The Operational Strategy for Gap Inc

It is clear in the market that as an organization Gap is struggling. Profitability, changing customer needs and tastes and increased global competition has affected our performance. The Gap North America division for instance, has not posted an annual increase in sales at stores open at least a year since 2004. In 2009, sales were $3.82 billion, down almost one-third from where they were in 2004, Clifford (2011). At least four changes at CEO level have occurred, and as the new CEO, the need to determine and implement an effective operational strategy is of paramount importance.

The objective of this presentation is to obtain board approval on the proposed Operational Strategy for Gap and any possible changes to the recommendations and conclusions drawn by the executive team.

The methodology adopted involved reviewing the entire business operations of Gap and that of its leading competitors (especially Zara). This involved using secondary data from the case study, internet searches on trends and developments in the global fashion industry and that of the company.

In the development of this operational strategy it was important to note that, the operational strategy is sub servant to the broad corporate strategy and using the Porters (1985) value chain analysis. This according to Heizer and Render (2011) uses identified activities that represent strengths or potential strengths and maybe opportunities for developing competitive advantage. It must be noted early, however, that an alternative perspective exist that the use of resource view approach. Using the resource view approach means that Gap’s effectiveness is predicated by determining the optimum fit for the firms resources in the dynamic environment as noted by Heizer and Render (2011). A hybrid response and differentiation strategy shall be adopted as apposed to the traditional cost leadership strategy within Gap. Our focus and competitive advantage as an organisation has thus shifted from just become cheaper to becoming better and faster. This means that we are aligning to changes in customer needs, increasing global competitiveness and a dynamic business environment. (A justification for this strategy is provided for in annexure 1 of this report).

The CSF’s necessary to ensure the success of the operational strategy included, effective communication, internal marketing, change management and while communication was found to be the most Cost of implementing changes to ensure that successful execution of the operational strategy was determined as…..

The recommendations put forward to the board included the need to adopt the operational strategy in line with understanding that radical change is a prerequisite. Critical Success Factors to include, internal marketing of the operational strategy, building a performance culture, ensuring effective communication and putting in place a reward-systems that are linked to performance are a must.

Table of Contents Page

1.0 Design of goods

2.0 Process and Capacity Design

3.0 Location Selection

4.0 Layout design

5.0 Supply Chain Management

6.0 Inventory Management

7.0 Scheduling

8.0 Conclusion and Recommendations

List of References

Annexures

1.0 Design of goods

2.0 Process and Capacity Design

3.0 Location Selection

4.0 Layout design

5.0 Supply Chain Management

Hanna and Newman (2002) define SCM as the configurations, coordination and improvements of a sequentially related set of operations. It is the output from operations referred to by Hanna and Newman (2002) that customers get, and therefore, the strategic emphasis of well-managed supply chain is to have a competitive advantage driven primarily by strong customer focus. Heizer and Render (2011) define SCM as the management of activities that procure materials and services, transform them into intermediate goods and final products and deliver them through a distribution system. The authors believe that in today’s business competition is not between companies but rather supply chains. This means that if internal operations at Gap can be improved to surpass that of competition it will give our organisation a competitive advantage.

This section of the report will focus on how Gap can change its relationship with suppliers and distributors and most importantly an evaluation of managing our purchasing and outsourcing activities in line with increased competitive activity. In reviewing the above the objective it to build a chain of suppliers that focuses on maximising value to the ultimate customer Heizer and Render (2011). The major challenge within Gap has been our inability to control and determine what is to be made and what is to be purchased effectively. As we maximise value along the chain we will be able to ensure that we improve on quality, delivery and innovation.

