than Crocs

models. The biggest difference is that the imitators are not made of Crocs patented non-marking, odour

resistant Croslite material, but the company has not hesitated to file patent infringement suits against

imitators. Crocs went public in February 2006 in a highly anticipated IPO, raising $239 million, a record for a

footwear company at the time. In 2007 the company sold a total of 30 million pairs of shoes worldwide. In

the early years after the company's IPO, Crocs saw average Net Income growth of 150% year on year.

However, Crocs has since seen a significant downturn in earnings starting from the first quarter of 2008, and

reported a Net Loss of $183.62 mn in year ended December 20081.Consequently, the company's share price

has also seen a significant 40% drop in value. According to a recent report, crocs sales have been hit

adversely due to the subprime mortgage based financial crisis since the last quarter of 2007. According to

the U.S. Commerce Department, consumer spending in the retail section has fallen 7.4% below 2007

figures.2

Net Income

Since late 2007, Crocs has been suffering losses. The company reported a Net Loss of $183.62 mn for the

year ending December 2008. This is compared to Net Income of $168.23 in 2007 and $64.42 in 2006.

Sales and Revenue Growth Rate

From Crocs' inception in 2002 through the year ended December 31, 2007, the company experienced rapid

revenue growth however; Croc's financial outlook took a turn for the worse when third quarter 2008

revenue tumbled 32% to $174.2 million. Dismal performance led to management discontinuing certain

styles in September 2007.3

Profit Margin

The company has historically recorded high profit margins on sales of Crocs footwear. For the year ended

December 31, 2007, gross profit was $497.6 million, or 58.7% of revenues, compared to $200.6 million, or

56.6% of revenues, for the year ended December 31, 2006. However, weak sales and the general economic

downturn in 2008 have significantly reduced gross profits by 52.80%. The decrease in gross profit was

primarily attributed to excess capacity in Company-owned manufacturing and distribution facilities.

Receivable Turnover

As seen from Exhibit C, Crocs made significant improvements in the year ending 2008 with a receivable

turnover ratio of 20.43 as against 5.54 the previous year ending 2007.This implies either that Crocs now

operates on cash basis or that its extension of credit and collection of accounts receivable is efficient. The

receivable turnover ratio for the year ending 2005 and 2006 for Crocs was 8.0 against 6.0; 6.5; 7.4 and 6.6 of

Deckers Outdoor, Nike, Timberland and the Industry median respectively as given in Exhibit 4 of the original

case.


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Inventory Turnover

As seen from the Exhibit C, Crocs inventory turnover for the year ended 2008 was 3.4. Its inventory turnover

is lower than that of the industry average. The inventory turnover ratio for the year ending 2005 and 2006

for Crocs was 3.5 against 5.0; 4.3; 4.7 and 5.6 of Deckers Outdoor, Nike, Timberland and the Industry median

respectively as given in Exhibit 4 of the original case. Despite Crocs best efforts to reduce inventory its

competitors seem to be better able to manage inventories.

Gross Margin Return on Investment (GMROI)

As seen from Exhibit C for the last 5 years Crocs GMROI has always been above 1. This means that the firm is

selling the merchandise for more than what it costs the firm to acquire it.

Growth Platforms Adopted by Crocs

In its journey from 2002 onwards Crocs Inc, has applied multiple growth platforms to support its business

structure and increased revenues from 1.2 million to 720 million (Exhibit B). The growth strategies which

made this humongous feat achievable are discussed further. But as every decision has a trade off, Crocs too

paid the price of its strategy. Here is an insight on Crocs growth platform and its strategies before the

financial crisis.

Further vertical integration in to materials

According to Fisher, M (1997) there exist two types of supply chain practices. Efficient supply Chain Practices

(Lean) which is applied when demand is supply chains are forecast-driven that implies that they are

inventory-based. Agile supply chains are more likely to be information-based. Crocs understanding the

dynamics of the industry established an agile network to connect to its customers. The main aim was to

vertically integrate its operations to the best extent possible and exercise an option for it to control its

inputs and distribution of its products and services. Specifically the agile supply chain (Diagram Exhibit D) is:

Market sensitive it is closely connected to end-user trends.

Virtually Integrated it relies on shared information across all supply chain partners.

