Operations Strategies Revision Notes for HSC SSCE Business Studies

Operations Strategies

Kathmandu's operations strategies reflect the company's commitment to achieving high quality products, quick market delivery, and mass customisation at low cost. Quality and performance are embedded in new product design and development, supported by ongoing investment in improved design and technical capabilities that appeal to its broad customer base.

Supply chain management

Supply chain management refers to the ongoing commitment to establishing and maintaining strong relationships with suppliers and contractors. Kathmandu has developed robust processes to ensure ethical and sustainable sourcing practices.

Supplier selection and relationships

Kathmandu screens $100\%$ of new suppliers using social criteria—standards that assess suppliers' ethical practices, labour conditions, and environmental impact. This rigorous selection process has resulted in:

Average supplier tenure of $8.5$ years
Only $5\%$ annual supplier turnover
Long-term, enduring partnerships with contractors

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These statistics demonstrate Kathmandu's commitment to building stable, reliable supply chain relationships rather than constantly switching suppliers for short-term cost benefits. The $8.5$ -year average tenure and low $5\%$ turnover rate are significantly better than industry standards, indicating strong supplier satisfaction and partnership quality.

Factory assessment and monitoring

Kathmandu operates a comprehensive factory assessment and monitoring programme to ensure compliance with ethical standards. Key requirements include:

Suppliers must pay workers at least the minimum legal wage
Regular factory audits to assess working conditions
Monitoring of worker wellbeing and rights

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However, Kathmandu acknowledges that many workers in its supply chain earn less than what would be considered a fair living wage. To address this critical issue, the company collaborates with other global brands and the Fair Labour Association to promote better wages and conditions across the fashion industry.

The HIGG Index

Kathmandu uses the HIGG Index as a self-assessment tool. The HIGG Index is a globally recognised suite of tools that enables businesses to:

Accurately measure and score a product's sustainability performance
Protect factory worker wellbeing
Support local communities
Minimise environmental impact

This standardised approach allows Kathmandu to benchmark its performance and identify areas for improvement systematically.

Case study: Khusi beanie project

The Khusi beanie project demonstrates Kathmandu's commitment to supply chain accountability and women's empowerment. The project specifically employed Nepalese women knitters to help them gain economic independence in a region where women face lower literacy and employment rates than men.

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Case Study: Khusi Beanie Project Implementation

Meet the women who knitted your Khusi beanie – Kathmandu AU

Process:

Beanies were knitted at home by community-based groups
Products were sent to a factory for completion and packaging
The factory had never been audited by an overseas company before

Key actions taken by Kathmandu:

Sent auditors to assess the factory
Auditors identified issues of non-compliance with labour standards
A Corrective Action Plan (CAP) was agreed upon
The CAP ensured project integrity and protected workers' rights

Outcome: This case study illustrates how Kathmandu balances business objectives with social responsibility, even when working with new suppliers in developing regions.

Supply chain structure

Outsourcing is the central focus of Kathmandu's manufacturing strategy. The company does not own its own factories but instead contracts production to manufacturers globally.

Geographic concentration

Kathmandu manufactures $76\%$ of its products in China, reflecting a significant geographic concentration in its supply chain.

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Understanding Outsourcing Trade-offs

Advantages of outsourcing:

Access to low-cost, high-quality products
Ability to scale production up or down based on demand
Access to specialised manufacturing expertise

Disadvantages and challenges:

Need for a responsible purchasing policy to avoid putting undue pressure on suppliers
Risk of unreasonable timeframes that could lead to excessive overtime or poor working conditions
Requirement for workplace audits to ensure compliance with ethical standards

Collaborative approach to auditing

Recognising the burden of multiple audits on suppliers, Kathmandu partnered with outdoor industry competitors to create a shared audit system. This collaborative approach:

Reduces costs for all participating brands
Alleviates audit fatigue for suppliers (who may be inspected by multiple clients)
Frees up more time for suppliers to address identified problems rather than preparing for audits

This innovation demonstrates how businesses can work together to improve industry practices while maintaining competitive operations.

