Kate Spade & Company (NYSE: KATE)

An Assessment of the Supply Chain

The company

The Kate Spade & Company is owned by Fifth & Pacific Companies Inc. Kate
Spade & Company is a leading brand in the accessories and apparels space
operating under three global brands Kate Spade New York, Kate Spade
Saturday and Jack Spade. Kate Spade also operates a private brand jewelry
design brand Adelington Group that markets its products through leading
department store chains and through exclusive supplier agreements with JC
Penney. Following the sale of non-core brands such as Lucky Brand and
Juicy Couture, the company has been focusing on a mono-brand strategy,
with a streamlined operating model focusing on achieving a competitive cost
structure. With macroeconomic challenges and economic uncertainty, Kate
Spade continues to focus on improving profitability and productivity.
While focusing on the physical retail as the major sales channel, the growth
of ecommerce engine as an alternate channel has spurred the concept of
Omni Channel retail, with virtual retail spots for merchandise display and
order placement and physical deliveries to customers.
Strategic directions of Kate Spade
Kate Spade has adopted a strategy of becoming a global, mono-brand
company. Accordingly, the company has relied on divesting or selling off its
non-core brands that will help improve liquidity and streamline operations.
With this focus at the core of its strategy, Kate Spade has articulated the
following facets as key strategic imperatives:
1. Focus on topline growth through expansion in Americas, Europe and
Asia
2. Compete through pricing
3. Omni-Channel retail
4. Expanding partnerships to increase margins
Competition
The fashion industry is intensely competitive with competition from players
across the apparel value chain including retailers, designers and
manufacturers. The predominant markets where Kate Spade operates in US
and Europe are flooded by competitors such as Tory Burch, Burberry, Coach
and Michael Kors. To ensure that Kate Spade remains a serious competitor in
the fashion and apparels market, the following forms part of their
competitive strategy:
1. Respond to fast-changing customer demand in the minimum possible
time

2. Beat competition on pricing through internal cost efficiency

3. Improve product quality and differentiation
4. Improve retail and supply chain capabilities

A look at the financials

Kate Spade clocked revenues of $1.26 Billion in FY 2013 compared to $1.04
Billion in FY 2012. The revenues increased purely on account of organic
growth supplemented by a higher same store sales growth and increased
productivity. The net income from operations has increased from (74) Million
in 2012 to 72 Million in 2013, mostly due to the sell-off of non-core,
underperforming brands in 2013.

While the profitability has improved in the last year, Jack Spade needs to
maintain its focus on improving the profitability to remain competitive in the
market. With the adoption of a mono-brand strategy and a focus on
streamlining operations, the company is expected to turnaround in the
following years.
While debt component in its capital structure has reduced consistently, a
significant leverage can impact its cash flow for interest payments and
making the corporation less liquid. To worsen the situation, the working
capital has increased over the last three years making the company cash
strapped. Jack Spade needs to focus on improving its cash flows and
delivering its balance sheet immediately.

Kate Spades Supply Chain

Kate Spade follows a supply chain with a conventional distribution model of
Distribution Centers to serve retail nodes (including self and major retailers).
Though various players in the fashion industry have relied on their supply
chain as a competitive advantage, Kate Spade has been continuously
investing in its supply chain capabilities mainly with the intent to increase
cost efficiencies.

Supply Chain as a competitive parity for Kate Spade

The following value map depicts the various activities in the Supply (value)
Chain. The section below discusses the advantages for Kate Spade across
the gamut of the value chain that has served in maintaining parity (if not
advantage) with its closest competitors.

Sourcing as a competitive advantage

The core of Kate Spades sourcing strategy is based on cost advantage
through sourcing consolidation through a global sourcing agent and Low Cost
Country Sourcing, mainly from Asia with lower labor costs. Kate Spades
sourcing agreement with Li Fung & Company as the global sourcing agent for
all major brands in its portfolio on a variable cost model has resulted in
advantages of minimal supplier management while providing cost
advantages through volume consolidation.
Kate Spades key sourcing strategy includes a Low Cost Country Sourcing
model with a substantial majority of purchases from Asia. Kate Spade
sources its finished goods from a spectrum of 230 suppliers globally from 17
countries, reducing supply risk due to a significant supplier base.
The Distribution backbone of Kate Spade
The majority of sales and distribution of merchandise happen through a
network of owned retail outlets and departmental stores. With the
emergence of ecommerce, sales through online portals and fulfillments to
customer are made directly from the distribution centers. In the key non-US
markets such as Canada, Japan, South East Asia, Middle East wholesale
distribution agreements with leading retailers are sought to extend the
distribution footprint.
Kate Spades distribution backbone is through their network of distribution
centers globally. The distribution centers act as the sourcing and fulfillment
center for customer orders (from retailers and wholesalers). Realizing that
the fulfillment operations is critical to ensure the service levels of its Supply
Chain, Kate Spade has retained the core of the distribution functions Order
Management, Fulfillment while outsourcing the non-core facility operations to