Network-based it gains flexibility by using the strengths of specialist players.

Process aligned it has a high degree of process interconnectivity between the network members.

Strengths of Growth by vertical Integration

Economies of Scale and Scope.

Effective competitive barrier to entry.

Higher degree of control over value chain.

Better position to negotiate with suppliers and buyers

Possibility of higher costs due to low efficiencies resulting from lack of competition by suppliers.

Weaknesses of Growth by Vertical Integration

May cause capacity balancing issues due to excess production capacity in times of falling sales.


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Possibility of higher costs due to low efficiencies resulting from lack of competition by suppliers.

It is possible that ability to increase product variety is decreased if significant in-house development is

required and in pursuit of developing new competencies, existing competencies may be compromised.

Recommendations

Risks and investments should be shared and information should be shared on stocks and inventory levels.

Goals should be aligned between suppliers, company and customers to avoid any conflicting interests

Growth by Acquisition.

Crocs realized early on in its business cycle that acquisition would play an important role to support growth

and started a string of acquisitions to horizontally integrate and support its strategic moves. Within 2 years

of operations Crocs first acquired Canadian manufacturer Finproject NA in June 2004. Finproject NA which

was renamed Foam designs, originally manufactured Crocs products. The acquisition gave Crocs the

intellectual rights to the patented Croslite material. In October 2006 Crocs acquired Fury (Formerly 55

Hockey products) and started manufacturing protection gears based on Croslite. Subsequently in October

2006, Crocs acquired EXO Italia, a company engaged in designing ethylene vinyl acetate (EVA) products used

primarily in footwear products. The most successful acquisition in December 2006 was a company called

Jibbitz, which specialized in manufacture of colorful snap-on products as accessories for Crocs footwear. In

January, 2007 Crocs acquired Ocean Minded, LLC a company which manufactured high quality leather and

EVA based sandals for the beach, adventure and sports market. Crocs thus offered a variety in its product

range for varying target markets and this move phenomenally boosted the companys sale.

Strengths of Growth by Acquisition

Economies of scale and Scope.

Access to developed technologies and products.

Reduction in competition.

Ability to meet varied customer expectations

Defense against substitute products.

Weaknesses of Growth by Acquisition

Acquisition costs should be able to justified by a positive NPV ( Net Present value)

Integration concerns due to cultural change and differences in organizational practices.

Possibility of raising antitrust concerns.

Recommendations

Ensure legal compliance and justifiable return on investment. Adopt efficient change management practices

to facilitate integration.

Growth by Product Extension

Considering the industry and its changing requirements, Crocs has performed extremely well in this sector to

fuel the excitement for its customers. Beach and Cayman the original models is most popular and has been

used as a basis of developing other shoe products. The companys website shows that the company sells


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close to 31 basic footwear models, ranging from sandals to childrens boots to shoes designed for

professionals, such as nurses who had to stand the whole day. Crocs also got in to a license agreement with

Disney and made shoes incorporating Disney characters. In addition Crocs offered shoes under the brand

name CrocsRX that were specially designed to meet the special needs of those with medical problems that

affected their feet, such as diabetes. The company offered 17 models of collegiate models that were

customized to school colors with school logos. Crocs also sponsored the AVO beach volleyball tour and

offered two models with the AVP logo. The company also branched out to produce accessory products such

as caps, shirts, socks, shorts, backpacks, wristbands, kneepads and kneelers.

Strengths of Growth by Product Extension

Economies of scale and Scope.

Value addition and generation of excitement factor(Kano,1984)

Ability to meet varied customer expectations.

Making product obsolete before competition catches up and copies design.

Weaknesses of Growth by Product Extension

Increased production setup costs.

Increased capacity allocation and possibility of excess capacity.

Difficulty in managing multiple SKUs.

Possibility of lack of supplier and retailer coordination in failing times when market growth is slow.

Recommendations

Product extension is integral to the business and thus it is critical to continuously monitor POS data to note

differing trends and develop a contingency plan in case of unexpected market behavior.

What Crocs did to manage its logistic pipeline?