Environmental impact: carbon emissions

Kathmandu tracks and reports its carbon footprint across different scopes:

Scope 2 emissions (energy use in stores):

Achieved a $20\%$ reduction in CO₂e per store between 2012 and 2020
Average emissions reduced from $40.8$ tonnes CO₂e per store (2019) to $38.5$ tonnes CO₂e per store (2020)

Scope 3 emissions (transport):

Air transport: $829$ tonnes CO₂e ( $77$ tonnes of stock moved)
Sea transport: $398$ tonnes CO₂e ( $2,296$ tonnes of stock moved)

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The data shows that sea transport is far more carbon-efficient than air transport, even though more goods are moved by sea. Specifically, air transport produces $829$ tonnes CO₂e for only $77$ tonnes of stock, while sea transport produces $398$ tonnes CO₂e for $2,296$ tonnes of stock. This information helps Kathmandu make informed decisions about balancing speed of delivery with environmental impact.

Inventory management

Inventory management is a critical performance metric for Kathmandu's operations, focusing on minimising stock levels while ensuring product availability.

Recent performance

Stock levels fell by an average of $7.6\%$ per store, demonstrating improved efficiency. The business prioritises high inventory turnover—selling stock quickly rather than holding large quantities for extended periods.

Strategies for improvement

Planning software investment: Kathmandu invested in advanced planning software that enables:

More accurate buying decisions based on data analysis
Recognition of store-specific differences in customer demand
Better matching of stock levels to local market needs

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Seasonal considerations: The seasonal nature of outdoor apparel and equipment (with higher demand in winter months) requires effective stock holding processes to avoid:

Overstocking during low-demand periods
Stock-outs during peak seasons
Excessive discounting of end-of-season inventory

Quality management

Quality management encompasses all processes and strategies aimed at ensuring product excellence and customer satisfaction. For Kathmandu, this includes a commitment to continuous improvement—the ongoing effort to incrementally improve products, services, and processes.

Strategic focus areas

Quality management is central to Kathmandu's growth strategies in the Australian and New Zealand markets. Key initiatives include:

Elevating brand awareness through design and innovation, especially for adventure travel products
Growing social media and digital channels for better customer engagement
Expanding product range available both in-store and online
Opening new stores with improved customer service
Enhancing overall customer experience

Designing for quality

Kathmandu's approach begins with fundamental questions about product functionality:

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Critical Quality Questions:

Does the product perform its intended function effectively?
Do product features support marketing claims?
What is the quality of the manufacturing process?

By asking these questions early in the design phase, Kathmandu can identify and address potential quality issues before production begins.

Supplier Quality Excellence programme

The Supplier Quality Excellence programme is an award-based system designed to improve product quality before items reach customers.

Key components:

Factory audits to assess manufacturing processes
Product inspections at various stages of production
Assessment of return rates to identify quality problems
Recognition and rewards for high-performing suppliers

Objectives:

Identify quality control problems before products reach warehouses
Reduce the number of unacceptable products entering the supply chain
Decrease customer returns due to poor workmanship

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Performance Results: Initial results show improvement, with first-time pass rates of $38\%$ . While this indicates progress, it also shows significant room for further improvement, as $62\%$ of products still require corrections or fail initial inspection.

Quality return rates

Product return rates for quality failures have decreased consistently:

2016: $0.34\%$
2017: $0.31\%$
2018: $0.26\%$
2019: $0.20\%$
2020: $0.15\%$

This downward trend demonstrates the effectiveness of Kathmandu's quality management strategies over time.

Care and repair data:

$3,377$ repairs completed (extending product life)
Only $1$ reported safety incident (non-compliance with voluntary codes)

These statistics show Kathmandu's commitment to product longevity and customer safety.

Global factors: global sourcing

Global sourcing refers to the practice of procuring materials, components, or finished products from suppliers in different countries, often to reduce costs or access specialised capabilities. For businesses engaged in global sourcing, responsible supply chain management is essential.

Protecting human rights

Kathmandu seeks to protect human rights and improve working conditions for contract workers through:

Greater transparency in supply chain operations
Partnership approaches with suppliers
Collaborative industry initiatives

Outdoor Industry Association (OIA) Sustainability Working Group

Kathmandu participates in the OIA Sustainability Working Group, a collaborative group of more than $300$ outdoor brands and suppliers. This group works cooperatively to:

Identify more effective business practices
Share best practices across the industry
Develop common standards for sustainability and ethics

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This industry-wide approach recognises that systemic problems require collective action rather than individual company efforts alone. The participation of over $300$ brands creates significant leverage for change across the entire outdoor industry.

Supplier segmentation and management

Kathmandu segments its supply chain based on suppliers' willingness to acknowledge problems and work collaboratively toward solutions.

