Croc's Operational Case Study
Business and Management
Submitted By jescher
Croc’s Operational Case Study
Jeff S. Escher
Herzing University – Madison, WI
Dr. Armando Salas-Amaro
20 October 2013
Croc’s Operational Case Study
In examining, the case study on Crocs; it displays an overview of the company’s objectives in operations to include the supply chain. This examination reveals the success behind how the company thrives in times when others are unable. Part of Crocs leading objectives and primary function is to reinvent the supply chain to provide less shortages and increase awareness and customer satisfaction. This paper will outline a brief overview of company history, Crocs two primary core competencies and in which manner do they exploit them; continued evaluation will cover vertical integration, acquisition, or product extension growth. Further discussion consists of company production and inventory as well, as how margins affect their decisions.
History and a Foundation for Core Competencies
Lyndon Hanson, Scott Seamans, and George Boedecker created Crocs, INC. in 2002 out of Boulder Colorado. The idea came from a trip taken by the three, where one of them had purchase a pair made from a company out of Canada. The decision to start a business selling the shoes was realized after they leased a warehouse in Florida; when sales took off, they contacted Ronald Synder a college friend who which was employed for Flextronics (electronics manufacture) in an executive position. The addition of Snyder was positive as he helped invent their supply chain strategy (Schroeder, Goldstein & Rungtusanatham, 2011).
In historical industry practice, it was commonplace to build orders for future dates, this creates issues for retailers, as demand is hard if not at times impossible to predict. When predictions for demand surpass actual demand, outlets are left with extra inventory, this forces retailers to discount products heavily in order to make room for future products. This problem is what Crocs aim was to diminish if not to eliminate known problems by acquiring all aspects in the supply chain. This bold move retains all control over costs and close management of inventory and all related issues; while doing so creates an advantage over its competitors.
“Much of this growth had been made possible by a highly flexible supply chain which enabled the company to build additional product to fulfill new orders quickly within the selling season, allowing it to respond to unexpectedly high demand-a capability that was previously unheard of in the footwear industry. This ability to fulfill the needs of retailers also made the company a very popular supplier to shoe sellers” (Schroeder et al., 2011).
What are Crocs Core Competencies? With various acquisitions to increase control, 0Crocs created a flexible supply chain and obtained the proprietary resin (Croslite, a closed-cell resin) used to manufacture the footwear (Crocs, 2013). With Crocs extremely elastic supply chain, it is able to retort to disparities in demand consequently, averting a significant amount of loss sales. In contrast with other manufactures, Crocs retains manufacturing facilities in Mexico, Italy, Canada, and China, that enables to it vary production with demand. In conjunction with these manufacturing locations, the company also has warehousing capabilities to aid in distribution by shuttling inventory where it is needed. This benefit for improving Crocs status is that, with merchants who are likely to order directly from Crocs, in part to a partnership versus its opponents. Likewise, Crocs does not have to discount its product at seasons end due to efficiency in monitoring production to sales. In addition to Crocs flexible supply chain, they also have created an advantage by obtainment in the proprietary resin Croslite. This technology is the enabler to comfort, scuff resistance, and odor resistance. With the construction of compounding facilities in Mexico, Canada, and China, the company has enabled itself to respond to consumer demand (whether it be an increase or decrease). Further, the additions of these plants (an add on to the supply chain) has reduced time constraints and cost savings, eliminating the need to rely on outside vendors in terms of production. Although raw materials are still purchased from other companies such as DOW Chemical (Schroeder et al, 2011, p. 498), this remains a savings and an increase in efficiency and quality.