The footwear industry thrives on innovation and is extremely fast paced with designs changing in every

season sale. Companies in order to cater to the demands adopt a model building in a combination of agile

and lean manufacturing and supply chain capabilities. When we see a company outperform competitors in a

given industry, its because it has created a differentiating strategy that it can maintain or choosing a

different position within an industry that involves a unique configuration of activities (Porter, 1996). The

uniqueness of such a configuration rests not only on which activities a company performs and how it

configures each of them, but also on how such activities relate to one another (Milgrom and Roberts, 1995;

Whittington and Others, 1999).In fact, while achieving excellence in performing individual activities or

functions is important, strategy is about combining activities in an original fashion (Mintzberg, Ahlstrand and

Lampel, 1998).

I believe that Crocs defined a new strategic position in the footwear industry. Crocs blue ocean

strategy (Kim and Mauborgne, 2004): A)It has created a somewhat uncontested market space where

competition is less relevant by changing the traditional market segmentation rules; B) It involves a unique


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configuration of activities, removed from the stereotype of the fashion footwear manufacturer, but also

significantly different from other US and European competitors; and C) It has broken the value/cost trade-

off, succeeding in a feat, difficult for most other competitors to emulate by serving successfully a large,

diverse customer base with a wide variety of product lines and styles.

Crocs business model is based on Collaboration (Stevens, 1989) as the supply chain activities are

integrated by using a home-grown planning database system giving them access to global view of their

inventories and centrally monitor planning. Firms now view other allied business units as extensions of their

own firm. Crocs seems to be attempting to follow one of the best supply chain practices as denoted by the

outward facing supply chain strategy arc of integration (Frohlich and Westbrook, 2001) and orients its

manufacturing focus equally towards customers and suppliers. This feature is difficult for any competitor to

emulate. In other words the company has taken bold steps towards external integration by binding the

customers, internal supply chain and suppliers. Considering the complex relationship between the dynamics

of purchasing behavior it is critical to manage supply chain issues efficiently. Traditional ways of responding

to customer demand have been forecast-based where the normal practice is to manufacture as much as

possible of the finished goods inventory required before the season starts and then deliver half to two-thirds

of the necessary products before the beginning of the season and ship the balance of the inventory at pre-

agreed times. An unexpected change in demand creates shortage in the supply chain. In order to increase

safety stocks people over order and this causes a distortion in demand cycle which then leads t o further

shortages and so on. The system loses its balance and inventories piles up to give rise to an effect also called

Forrester effect (Houlihan, 1987) .The Company has taken a range of initiatives to cope with the Forrester

effects of the industry.

Vertical integration, a distinctive feature of Crocs business model, has allowed the company to

successfully develop a strong merchandising strategy. This strategy has led Crocs to create a climate of

scarcity and opportunity as well as a fast-fashion system. By owning its in-house production, Crocs is able to

be flexible in the variety, amount, and frequency of the new styles they produce. Crocs sustainable higher

inventory turnover creates a climate of scarcity and opportunity in Crocs retail stores. The climate also

increases the frequency and rapidity with which consumers visit the stores and buy the products. Regular

customers know that new products are introduced every two weeks in a season and most likely would not

be available tomorrow. Therefore, Crocs scarcity climate allows the company to sell more items at full price.

This strategy helps improve Crocs gross margins as compared to its competitors. As the starting raw

materials used are cheap for manufacturing Crocs smartly focuses on the 4ps of marketing and offers its

products in the right place for an affordable price, with innovative product features and promotion using

dynamic sales and communication channels. Crocs could carve a niche for its business strategy by building

competencies in developing products with excellent and innovative features for the casual and adventure

shoe market. The company unlike other competitors produced products which were demanded by the

customers and rapidly adjusting for any change in demand pattern. The company began its presales


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activities by displaying its product range in the spring season and launched a few products during the actual

sale of the fall season. Within the selling period if the design received a good response, the company filled

new orders by quickly manufacturing and shipping new products to retail stores. The company has been well

received by the retailers as it offers a sales advantage to the retailer by eliminating the need to place bulk

booking orders in spring and offers the flexibility to manage inventory efficiently. Moreover the company

custom distributes 24 packs of shoes in a pack for its smaller retailers, a feature unmatched by any

competitor. For both the retailer and company it was Win-Win situation as both do not run the risk of

ending up with excess unsold inventory at the end of the season sale.

