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Batch Name Course Name Assignment Title Individual Prepared by : GMBA April 2011 : International Management : Case ECCO A/S- Global Value Chain Management : GAPR11GLSCM130 : Name of the Student / s Rohit Kaushal Roll Number GLSCM130 Division A

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: Rohit Kaushal

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Case ECCO A/S- Global Value Chain Management Executive Summary: ECCO, a Danish shoe manufacturer, founded in 1963 by Karl Toosbary with a simple slogan A perfect fit -a simple idea. The company has its global presence with production houses in five different geographical regions Portugal, Slovakia, Indonesia, Thailand and China. 90% of its total production gets exported to destination such as US, Germany, Japan. With an in-house capability of 80% of its total sale of products, ECCO has achieved an earning of DDK 150 million and lifted its operating margin to eight per cent in the year 2005. ECCOs tannery plays an important part in its global value chain. It is among the five largest producer of the leather worldwide. Apart from supplying leather to its shoe factories to the around the world it also sold leather to furniture and auto industries.

This case study focuses on the global value chain of ECCO and its production process, which is divided in to five strategic phases. The case study gives an insight of it new improved laboratory production techniques. ECCOs distribution system plays an important role in its global sales across the globe. The market for lifestyle casual footwear was highly competitive and subject to changes. Strong competition has bring about investment in both cost optimization and new technologies, which once made ECCO indebt of DDK 2 billion in the years 2002. But it regained its pace and shown increase in the profit margins in year 2005. With an inclination towards market orientation, ECCO needs to relate better to the customers while being able to exploit the efficiencies of a global value chain that it processes.

Value Chain Analysis Primary or Direct Activities: 1) Inbound Logistics: ECCO bought raw hides from various places and latter it owned several tanneries. Its Dutch tannery manufactures around 3500 raw hides a day, corresponding to approximately one million cows per year. 2) Operations: ECCO owned several tanneries in the Netherlands, Thailand (opened in 1999) and Indonesia, which supplied leather to ECCO factories all over the world.

Its full scale production involved both manual and capital intensive machinery. An injection molding machine is being used to attach the upper half with lower half of the shoe under high pressure. Although at times hand cutting was used to make it even finer. Of a total production of 12 million pairs of shoe in 2004, 80 were based on direct injection technology. The design and product development process were generally conducted by the head office and the development of shoe happened with strong involvement of the subsidiary in Indonesia. Production samples were also made there in Indonesia before the actual production starts. Based on the sales forecast headquarters allocate the production orders among its network subsidiaries and licenses.

3) Outbound Logistics: ECCO distribution system was also vital to its business. It has two main distribution centers; one in US and the other in Tonder, Denmark. Majority of the ECCOs production goes thorough Tonder. Due to consolidation in the distribution centers the warehouse in Bredebro and distribution center in Brondby were closed. The majority of shoe shipments arrived though the harbor of Aarhus, Denmark, but ECCO also utilizes vans and freight planes in urgent cases. Through the use of barcode system the distribution system was able to ship 60,000 pairs of shoe s per day by lorry to 25 countries. Shoe for markets outside Europe was shipped though sea. Retailers typically orders 80% of the ECCOs production I advance and the rest has to be delivered in a notice of few days. American subsidiary has streamlined its vendor ship, cutting the number from 1200 to 1000 yet remain dealers purchased greater volumes. 4) Marketing and Sales: ECCOs strategy was quite unique, as most of its competitors have phased out in-house production. Its competitors were having marketing oriented business but ECCO on the other hand produce 80% of its shoe from in-house. Its marketing team would screen the samples to forecast the sales and volume. In 2004 ECCOs 90% of the production has been exported to US, Germany and Japan.

5) Services: In order to provide the better quality of shoes ECCO also has training programs for its employees. ECCO has given a high priority to the continuous education and training of its employees. The company invested aggressively in vocational training to provide better services.

Secondary Activities:

1) Procurement: ECCO has its own tanneries so it produces 80 per cent of its shoes inhouse. Rest 20% was outsourced. Company has five tanneries in its name. 2) Human Resource Management: Operating on a global scale employees require good adaptability skill and international mindset so, ECCO established an Education and Conference center in 1994 to provide the tanning and carrier development for its employees. This is also to promote that 80 percent of the companys leaders should come from inside ECCO. 3) R&D/ Technology development: Since the foundation ECCO has insisted on production technology. Technology has been the key asset of the company. Its technology was based on direct injection, in which the upper sole was attached to lower under high pressure using hydraulic machines. ECCO developed a development and research center, where the main task was to explore less polluting tanning methods and also experimenting for new technology shoes. 4) Infrastructure: ECCO has a sound infrastructure of production. It has established almost 25 subsidiaries covering the entire world. It has five production centers across the globe. Its Portugal unit concentrates more on technology with its leading technology of laser cutting. The production unit in Indonesian satisfies approximately 40 to 50 per cent of shoe upper demand. ECCOs Thailand production facility opened in 1993 encompassed both tannery and assembling facilities. Slovakian production facility ensures companys close proximity to major market; i.e. Asia. It has started operations in China also.

