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Discussion on CROCS: Revolutionizing an Industry’s Supply Chain Model For Competitive Advantage
Atanu Bhattacharyya CPR-030178-4095 Prof : Carlos Mena & Andrew White Date of Submission – March 16, 2009


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)



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

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


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. 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:

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


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


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 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. 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.

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


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

Strengths of Growth by vertical Integration

Weaknesses of Growth by Vertical Integration

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


• •

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 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. 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.

Weaknesses of Growth by Acquisition

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


close to 31 basic footwear models, ranging from sandals to children’s 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. 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.

Weaknesses of Growth by Product Extension

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


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


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, 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)


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


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 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  Existing localized manufacturing and quick response supply chain practices reduces excess product inventory.  Factory based distribution setup to reduce lead time between company and large retailers.  Product customization and distribution system dedicated to small retailers.  In house product development making it possible to flex prices in accordance to market requirements and meet customer demands.  Business structured to transfer manufacturing and inventory products to different regions depending on seasonal changes.  Synergistic operations and support from retailers and contract firms in terms of data transfer to be able to better respond to QR supply chain practices.  Flexibility to retailers in terms of ability to place orders as and when required.  International scope of business and possibility of sharing best evolving practices in supply chain. Strategic Weaknesses  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.  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?  Increased risk due to high capital expenditure incurred in product development, manpower training and inability to mass produce to reduce costs, conditions needed to cater to QR supply chain practices.

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



 

Growth Opportunities Possibility of leasing equipments to 3P suppliers in order to use excess facility or manufacture as a 3P for other companies. Possibility of using Denver distribution capacity and become a 3PL to distribute other products. Externally integrate operations to drive down costs and improve efficiency.

Business Threats  Possibility of increase in sourcing prices due to change in duty structure and capital requirements.  Financing challenges and possibility of reduced supplier support for providing flexibility 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 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.

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


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 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.

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.

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


Journal References Fisher, M. (1997) What is the right supply chain for your product? Harvard Business Review, (2), pp. 105116. 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.481,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

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


Website References

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


EXHIBIT A: CROCS INC, Consolidated Balance Sheet
Period End Date Assets Cash and Short Term Investments Total Receivables, Net Accounts Receivable - Trade, Net Receivables - Other Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total - Net Goodwill, Net Intangibles, Net Long Term Investments Note Receivable - Long Term Other Long Term Assets, Total Other Assets, Total Total Assets Liabilities and Shareholders' Equity Accounts Payable Payable/Accrued Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities Total Long Term Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Redeemable Preferred Stock Preferred Stock - Non Redeemable, Net Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total Total Equity Total Liabilities & Shareholders’ Equity 12/31/2008

51.67 54.16 35.31


36.34 152.92 152.92


64.98 65.59 65.59


4.79 17.64 17.64 0.0 28.49 3.49 1.94 56.35 14.77 0.34 5.31 0.0 0.0 1.27 0.0 78.03


1.05 3.25 3.25 0.0 2.41 0.35 0.0 7.07 3.73 0.33 5.1 0.0 0.0 0.0 0.0 16.22

18.86 143.21 13.42 12.73 275.18 95.89 0.0 40.89 0.0 0.0 36.74 0.0 448.7

0.0 248.39 17.87 12.44 467.95 88.18 23.76 31.63 0.0 0.0 15.9 0.0 627.43

0.0 86.21 14.33 6.58 237.69 34.85 11.55 12.21 0.0 0.0 3.16 0.0 299.46

35.14 0.0 52.09 0.0 22.43 14.71 124.37 0.0 4.81 0.0 27.42 156.6 0.0 0.0 0.08 232.04 65.69 -25.02 19.32 292.11 448.7

82.98 0.0 57.25 0.0 7.11 20.12 167.45 0.01 1.86 0.0 14.0 183.31 0.0 0.0 0.08 211.94 249.31 -25.02 7.81 444.11 627.43

43.79 0.0 31.11 0.0 0.54 12.47 87.91 0.12 1.69 0.0 1.49 91.2 0.0 0.0 0.08 131.79 81.08 0.0 -4.7 208.26 299.46

20.83 0.0 8.18 0.0 8.6 8.7 46.31 3.42 1.77 0.0 0.32 51.82 5.5 0.0 1.82 13.98 16.7 0.0 -11.78 26.21 78.03

6.05 0.0 1.83 0.0 0.98 0.0 8.86 1.41 1.78 0.0 0.47 12.52 5.5 0.0 1.8 0.0 -3.67 0.0 0.08 3.71 16.22

Total Common Shares Outstanding Total Preferred Shares Outstanding

83.54 0.0

82.2 0.0

78.68 0.0

34.9 0.0

75.63 0.0

Source : MSN moneycentral.

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


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 Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Administrative Expenses, Total Research & Development Depreciation/Amortization Interest Expense (Income), Net Operating Unusual Expense (Income) Other Operating Expenses, Total Operating Income Interest Income (Expense), Net Non-Operating Gain (Loss) on Sale of Assets Other, Net Income Before Tax Income Tax - Total Income After Tax Minority Interest Equity In Affiliates U.S. GAAP Adjustment Net Income Before Extra. Items Total Extraordinary Items Net Income

721.59 721.59 486.72 234.87 343.36 0.0 0.0 0.0 54.35 0.0 -188.28 0.0 0.0 0.57 -189.51 -5.89 -183.62 0.0 0.0 0.0 -183.62 0.0 -183.62

847.35 847.35 349.7 497.65 269.94 0.0 0.0 0.0 0.0 0.0 237.77 0.0 0.0 3.0 240.33 72.1 168.23 0.0 0.0 0.0 168.23 0.0 168.23

354.73 354.73 154.16 200.57 105.22 0.0 0.0 0.0 0.0 0.0 95.35 0.0 0.0 1.85 96.63 32.21 64.42 0.0 0.0 0.0 64.42 0.0 64.42

108.58 108.58 47.77 60.81 33.92 0.0 0.0 0.0 0.0 0.0 26.89 0.0 0.0 0.01 26.29 9.32 16.97 0.0 0.0 0.0 16.97 0.0 16.97

13.52 13.52 7.16 6.36 7.93 0.0 0.0 0.0 0.0 0.0 -1.57 0.0 0.0 -0.02 -1.64 -0.14 -1.49 0.0 0.0 0.0 -1.49 0.0 -1.49

Total Adjustments to Net Income Basic Weighted Average Shares Basic EPS Excluding Extraordinary Items Basic EPS Including Extraordinary Items Diluted Weighted Average Shares

0.0 82.77 -2.22 -2.22 82.77

0.0 80.76 2.08 2.08 84.19

-0.03 74.6 0.86 0.86 80.17

-0.28 50.99 0.33 0.33 67.14

-0.14 49.28 -0.03 -0.03 49.28

Source : MSN moneycentral.

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


EXHIBIT C: Key Financial Ratios of Crocs, Inc

Financial Ratios
Operations Inventory Turnover Receivables Turnover Gross Margin Return on Investment (GMROI)


3.4 20.43 1.64

1.40 5.54 2.00

1.78 5.40 2.320

1.67 6.15 2.13

2.97 4.16 2.63

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



Agile systems in a footwear Industry

• •

Collaborative Planning Sharing information on real time data

Virtual • • • Daily POS feedback Listening to customers Capturing emerging trends Market Sensitive Integration

• • •

Co-managed inventory Collaborative product design Synchronous supply

Agile Supply Chain

Process Integration

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)


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