Analyzing Crocs competencies internalization has been a source of competitive advantage because

the firm safeguarded its proprietary manufacturing processes by discontinuing inefficient compounding

facilities in a third party facility (3P) in Italy and installed new compounding facilities in Canada, China and

Mexico. Here the plant could compound materials as needed, delaying the colorizing decision until a specific

product was needed. In Europe, North America and South America Crocs faced issues with third party

manufacturers, as they were required to give them long term forecasts, long term contracts unlike 3P

manufacturers in Asia. Hence the company set up its own operations in Florida, Canada, Mexico, Brazil and

Italy to support business strategy of Just in Time deliveries. Operations were contracted on a trial basis in

Bosnia. Contracting options were also considered in India and Romania. Using this strategy Crocs leveraged

its manufacturing expertise and reduced any variation in quality by optimizing its supply chain practices.

Considering warehousing operations the company changed it to boost efficient supply chain practices.

Traditionally the company had used a contract warehousing and distribution firm in Colorado to handle all

its shipments. All orders came to the Colorado warehouse in bulk, where every shoe was removed, labeled

and packed to supply to the customer. This could be done directly from the plant, hence the company value

added operations by including warehousing operations to each factory. For customers that ordered large

quantities like Nordstrom, Dillards or Dicks sporting goods the order could be shipped directly from the

Chinese Warehouse. The Chinese warehouse was owned by a Chinese supplier but run by Crocs personnel

and Crocs system. Other ware houses were owned by Crocs, or being transitioned to Crocs ownership (as in

the case of Japan). Crocs using this strategy was able to control order fulfillment activities in Asia. Handling

large retailers was not as difficult as these retailers had their own distribution centers. Crocs supplied

finished products from its Colorado operations to the customers distribution center and from here it would

be dispatched to the retailer. A unique move was retaining Denver warehouse operations to distribute

products to small retailers as they did not have access to the distribution facilities of large retailers. Thus

thoroughly grounded in product innovation, Crocs competitive advantage has not grown out of operational

excellence in single activities in the business, but, rather, is derived from a unique and consistent

configuration of complementary activities.


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Why Crocs transformed Agile Systems to Quick Response Systems?

Sheer adoption of the various technologies, processes and activities will be insufficient for an agile response;

close linkages are required across the whole supply system in order to provide a QR capability which is

essentially an outgrowth of the JIT philosophy. What has made QR possible in the case of Crocs is the

development of information technology in a consulting venture with Manhattan associates4 who helped the

company implement electronic data interchange (EDI), bar coding, the use of electronic point of sale (EPOS)

systems and laser scanners. Essentially the logic behind QR is that demand is captured in as close to real-

time as possible and as close to the final consumer as possible. Quick Response operations strategy offers a

high degree of speed, flexibility and responsiveness in supply pipelines. The basic idea behind quickresponse (QR) is that in order to reap the advantages of time-based competition it is necessary to develop

systems that are responsive and fast. The logistics response is then made directly as a result of that

information.

Some companies extensively use QR systems and a suitable example is provided in the United States

by Procter and Gamble who receive sales data directly from the checkout counters of North Americas

largest retailer, Wal-Mart. Making use of this information P & G can plan production and schedule delivery

to Wal-Mart on a replenishment basis. The result is that Wal-Mart carries less inventory yet has fewer stock-

outs and P & G benefit because they get better economies in production and logistics as a result of the early

warning and - most importantly - they have greatly increased their sales to Wal-Mart. Whilst the investment

in the information system is considerable, so too is the payback. QR systems makes it possible to make

demand driven decisions to ensure diversity of offering is maximized and lead times, expenditure, inventory

and cost is minimized. QR encompasses an operations strategy, structure, culture and set of operational

procedures directed at integrating enterprises in a collaborative network through rapid information transfer

and profitable exchange of activity, (Lowson, King and Hunter, 1999). So why did QR come in to

prominence? Well mainly because of two reasons. First, the ability of this strategy to cope with the

complexity of footwear logistics; and, second, as a method to combat the relentless shift toward offshore

sourcing from low wage economies.

The approach is to focus on a key factor which affected Crocs business structure offshore sourcing.

Crocs did not subcontract it manufacturing in America and Europe because of steep contractual obligations.