third party contracts on a purely variable cost contract basis to ensure cost
efficiency.
Lean Production & Inventory Management
Kate Spades demand velocities are highly unpredictable due to the inherent
volatility in the fashion industry. To ensure that designs that are in trend are
made available, Kate Spade adopts a postponement strategy by scheduling
raw material dispatches and production plans with its suppliers later in the
production cycle to increase flexibility in production and leverage low cost
sourcing opportunities.
Kate Spade relies primarily on its IT systems to track and manage inventory
across its supply chain nodes while assisting to rollout raw material receipts
and production schedules to its production contractors. While IT systems are
used to monitor inventory in its own retail outlets, wholesale customers
including department stores are fulfilled using order based replenishment,
with advance planning through a collaborative planning process to get order
visibility well before the fulfillment cycle to accommodate for production and
sourcing lead times.
Current Supply Chain Challenges
1. Volatile demand and shorter product lifecycles due to changing fashion
trends; inherent to the fashion and apparels industry.
2. Kate Spade operates under time constraints in producing its designs.
Kate Spade has to secure order commitments from its customers,
months in advance from customers to ensure raw material availability
and production capacity allocation for the demand.
3. Minimize supply chain related risks and increase product availability
Supply Risks in the Supply Chain
Kate Spades current sourcing policies are skewed towards a sole sourcing for
majority of their purchase categories through a single agent Li & Fung. Any
disruption in the current supply agreement or an eventuality of Li & Fung
going out of business makes Kate Spade vulnerable to severe supply
disruptions affecting its business. Also, in case of such a supply disruption,
Kate Spade faces a difficult task of rebuilding the entire sourcing capacity.
Additionally, Kate Spade also sources from independent manufacturers and
any delays in commitments will impact service levels to the retailers. Failure

to honor purchase orders from customer would result in penalties and

increased price discounts resulting in eroding margins for Kate Spade.
Regulatory Risks in the Supply Chain
While the Low Cost Country sourcing strategy has its advantages it provides
through the cost arbitrage between the countries producing the goods and
the markets, the merchandise is subject to import duties in most of its major
markets. Though Free Trade Agreements favor merchandising from overseas
markets, to protect its own interests, major economies such as US have
started pursuing protectionist policies and Anti-Dumping policies.
In addition to vulnerability to import duties and anti-dumping policies,
maximum exposure to foreign sourcing also exposes Kate Spade to risks
pertaining to foreign currency fluctuations, negatively impacting profitability.

Recommendations
Kate Spades strategy of being a mono brand and a shift of focus to
improving operational efficiency would serve the company well in the coming
years. Kate Spades supply chain advantages provide competitive parity with
their major competitors. However, the supply chain risks outlined as part of
the study outweigh the advantages. Also, the financial position is an area of
concern for Kate Spade.
The following are the key recommendations for Kate Spade to successfully
implement their strategy:
1. Reduce leverage on the balance sheet through increased cash flow and
cost containment
2. Minimize supply risk by reducing exposure to single-source policies (Li
& Fung), through improving sourcing capabilities across a larger supply
agents
3. Improving integration of brick & mortar and ecommerce channels to
develop the omni-channel retail.

Bibliography
Can Kate Spade Skip the Growing Pains? (n.d.). Retrieved from
www.businessweek.com: http://www.businessweek.com/articles/2014-05-14/cankate-spade-skip-growing-pains
Here's How Kate Spade, Juicy Couture And Lucky Brand Are Plotting To Win The
Retail Revolution. (n.d.). Retrieved from www.businessinsider.com:
http://www.businessinsider.com/kate-spade-and-the-retail-revolution-2013-6?IR=T
http://www.katespadeandcompany.com. (n.d.). Retrieved from
http://www.katespadeandcompany.com: http://www.katespadeandcompany.com
(2011, 2012, 2013). Kate Spade Annual Reports.
Tablets Help Kate Spade Saturday Optimize Brand Experiences . (n.d.). Retrieved
from http://www.retailtouchpoints.com: http://www.retailtouchpoints.com/crosschannel-strategies/2430-tablets-help-kate-spade-saturday-optimize-brandexperiences
www.katespade.com. (n.d.). Retrieved from www.katespade.com:
www.katespade.com