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Approach to non-compliant suppliers:

If a supplier is unprepared to acknowledge workplace issues
If a supplier is reluctant to work with Kathmandu to facilitate change
Then Kathmandu is likely to terminate the business arrangement

Favoured suppliers: Kathmandu prioritises suppliers who demonstrate:

Integrity in business dealings
Honesty about challenges and problems
Openness to collaboration
Willingness to build strong employee relationships

This approach incentivises suppliers to maintain high standards and engage constructively with Kathmandu.

Responsible purchasing policy

Kathmandu's responsible purchasing policy recognises that buyer behaviour significantly impacts factory working conditions. The policy addresses:

Product development timing:

Avoiding delays that compress production timeframes
Ensuring adequate time for manufacturing without excessive overtime
Preventing rushed production that might compromise quality or worker welfare

Subcontracting controls:

Monitoring when suppliers use subcontractors
Ensuring subcontractors meet the same ethical standards

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This policy acknowledges that buyers share responsibility for working conditions in their supply chains, not just factory owners. By controlling their own purchasing behaviours, Kathmandu helps prevent situations that might force suppliers to compromise on worker welfare.

Fair Labour Association (FLA) accreditation

Disappointed that decades of factory audits failed to significantly improve workers' lives, Kathmandu embarked on a four-year accreditation process with the Fair Labour Association. The FLA is an independent organisation that:

Sets higher standards for workplace conditions
Conducts independent assessments
Requires member companies to demonstrate ongoing improvement

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This represents a shift from self-monitored audits to independent third-party verification. The four-year accreditation process demonstrates Kathmandu's serious commitment to meaningful change rather than superficial compliance.

Worker communication channels

Kathmandu provides workers with direct communication channels to report concerns:

Email facility: Workers can email Kathmandu directly with concerns (particularly important in China where trade unions are not supported). However, at the time of writing, no workers had used this facility.

WeChat engagement: Recognising the low uptake of email, Kathmandu began using WeChat, a popular Chinese social media platform, to engage with contracted workers in China. This demonstrates adaptability in using communication methods familiar to workers.

Compliance monitoring

Kathmandu appointed two full-time staff members dedicated to improving working conditions in its supply chain. Recent audit results showed:

$40$ audits conducted
$10$ factories ( $25\%$ ) found to be non-compliant with Kathmandu's code of conduct

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This data indicates ongoing challenges in maintaining standards across all suppliers, requiring continuous monitoring and improvement efforts. The $25\%$ non-compliance rate demonstrates why dedicated staff and continuous auditing remain essential.

Other global factors

Economies of scale

Economies of scale occur when increasing production volume reduces the average cost per unit. Kathmandu achieves economies of scale by:

Sourcing high-quality, mass-produced goods from low-cost suppliers
Operating in a global business environment with access to large manufacturing facilities
Maintaining competitive pricing in the retail apparel market

This strategy allows Kathmandu to offer competitively priced products while maintaining quality standards.

Scanning, learning, and research and development (R&D)

While Kathmandu continues to invest heavily in its own product development resources, it also:

Establishes partnerships with industry associations
Participates in collaborative research initiatives
Uses these partnerships to measure and improve progress in sustainable and ethical practices

This dual approach combines internal innovation with external learning and industry collaboration.

Impact on competitiveness

These global factors collectively enable Kathmandu to:

Remain competitive in pricing
Maintain quality standards
Meet increasing consumer expectations for ethical production
Innovate in product design and sustainability

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Key Points to Remember:

Supply chain management focuses on building long-term relationships with suppliers ( $8.5$ years average tenure, $5\%$ turnover, $100\%$ of new suppliers screened using social criteria)
Outsourcing to China ( $76\%$ of products) provides cost advantages but requires robust monitoring through collaborative audits and the HIGG Index
Inventory management improvements ( $7.6\%$ stock reduction per store) achieved through planning software and understanding seasonal demand
Quality management includes the Supplier Quality Excellence programme with $38\%$ first-time pass rates and declining return rates (from $0.34\%$ in 2016 to $0.15\%$ in 2020)
Global sourcing requires responsible practices including Fair Labour Association accreditation, responsible purchasing policy, and worker communication channels (email and WeChat)
Collaboration with competitors and industry associations (OIA Sustainability Working Group with $300+$ members) drives industry-wide improvements in sustainability and ethics
Economies of scale achieved through global sourcing enable competitive pricing while maintaining quality and ethical standards

Operations Strategies (HSC SSCE Business Studies): Revision Notes