Well, empirical research has established that sourcing offshore to secure lower cost inputs (typically from

underdeveloped, low wage regions) can have negative consequences; once the hidden and inflexibilitycosts

are quantified, Lowson (2001). Hidden costs are those that are not typically expected by the buying

organization, but almost always occur. Some examples include: significantly lower operator efficiency

offshore; delays at the port of entry, last minute use of air freight and other logistics costs; expensive

administrative travel to correct problems; the various initial investments to establish the new source of

supply, rechecking quality control charges; high initial training costs, coupled with a high staff turnover


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affecting both throughput and quality; process inefficiencies and quality problems; long lead times and the

need for large buffer inventories; and finally, the not insubstantial human cost involved in the conditions

endured in many foreign factory environments often employing child labor and overusing natural resources.

Inflexibility costs are the costs of using suppliers that are inflexible and unresponsive to changes in demand

(before, during and after a product selling season), leading to variable levels of demand multiplication across

a longer supply network and resulting cost implications. Sourcing decisions could be taken once these two

categories are quantified to understand the advantages and disadvantages of low wage outsourced foreign

firms Once the hidden costs are categorized, sourcing on the basis of low cost alone becomes far less

attractive. The situation worsens further, when the costs of inflexibilityare added and thus it becomes clear

that using a domestic Quick Response supplier may be a far better option due to flexibility and velocity that

is provided.

Strategic View of Crocs Business and Recommended Way Forward

Case analysis suggests that Crocs has adopted some of the best known supply chain models in the footwear

industry to achieve its phenomenal growth. The way forward looks interesting as the company brushes with

the economic downturn and faces pressure from stakeholders to maintain growth. A strategic peek in the

existing supply chain practices using the SWOT analysis will help explain the strategic business fundamentals

and recommended way forward.

Strategic Advantages Strategic Weaknesses

y Existing localized manufacturing and quick

response supply chain practices reduces excess

product inventory.

y Factory based distribution setup to reduce lead

time between company and large retailers.y Product customization and distribution system

dedicated to small retailers.

y In house product development making it possible

to flex prices in accordance to market

requirements and meet customer demands.

y Business structured to transfer manufacturing

and inventory products to different regions

depending on seasonal changes.

y Synergistic operations and support from retailers

and contract firms in terms of data transfer to be

able to better respond to QR supply chainpractices.

y Flexibility to retailers in terms of ability to place

orders as and when required.

y International scope of business and possibility of

sharing best evolving practices in supply chain.

y Excess capacity (as much as 2 to 3 times

expected capacity) risk built up in order to

account for demand changes. Excess

capacity increases fixed costs and affects

profitability in a slump.y Excess sunk capital in Denver operations. As

consumer spending as decreased in the

recent crisis volumes have reduced, there

has been less demand from small retailers.

This would affect operating margins due to

ongoing fixed costs in operations. Would it

be justifiable to maintain Denver

operations for such a small volume?

y Increased risk due to high capital

expenditure incurred in product

development, manpower training andinability to mass produce to reduce costs,

conditions needed to cater to QR supply

chain practices.


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Growth Opportunities Business Threats

y Possibility of leasing equipments to 3P suppliers

in order to use excess facility or manufacture as a

3P for other companies.

y Possibility of using Denver distribution capacity

and become a 3PL to distribute other products.y Externally integrate operations to drive down

costs and improve efficiency.

y Possibility of increase in sourcing prices due

to change in duty structure and capital

requirements.

y Financing challenges and possibility of

reduced supplier support for providingflexibility In terms of longer credit cycles to

issue new equipments given the financial

crisis and resulting reduction in product

sales. Suppliers might prefer dealing with

stable orders as there is no incentive to risk

capital.

Considering long term growth and its affect on recession, Gordon Moore Chairman of Intel Corp

came up with three rules of recession that have become ingrained in Intels culture. They are: economic

downturns always end. Some companies emerge from recessions stronger than before. You cant save your

way out of recession. Taking inspiration, strategic analysis of Crocs suggests that the time has come to face

the financial downturn and aggressively implement countercyclical capital expansion strategy. Successful

business strategies depend on multitude of aligning organizational activities, inter departmental and cross

functional support and supply chain has to be reoriented optimally to gain competitive advantage. The best

model which could support recommended Crocs expansive strategy could be the Master Cyclist

Management Wheel (Navarro,2005), which explains how firms seek competitive or sustainable advantage to

tactically manage the business cycle and behave strategically in times of boom and downturn,

simultaneously maximizing revenue and preparing for adversity. Discussed below are relevant strategies and

tactics from the wheel to help support Crocs business model.

