CPR-030178-4095

Prof : Carlos Mena & Andrew White

Date of Submission – March 16, 2009

09
Abstract

This paper discusses the case titled Crocs: Revolutionizing an industry’s 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.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
2
 PAPER TOPICS

CONTENTS PAGE NOS.

Introduction 4

Key Features of the Footwear Logistics Pipeline 4

Competitive Scenario: Financial Analysis and Comparison 5

Growth Platforms Adopted by Crocs 7

What Crocs did to manage its logistic pipeline? 9

Why Crocs transformed Agile Systems to Quick Response Systems? 12

Strategic View of Crocs Business and Recommended Way Forward 13

Conclusion 15

References 16

Exhibit A 18

Exhibit B 19

Exhibit C 20

Exhibit D 21

Introduction
Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
3
Crocs, Inc. is a rapidly growing designer, manufacturer and retailer of footwear for men, women and
children under the Crocs TM 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, Croslite TM, which
represents a substantial innovation in footwear. The Croslite TM 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. Croc’s 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 Croc’s 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:

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

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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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,
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

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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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 2008 1.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.

Inventory Turnover

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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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.
• Possibility of higher costs due to low efficiencies resulting from lack of competition by suppliers.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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• 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 company’s 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 company’s website shows that the company sells
close to 31 basic footwear models, ranging from sandals to children’s boots to shoes designed for

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
8
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 SKU’s.
• 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, it’s 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
configuration of activities, removed from the stereotype of the “fashion” footwear manufacturer, but also

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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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
activities by displaying its product range in the spring season and launched a few products during the actual

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
10
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, Dillard’s 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 customer’s 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.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
11
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 associates 4 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 quick
response (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 America’s
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 inflexibility costs
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
affecting both throughput and quality; process inefficiencies and quality problems; long lead times and the

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FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
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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 inflexibility are 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
 Existing localized manufacturing and quick  Excess capacity (as much as 2 to 3 times
response supply chain practices reduces excess expected capacity) risk built up in order to
product inventory. account for demand changes. Excess
 Factory based distribution setup to reduce lead capacity increases fixed costs and affects
time between company and large retailers. profitability in a slump.
 Product customization and distribution system  Excess sunk capital in Denver operations. As
dedicated to small retailers. consumer spending as decreased in the
 In house product development making it possible recent crisis volumes have reduced, there
to flex prices in accordance to market has been less demand from small retailers.
requirements and meet customer demands. This would affect operating margins due to
 Business structured to transfer manufacturing ongoing fixed costs in operations. Would it
and inventory products to different regions be justifiable to maintain Denver operations
depending on seasonal changes. for such a small volume?
 Synergistic operations and support from retailers  Increased risk due to high capital
and contract firms in terms of data transfer to be expenditure incurred in product
able to better respond to QR supply chain development, manpower training and
practices. inability to mass produce to reduce costs,
 Flexibility to retailers in terms of ability to place conditions needed to cater to QR supply
orders as and when required. chain practices.
 International scope of business and possibility of
sharing best evolving practices in supply chain.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
13
 Growth Opportunities Business Threats
 Possibility of leasing equipments to 3P suppliers  Possibility of increase in sourcing prices due
in order to use excess facility or manufacture as a to change in duty structure and capital
3P for other companies. requirements.
 Possibility of using Denver distribution capacity  Financing challenges and possibility of
and become a 3PL to distribute other products. reduced supplier support for providing
 Externally integrate operations to drive down flexibility In terms of longer credit cycles to
costs and improve efficiency. 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 Intel’s culture. They are: economic
downturns always end. Some companies emerge from recessions stronger than before. You can’t 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 company’s 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.
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

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
14
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 Divesture –Crocs 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 learning’s 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.

REFERENCES

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
15
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, 85–200

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 in
Manufacturing, 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

Website References

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
16
1
http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?
Symbol=crox&lstStatement=Balance&stmtView=Ann

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

3
http://www.sec.gov/Archives/edgar/data/1334036/000104746908012362/a2189237z10q.htm#de76902_it
em_1._financial_statements,

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

EXHIBIT A:

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
17
CROCS INC, Consolidated Balance Sheet
  2008 2007 2006 2005 2004
Period 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.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
18
EXHIBIT B:

CROCS INC, Consolidated

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

Period End Date

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 0.0
Unusual 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 0.0
Equity 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 49.28
Basic 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.

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
19
EXHIBIT C: Key Financial Ratios of Crocs, Inc

Financial Ratios 12/31/200812/31/200712/31/200612/31/200512/31/2004

Operations
Inventory Turnover 3.4 1.40 1.78 1.67 2.97
Receivables Turnover 20.43 5.54 5.40 6.15 4.16
Gross Margin Return on Investment 1.64 2.00 2.320 2.13 2.63
(GMROI)

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
20
 EXHIBIT D:

Agile systems in a footwear Industry

• Collaborative Planning
• Sharing information on real time data

Virtual
• Co-managed inventory
Integration
• Collaborative product
• Daily POS feedback
design
• Listening to
• Synchronous supply
customers
• Capturing emerging
Process
trends Market
Agile Supply Integration
Sensitive
Chain

Network
Based

• Leverage partners’ capabilities

• Focus on core competencies
• Function as a network orchestrator

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

Atanu Bhattacharyya
FTMBA 2008-2009
Supply Chain and Operations Management Term paper (Crocs, Inc)
21