Our global presences demands that the review of the supply chain be linked closely to the overall strategy of the business. In other words this means that the operational strategy must link back to the broad corporate strategy for GAP. Key aspects of this the broad corporate strategy and operational strategy is driven primarily be the need to increase competitiveness through product customisation, high quality, cost reductions and speed to market with the added emphasis being on the supply chain Heizer and Render (2011). Refer to the corporate strategy in …. It is proposed that a new integrated supply chain be adopted with Gap. This means that, having fewer suppliers and building on a centralised manufacturing. The advantages will be cutting down on unnecessary costs by suppliers while building on a pool of highly effective supplier base that is aligned to the firms overall vision and direction. Zara continues to use vertical integration as a method to build on expanding its supply chain. The Japanese, method of Keirestu would work well as we combine both few suppliers and vertical integration.

Whilst our traditional many-supplier strategy worked in the past suppliers were responsible for maintaining the technologies and expertise, costs and quality controls the surge in competitive activity especially form Zara has shown that centralised and or few supplier strategy works better. The need to focus on controlling supply and building on technological advantages is an imperative to the success in the industry. It will be necessary as few suppliers will help on improve inventory management as we move closer to the implementation of a JIT system. These few suppliers will be asked to participate in the design of goods by helping in the partnering in research and development initiatives to include, provide design innovations, input on changing customer’s tastes and needs and technological expertises.

Review of existing Suppliers: our focus is to cut down on scatter and huge number of suppliers and thus focus on building dependable close yet very few suppliers with long-term strategic relationships Heizer and Render (2011) Because of the shift in focus of our broad strategy (differentiation) it means that the selection of our suppliers inevitably has to change. This change however is radical demanding that our lower end suppliers that are not cost effective and do not meet the changing requirements set by the organisation must be immediately cut out.

Whilst the medium to long-term aspect of our strategy demands that we build a centralised manufacturing. This means that, existing risk associated with the environment (customs duties, tariffs, security screening, natural disasters, currency fluctuations, terrorists attacks and political issues), controls (management metrics and reliable secure communication for financial transactions product designs, and logistics scheduling) and process performance (raw material and component availability, quality and logistics) need to be considered, Heizer and Render (2011). Ongoing reviews of competitors centralised manufacturing performance will continue in line with building on the above necessary changes to ensure that risks identified can be mitigated.

Heizer and Render (2011) proposes that while changes in the supply chain management happens differently in different organisation its success will depend on the building mutual agreement of goals, trust and compatible organisational culture. These are discussed in the conclusion section of the report.

Fisher (1997) offers insight on how supply chain decisions affect strategy. Because Gap desires to use a hybrid strategy various aspects of Fisher’s input are critical to the success of the organisation. Our Supplier goals will equate to those of Benetton and that is to share market research jointly and develop products and options. Our Primary selection criteria however will select primarily for capacity, speed and flexibility. Gap would need to invest aggressively to reduce production lead time while use product design that lead to low setup time and rapid production ramp-up.

6.0 Inventory Management

Effective supply chain management that is aligned to both a well-structured operational and corporate strategy has ensured that Zara remains highly profitable. It has also meant that it (Zara) can continue to build on its in-house production and inventory management systems. Backed by advanced technologies and inventory optimisation models Zara has been able to improve on its efficacy. To this end, Zara has a failure rate of 1% compared to the industry of 10%. The experiences that we have faced as an organisation in managing inventory has greatly performance because our 10% error rate in our clothing collection is very high and makes us very uncompetitive.

In-part our many-supplier strategy is to be the cause of theses failures while in turn the fact that suppliers are many, makes the handling and processing of inventory very difficult from inbound logistics of raw material inventory to delivery of finished goods inventory. Two categories of inventory posses the biggest threat to our organisation and are a major concern. These are the management of raw material inventory and finished goods inventory. It is key to note that in line with changes in supply change, a review of our customer satisfaction (refer to Goods and service design …) suppliers, production schedules and human resource planning are key in achieving success in inventory management as noted by Heizer and Render (2011).

