Assignment Submission Form

Batch Name : GMBA April 2011

Course Name : International Management

Assignment Title : Case – ECCO A/S- Global Value Chain Management

Individual : GAPR11GLSCM130

Prepared by :

Submitted by : Rohit Kaushal

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Signature: Date: 19th June, 2011

To be filled by the Evaluator only

Name of the Student / s Roll Number DivisionRohit Kaushal GLSCM130 A

Score Obtained: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.

ECCO’s 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. ECCO’s 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

ECCO’s 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 ECCO’s 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: ECCO’s 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

ECCO’s 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 in-

house. 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 company’s 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. ECCO’s Thailand production facility opened in 1993 encompassed

both tannery and assembling facilities. Slovakian production facility ensures company’s

close proximity to major market; i.e. Asia. It has started operations in China also.

Competitor Analysis

Geox: Geox constituted a competitive threat to ECCO’s 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 ECCO’s. 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

footwear’s.

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: Timberland’s 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 company’s

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: Timberland’s 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

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.

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.

ECCO should consider an option of outsourcing its supplies while venturing into new

markets to be in a competitive condition with its competitors.

There should be marketing campaigns for branding their product in the new markets. This

would position the product in the market better.