Production and Inventory Control Most of Crocs products are manufactured in house and this helps

reduce inefficient outsourcing hassles. Crocs could primarily focus on producing molded shoes in china

because of the low duty structure levied in exporting. It needs to do a quick assessment of other regions in

the world and their duty structures and shift production by transferring adequate production resources and

eliminating adjustment schedules for the short run. Also since the European and Us market is saturated with

Crocs products, the focus could be on other countries where excess capacity could be leased. This opens the

option of increasing geographical diversity. Denver distribution network could be used as a 3P to distribute

other companys products as a step taken to cover the minimum fixed costs. Crocs implemented the global

inventory planning system. The system will help them take faster decisions and better inventory

management practices as electronic data at point of sale is now available.


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Marketing and Pricing Crocs should continue investing in marketing to build the brand and retain its

market share through countercyclical advertising. The company could in this way communicate evolving

changes in its product mix and advertising messages geared to market changes. It should also retarget the

customer and market as economic conditions dictate. It could also cut prices in these bad times to

encourage consumer spending and focus on basic designs. Consumers in economic turmoil look forward

more to value rather than to style.

Risk Management Crocs should revisit its outsourcing plans and renegotiate with capable 3P

manufacturers to outsource non-core manufacturing activities. It is possible that in times of economic

downturns 3P might consider actually producing. There is also the possibility that the customer appreciates

the opportunity of working with Crocs Systems and maintains a continual relation in future. In addition the

company could system contract (Kraljic P,1983) normal items like Jibbitz, rivets to other companies. The

company could consider further geographical diversification and focus on developing new products for

untapped markets, thus accounting for the macroeconomic shocks.

Capital Expenditure Ideally firms should counter cyclically cut capital expenditures in anticipation of

recession to protect cash flow. Crocs Acquired Ocean Minded LLC in 2007 for $ 1.75 million in anticipation of

building a product line blending EVA and leather goods in its portfolio. In times of downturn Crocs should

develop innovative products and maintain existing capacity in time for recovery.

Acquisitions and DivestureCrocs should be alert to acquire new undervalued companies adding up to new

competencies. The timing of acquisition is important and Crocs could use patterns of sector rotation to fine

tune this tactical timing.

Human resource Management-Crocs could use cross-training wage and work hour flexibility to protect high

skilled workforce during periods of recession. It could announce a no layoff policy and be prepared for the

recovery phase.

Conclusion

To conclude, Crocs, Inc has the potential for sustainable growth due to its competitive advantage and its

ability to face the challenges of the footwear industry. For many Americans and Europeans, Crocs is a

familiar face with consistently trendy, well-priced evolving range of footwear every season. The company

seems well geared to face challenges and is ambitiously preparing for the future. Supply Chain practices are

continuously evolving in the system and Crocs seems to employ the best practices known in the Industry. As

part of the learnings there are some uncertainties which every company faces and Crocs has witnessed it too

by recording huge losses in the last few quarters. Though, Crocs is researching and developing new methods

for expansion, the company must continue to re-invent and innovate themselves in order to stay fresh in the

footwear industry. The best companies stand the test of times; Crocs has proved its worth in the past six years,

but its future will depend on the decision taken to maintain core competencies and distinctiveness of its brand.


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REFERENCES

Journal References

Fisher, M. (1997) What is the right supply chain for your product? Harvard Business Review, (2), pp. 105-

116.

Forrester, J. (1969), Industrial Dynamics, MIT Press, Cambridge, MA.

Frohlich, M.T., Westbrook, R., 2001. Arcs of integration: an international study of supply chain strategies.

Journal of Operations Management, 19, 85200

Harrison, A., Christopher, M. and van Hoek, R. (1999), Creating the Agile Supply Chain, Institute of Logistics

& Transport, UK

Kano, N. (1984), Attractive quality and must-be quality, The Journal of the Japanese Society for Quality

Control, April, pp. 39-48.