Poor record keeping of inventory has also been a major problem this has been caused by the huge stock of unsold items returned from own store retail chains in exchange of in-season stocks. While the existing many-supplier strategy has also increased stock and warehouse as lead times for stocks continue to negatively affect stock holding levels and record keeping. This also in turn increases holding stock costs and insurance charges while our competitors especially Zara centralised distribution warehouses hold stock for only 72 hours. A very effective and simple system to implement in store is a two -bin system. It is the view of the executive that going back to basics in inventory control will play a critical role in ensuring that we succeed in tracking and monitoring stock movement for the group. If is difficult to worry about more scientific approaches such as probabilistic models when the major challenge is that we have excess stock of clothing lines that have not been sold. Art Peck the former CE for Gap the Northern American rightfully notes “Unless we put cute clothes in front of our customer on the shelf…everything else we do isn’t going to matter.”

7.0 Scheduling

Contracting manufacturing has created major challenges for our organisation in the past, as lead times have been long, late deliveries and prevention of out-of stock situations become an on going exercise. Lessons from the industry have shown the need to restructure our scheduling in line with proposed changes in supply chain and inventory management. According to Heizer and Render (2011), the scheduling decision addresses the problem of matching productivity to fluctuating demands. It is however important to note that different processes suggest different approaches to scheduling. Based on our selected strategy and the position taken by our competitors such as Zara and H&M, it is important that we build on process focused facilities in the medium to long term period as we seek to centralise our operations. This means that we generate a forward-looking schedule, where MRP generates due dates that are refined with finite capacity scheduling techniques as noted by Heizer and Render (2011).

Automated scheduling systems will be put in place with trained and competent personnel. This is necessary to ensure that accurate and relevant production database is maintained throughout the entire organisation. Therefore in the first few months of operationalising the CE and Operations Director will review item master file, routing file, work-centre master file to ensure that scheduling is down to satisfactory standards (something that my predecessors failed to effectively manage). In own store retail structures Gap will employ a strategy current used by Zara to effectively manage staff. This method involves cyclical scheduling as it has been proven to reduce man-hours and increase staff motivation. Software to perform scheduled staff based on stores forecasted sales volumes with location staffing even during peak periods has been identified and been purchased to achieve the above requirement of cyclical scheduling at own store retail locations.

Feasible and efficient schedules of production must be developed, the demands of human resources and facilities must be determined and controlled Heizer and Render (2011).

8.0 Conclusion and Recommendations

The above analysis has clearly shown that change is eminent within the organisation. It is important to note that this change is radical and has to be implemented immediately. The criticality of the operation strategy (like all other major programs such as the balanced score card) demands that executives are tasked with specific duties and responsibility to ensure its success. To this end, executive management must ensure that operational decisions assigned to them be coordinated and communicated effectively among all operational structures and divisions (a schedule for the critical implementation has been shown below). The major concern from a marketing perspective is our failure to provide customers with products that clearly meet their specific needs and or tastes. The ever-changing business environment and increased competitiveness globally has also worked against the firm. However, from a purely operational perspective this has meant that we need to change our operating model and ensure that it is aligned to the broad corporate strategy. In this regard the most effective strategy will be a hybrid response and differentiation strategy. This strategy will be different to the traditional cost leadership strategy within Gap. Our focus and competitive advantage as an organisation has thus shifted from just become cheaper to becoming better and faster. This means that we are aligning to changes in customer needs, increasing global competitiveness and a dynamic business environment.

Key aspects of differentiation that will be incorporated are innovative design and a shopping experience unmatched to competition whilst the response aspect of our strategy will ensure flexible manufacturing reliability in our inventory, supply chain and scheduling structures and quickness in process design (as this will now be a lean structure).