Competitor Analysis Geox: Geox constituted a competitive threat to ECCOs operations in the casual lifestyle footwear. 1) Financials:

Founded in 1994 by an Italian entrepreneur, Geox has achieved impressive growth rates, increasing sales from 147.6 millions in 2001 to 340.1 millions in 2004 with a CAGR 32%. 2) Technology and R&D: It has technology which has been protected with 30 patents, which allows the vapors from perspiration to leave but still preventing water. Its R&D was located near a large shoe making are near Venice 3) Production & Suppliers: It has its own production facilities in Slovakia and Romania and outsources from china Vietnam and Indonesia. 4) Distribution Channel: Its channel is similar to ECCOs. The company has its worldwide distribution network with 230 single brand shops in 60 countries. 5) Market: Geox has strong market penetration in Italy with 55% of its sales there. Rest 45% in Germany, France, Spain, United States and Portugal. It has very strong sales hold in US with sales of $ 115 million.

Clarks: The English shoe maker, Clarks, was the biggest player in the market of casual lifestyle footwears. 1) Financials: With global sales of $1,543million it was the biggest shoe maker of the casual lifestyle shoes. 2) Technology and R&D: Its widely used technology like active air (an air Cushing technology) and waterproof (impermeable membrane sewed inside the shoe). 3) Production & Suppliers: Clark sourced shoe from 12 different manufactures located primarily in Asia. It manufactures 35 million pairs per year. Production houses shifted to China, Vietnam and Romania. However, it has less than 1% production in house. 4) Distribution Channel: It has presence in America, UK, and other European markets.

Timberland 1) Financials: Timberlands total revenue of 2003 is $ 1.38 million, making it twice the size of ECCO. International sales comprised 38.5 % of the total generated revenue. 2) Technology and R&D: It has a waterproof boot based on injection-molding technology. 3) Production & Suppliers: Timberland manufacturing facility is there in Puerto Rico and the Dominic republic. However, Timberland manufactures only 10% of its total unit

volume and rest of the production is performed in China, Vietnam and Thailand. Timberland set up a quality management group to develop, review and update companys quality. In terms of suppliers, Timberland purchased from an independent web of 60 suppliers who were subject to rigid quality controls. Timberland was vulnerable to price increases on raw material as they require substantial recourses to scrutinize and monitor the supplier network. Later on they cut down their suppliers and 80% of their raw material was provided by just 10 suppliers. 4) Distribution Channel: Timberlands products in US and internationally were sold through independent retailer, departmental stores, athletics stores, Timberland specialty stores and factory outlets. In Europe products were sold mostly through franchised retail store.

Cost Comparisons for in-house Vs outsourcing In-house cost: Employee wages and employee benefit costs. Cost for Employee training. R&D costs. Training facilities and training centers cost. Outsourcing Cost: Employee wages and employee benefits costs.

Key issues in the case By the end of the year 2003, the profits were falling and costs were increasing. It made them to look into their value chain to find where exactly the problem is? Other concerns are whether they need to integrate their present global value chain or not? New entry into the new market like China is also under scanner. Also, look in to the present value chain. Traditionally market was fragmented but in recent years companies like Nike and Reebok compete directly with ECCO products. Also, the competitors of ECCO use outside-in strategy and ECCO uses inside-out strategy.

Problem Analysis With the expanding operations in to different geographical locations there is an increased concern to integrate the operations. Chinese market has a huge potential so ECCO has access al the risks before entering in to the market. ECCO has already been handling issues of copying its design by local Chinese shoe maker. It has to protect its brand and design in the new market such as China. The value preposition of expanding into the new market and at the same time making a check in to cost incurred in the various elements of the value chain. There should be a model which would be able to measure profitability across the value chain. Because of the inside-out possibility there is an increase risk from the competitors of ECCO, who are outsourcing. As the cost associated with the inside-out (in-house production) is more while taking in consideration to launch the product in new markets. Recommendations y ECCO need to device a model for the global profitability management. Possibility of reporting and analyzing the profitability from multiple dimensions, such as branding divisions, products, regions, customers, channels of distribution. y Activity based costing can be incorporated to cut down the costs in the value chain. By identifying the appropriate cost for various operations the value chain can be streamlined. The activities which are over cost will be corrected and the under cost activities will be imparted more proportion of resources. y ECCO should consider an option of outsourcing its supplies while venturing into new markets to be in a competitive condition with its competitors. y There should be marketing campaigns for branding their product in the new markets. This would position the product in the market better.