Exploitation of further vertical integration into materials. “Traditional approaches to vertical integration have tended to focus…on vertical integration as a response to preexisting market power problems or as a strategic move to create or enhance market power in upstream or downstream markets” (Joskow, 2003, p. 3). As with Crocs, this is represented by enhancing its supply chain to achieve control product quality, development, and distribution (market saturation). Vertical incorporation opportunities for Crocs consist of procuring vendors in raw materials (pellets produced by Dow, which are then combined with additional chemicals and are combined into a process known as compounding (Schroeder et al., 2011)). Procuring sources in raw materials safeguards Crocs future and aids in control over production costs. Although, Crocs owns Croslite, this does not suppress companies (the competition) from producing a lower quality of product using the same raw materials and passing it off as a similar or an alternative good. However reducing the amount of inadequate arrangements, by retention of joint venture, the company’s odds for investment incentives increases while manufacturing decrees are easily altered to adapt and overcome market environments, it also improves a (Riordan, 2005, p. 6). http://economics.mit.edu/files/1176 http://www.mckinsey.com/insights/strategy/when_and_when_not_to_vertically_integrate
Growth by acquisition and product line extensions. Expansion by means of attainment is an inexpensive, quicker, and less precarious proposal than ingesting funds into expanding marketing and sales efforts to achieve the desired results. Additionally, procurement poses other benefits such as relaxed financing and immediate market share. Crocs added the capability for growth in acquisitions in 2006; Jibbitz was purchased by Crocs in 2006 and is credited with the development of inserts designed to fill ventilation holes into the Crocs line of shoes (Schroeder et al., 2011). The value in this methodology brings additional capabilities and expands their portfolio without having to create additional manufacturing technologies. Crocs specialty is shoes and focusing on products other than shoes may distract the management from core strengths. Thus, it may be better to acquire companies that already have proven business model and whose products (not necessarily shoes) complement Crocs strategy or product lines.
The advantage in acquisition is, obtainment by procurement of companies that share similar values and operate in a similar manner as Crocs, to include business strategies and product offerings. A major drawback lies in the inconvenience of paying increased rates for attainments for operations. These acquisitions are needed to maintain an in-house supply chain; furthermore, these elevated expenses continually allow for the reduction in future production, allowing for effective collaboration between the various aspects of the organization (marketing, accounting, finance, HR, production/operations, information systems (IS or IT) (Jr., Rainer & Cegielski, 2011, p. 8) and at times include the supply chain). As with any new venture, poor integration or discrepancies during the merger can prove to be detrimental for the company’s outlying objectives.
For Crocs to remain competitive, consideration of growth through product line extensions is crucial, as demand for a specific product fluctuates per global region. Crocs has gained substantial brand recognition amongst customers, in which provides the company with diverse opportunities, to present new commodities and/or inflate current products. As demand increases Crocs has the ability to expand into additional areas of retail, in doing so this will diversify its intake of income while, allowing for the introduction in brand expansion with little effort in marketing. This is accomplished by their preexisting recognized product and merchants that have made considerable efforts to promote demand.
Product extension will enable the company to leverage its brand into more products and create additional revenue and profit opportunities. As of now Crocs currently offers additional apparel other than shoes, offerings include hats, sunglasses, hospital scrubs, socks, purses, backpacks, phone and mp3 cases and much more (Crocs, 2013). The drawback to this is that since Crocs primary offering is shoes, these additional offerings may divert focus from its fundamental asset. As Crocs is still a youthful company, product extension, is inevitable to expand brand recognition. Further, introducing unrelated products to the market rapidly may obscure brand reputation.
When discussing the positive impacts, with any strategy, one must consider the drawbacks to implementation. http://www.carlsonschool.umn.edu/Assets/71939.pdf Alternatives
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Production and Inventory
Crocs current production and inventory strategy is right on the mark and should be maintained. Because the company employs Just-in-Time manufacturing, it doesnâ€™t have excess inventory left at the end of the season. This allows the company not to mark down its excess inventory at the end of the season, an action that may hurt its profit margins. Crocs has the highest gross profit margin in the industry which is even more impressive when one takes into account the fact that Crocsâ€™ gross profit margins are more than twice the industry average. Even in 2011, Crocs continues to lead the footwear industry in terms of gross profit margin (YCharts). In addition, costs of raw materials are low so there will not be much economic gain from higher production level due to economies of scale. Even if there are cost reduction opportunities from economies of scale, Crocs will still be required to sell all of them. There is no indication that Crocs is unable to meet excess demand. One way of increasing demand will be to lower prices but that would affect Crocs profit margin. Thus, Crocsâ€™ current production and inventory strategy is sound and should be maintained. http://sloanreview.mit.edu/article/operations-improving-quality-just-in-time/
Key words: Croc’s, vertical integration, acquisition
The company is focused on controlling as many aspects of its supply chain as possible because control and close management is the key to its industry leading supply chain model. Thus, acquiring raw material providers may be a sound strategy because it will further improve Crocsâ€™ control over supply chain. The problem with this alternative is that it may not make economical sense because raw materials are already cheap and it will use up funds that can be better spent somewhere else. The company is still in its early years thus, it should be careful with capital spending.