Key Operations Decision

Major activities to be conducted

Responsibility

Due Date

Design of Goods

Process and capacity design

Location Selection

Layout design

Supply Chain Management

Inventory Management

Scheduling

The success of the Operational Strategy will not solely be based on its adoption and approval by the board but also by the need and realisation that it has to be implemented. However, implementation will also involve change, Burnes (2004), effective communication, Thill and Bovee (2001), internal marketing, Keegan (2001) and redefinition of reward systems and performance culture, Hitt, Black and Porter (2004). These critical success factors will help build on trust, ownership, teamwork and transparency while ensuring the successful implementation of the Operational Strategy.

8.1 Performance culture

Reid (2005), sums up a performance culture that Gap must adopt to achieve a credible performance learning system these are:

Openness and trust: candor must be encouraged and managers have to be willing to speak the unspeakable. Trust produces an environment where there is less defensiveness when issues are raised; people react more honestly and ask questions.

Managed differences: conflicts are addressed and unfulfilled commitments exposed, options and alternatives are looked at without predetermined outcomes.

Simplicity and focus: there is focus on implementation, with clarity and precision defining what needs to be accomplished and how. There is commitment at every level to remove complexity from the way of doing business.

Playing to people’s strengths: leaders know their people and match effectively talent and task, as they understand their people’s strengths and how best to elicit them.

8.2 Internal marketing

Internal marketing must become part of the on-going process within Gap. This will involve functional process alignment, motivation and empowerment of employees at all levels to consistently deliver and satisfy customer experience. Internal marketing must empower employees and give them accountability and responsibility because it helps non-marketing staff to learn and be able to perform their tasks in a marketing-like manner. For the internal marketing to be effective, employees must internalise the core values of the organisation. Sponsors can print t-shirts, caps and merchandise to give employees to wear every Friday so that they remember the importance of the project.

8.3 Reward systems

To address motivation and morale within Gap there is need to initial review the existing reward and performance bonus scheme. The traditional approach of linking this to bottom line heavily undermines long term sustainability of the organization, as managers and employees race to meet target. Having worked in operations, the risk is made high as we near the festive season sales personnel dump long shelf life products on customers (on the basis that they will be in critical short supply) so as to meet targets. This works well until two months down the line, customers either refuse to replenish orders and or return product because it is nearing expiration. These losses are usually only accounted for way after the productivity bonuses have been paid out and annual accounts drawn. Whilst it is important to inform or remind employees what results are desired and motivate them to achieve and exceed the performance targets, the performance learning system (balance score card will help address ensure this is done with great transparency). To achieve the above, sponsors through the HR department must ensure:

Drafting job description based on process requirements and characteristics

Translating process goals and action plans, personal training and development requirements into personal performance measures.

Defining appropriate performance targets based on known capability and desired characteristics.

Formally appraising performance against the range of measures developed and compare with target performance.

Rewarding and recognizing superior performance.

A balance must be struck in selection of reward system mix for both long term and short term success of Gap. Thus, in the short-term, rewards such as bonuses, commissions and piece-rate payments can be used long-term rewards can constitute stock based incentives i.e. stock options, stock appreciation rights and phantom stock plans.

8.4 Change Management

Having internally marketed the adoption of the Balanced Scorecard as a PMM system, performance measure owners, must manage the change process. The change being implemented in Gap is planned as it is being consciously embarked upon, Burnes (2006).

Stages of the planned change will entail: exploration, planning, action and integration. During each stage identified above it will be necessary for performance measure owners to involve employees for the change process to be successful. The change process reinforces behaviors that are aligned to Gap’s objectives through feedback and full utilization of the reward system being created.

However, in the implementation of the balance scorecard and in effecting change as a critical success factor to the entire project barriers might impede the successful execution of the project. According to Burnes (2006) the barriers to effective change programs are: competing resources, functional boundaries, change management skills, communication, “Them and us”- the opposition element, people needs and training, unrealistic timetables, resistance to change and initiative fatigue

These factors can occur at any stage and can affect employees both the general labour force and even managers and the executive. To overcoming these barriers, Burnes (2006) proposes communication, ability to establish high trust relationships, negotiation, Influencing and build on self confidence.