Kim, C.W., Mauborgne, R., (2004), Blue Ocean Strategy, Harvard Business Review, 82 (10): 76-85

Kraljic, P (1983) Purchasing Must Become Supply Management, Harvard Business Review, Sep-Oct, pp.

109-117

Lowson RH, (2001), Retail Sourcing Strategies: are they cost effective, International Journal of Logistics, 4,

3, pp 271-296

Lowson RH, King R and Hunter NA (1999), Quick Response: managing the supply chain to meet consumer

demand, John Wiley & Sons: Chichester.

Milgrom P., Roberts, J., (1995), Complementarities and Fit: Strategy, Structure, and Organizational Change inManufacturing,Journal of Accounting and Economics, 19: 179-208

Mintzberg, H., Ahlstrand, B., Lampel, J., (1998), Strategy Safari: A Guided Tour through the Wilds of

Strategic Management, New York: NY, The Free Press

Navarro,P (2005). The Well-Timed Strategy: managing The Business Cycle. Harvard Business Review.48-

1,pp.71-91.

Porter, M. E. (1996). What is a strategy? Harvard Business Review(November-December): 61-78.

Stevens G C,(1989).Integrating the Supply chain. International Journal of Physical Distribution & Logistics

Management, 19-8.

Whittington R., Pettigrew A., Peck S., Fenton E. e Canyon M. (1999), Change and Complementarities in the

New Competitive Landscape: A European Panel Study, 1992-1996, Organization Science, 10: 583-600


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Website References

1http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=crox&lstStatement=Balance

&stmtView=Ann

2http://www.census.gov/marts/www/retail.html

3http://www.sec.gov/Archives/edgar/data/1334036/000104746908012362/a2189237z10q.htm#de76902_it

em_1._financial_statements,

4http://www.retailtechnology.co.uk/RTecasts/rt_newscast_issue182.htm


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EXHIBIT A:

CROCS INC, Consolidated Balance Sheet

2008 2007 2006 2005 2004Period End Date 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004

Assets

Cash and Short Term Investments 51.67 36.34 64.98 4.79 1.05

Total Receivables, Net 54.16 152.92 65.59 17.64 3.25

Accounts Receivable - Trade, Net 35.31 152.92 65.59 17.64 3.25

Receivables - Other 18.86 0.0 0.0 0.0 0.0

Total Inventory 143.21 248.39 86.21 28.49 2.41

Prepaid Expenses 13.42 17.87 14.33 3.49 0.35

Other Current Assets, Total 12.73 12.44 6.58 1.94 0.0

Total Current Assets 275.18 467.95 237.69 56.35 7.07

Property/Plant/Equipment, Total - Net 95.89 88.18 34.85 14.77 3.73

Goodwill, Net 0.0 23.76 11.55 0.34 0.33

Intangibles, Net 40.89 31.63 12.21 5.31 5.1

Long Term Investments 0.0 0.0 0.0 0.0 0.0

Note Receivable - Long Term 0.0 0.0 0.0 0.0 0.0

Other Long Term Assets, Total 36.74 15.9 3.16 1.27 0.0

Other Assets, Total 0.0 0.0 0.0 0.0 0.0

Total Assets 448.7 627.43 299.46 78.03 16.22

Liabilities and Shareholders' Equity

Accounts Payable 35.14 82.98 43.79 20.83 6.05

Payable/Accrued 0.0 0.0 0.0 0.0 0.0

Accrued Expenses 52.09 57.25 31.11 8.18 1.83

Notes Payable/Short Term Debt 0.0 0.0 0.0 0.0 0.0

Current Port. of LT Debt/Capital Leases 22.43 7.11 0.54 8.6 0.98

Other Current Liabilities, Total 14.71 20.12 12.47 8.7 0.0

Total Current Liabilities 124.37 167.45 87.91 46.31 8.86

Total Long Term Debt 0.0 0.01 0.12 3.42 1.41

Deferred Income Tax 4.81 1.86 1.69 1.77 1.78

Minority Interest 0.0 0.0 0.0 0.0 0.0

Other Liabilities, Total 27.42 14.0 1.49 0.32 0.47

Total Liabilities 156.6 183.31 91.2 51.82 12.52

Redeemable Preferred Stock 0.0 0.0 0.0 5.5 5.5

Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 0.0 0.0

Common Stock 0.08 0.08 0.08 1.82 1.8

Additional Paid-In Capital 232.04 211.94 131.79 13.98 0.0

Retained Earnings (Accumulated Deficit) 65.69 249.31 81.08 16.7 -3.67

Treasury Stock - Common -25.02 -25.02 0.0 0.0 0.0

Other Equity, Total 19.32 7.81 -4.7 -11.78 0.08

Total Equity 292.11 444.11 208.26 26.21 3.71

Total Liabilities & Shareholders Equity 448.7 627.43 299.46 78.03 16.22

Total Common Shares Outstanding 83.54 82.2 78.68 34.9 75.63

Total Preferred Shares Outstanding 0.0 0.0 0.0 0.0 0.0

Source : MSN moneycentral.


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EXHIBIT B:

CROCS INC,Consolidated

IncomeStatement

Period End Date

12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004

Period Length 12 Months 12 Months 12 Months 12 Months 12 Months

Revenue 721.59 847.35 354.73 108.58 13.52

Total Revenue 721.59 847.35 354.73 108.58 13.52

Cost of Revenue, Total 486.72 349.7 154.16 47.77 7.16

Gross Profit 234.87 497.65 200.57 60.81 6.36

Selling/General/Administrative Expenses, Total 343.36 269.94 105.22 33.92 7.93

Research & Development 0.0 0.0 0.0 0.0 0.0

Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0

Interest Expense (Income), Net Operating 0.0 0.0 0.0 0.0 0.0Unusual Expense (Income) 54.35 0.0 0.0 0.0 0.0

Other Operating Expenses, Total 0.0 0.0 0.0 0.0 0.0

Operating Income -188.28 237.77 95.35 26.89 -1.57

Interest Income (Expense), Net Non-Operating 0.0 0.0 0.0 0.0 0.0

Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0

Other, Net 0.57 3.0 1.85 0.01 -0.02

Income Before Tax -189.51 240.33 96.63 26.29 -1.64

Income Tax - Total -5.89 72.1 32.21 9.32 -0.14

Income After Tax -183.62 168.23 64.42 16.97 -1.49

Minority Interest 0.0 0.0 0.0 0.0 0.0Equity In Affiliates 0.0 0.0 0.0 0.0 0.0

U.S. GAAP Adjustment 0.0 0.0 0.0 0.0 0.0

Net Income Before Extra. Items -183.62 168.23 64.42 16.97 -1.49

Total Extraordinary Items 0.0 0.0 0.0 0.0 0.0

Net Income -183.62 168.23 64.42 16.97 -1.49

Total Adjustments to Net Income 0.0 0.0 -0.03 -0.28 -0.14

Basic Weighted Average Shares 82.77 80.76 74.6 50.99 49.28Basic EPS Excluding Extraordinary Items -2.22 2.08 0.86 0.33 -0.03

Basic EPS Including Extraordinary Items -2.22 2.08 0.86 0.33 -0.03

Diluted Weighted Average Shares 82.77 84.19 80.17 67.14 49.28

Source : MSN moneycentral.


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EXHIBIT C: Key Financial Ratios of Crocs, Inc

Financial Ratios

Operations

12/31/2008 12/31/200712/31/2006 12/31/200512/31/2004

Inventory Turnover 3.4 1.40 1.78 1.67 2.97Receivables Turnover 20.43 5.54 5.40 6.15 4.16Gross Margin Return on Investment(GMROI)

1.64 2.00 2.320 2.13 2.63


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EXHIBIT D:

Agile systems in a footwear Industry

Based on the model originally developed by Harrison, Christopher & van Hoek (1999)

Collaborative Planning

Sharin information on real time data

Co-managed inventory

Collaborative product

design

Synchronous supply

Daily POS feedback

Listening to

customers

Capturing emerging

trends

Agile

Supply

Chain

Leverage partners capabilities

Focus on core competencies

Function as a network orchestrator

Process

Integration

Network

Based

Market

Sensitive

Virtual

Integration

Documents

Supply+Chain+OM