Operations and supply chain Management 311

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Question Description

Please check the attached case study.

Each question must have not less than 500 words.

1- What are Croc’s core competencies? what are their advantages for the company?

2- How do they exploit these competencies in the future? Consider the following alternatives:

a. Further vertical integration into materials

b. Growth by acquisition

c. Growth by product extension

3- To what degree do the alternatives in question 2 fit the company’s core competencies, and to what degree do they defocus the company away from its core competencies?

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sch25243_case_433-530.indd Page 492 03/10/12 11:07 AM user-f502 Case Study Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage If the products sell extremely well, we will build more in season, and will be back on the shelves in a few weeks. And we’ll build even more, and even more, and even more, in that same season. We’re not going to wait with a hot new product until next year, when hopefully the same trend is alive. —Ronald Snyder, CEO of Crocs, Inc.1 On May 3, 2007, Crocs, Inc. released its results for the first quarter of the year. The footwear company, which had sold its first shoes in 2003, reported revenues of $142 million for the quarter, more than three times its sales for the first quarter of 2006. Net income, at $0.61 per share was more than 17 percent of sales, nearly four times higher than the previous year.2 These results far exceeded market expectations, which had been for earnings of $0.49 per share on $114 million of revenue.3 As part of the earnings release, the company announced a two-for-one stock split. Immediately after the announcement, the stock price jumped 15 percent. The growth and profitability of Crocs, which made funky, brightly colored shoes using an extremely comfortable plastic material, had been astounding. 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. This success also raised questions about how the company should grow in the future. Should it vertically integrate or grow through product line 1 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Quotations are from interviews with the authors, unless otherwise specified. 2 Press Release, “Crocs, Inc. Reports Fiscal 2007 First Quarter Financial Results,” May 3, 2007. Online at http://www.crocs. com/consumer/press_details/688244 (accessed May 4, 2007). 3 Rick Munarriz, “Ugly Shoes, Pretty Profits,” The Motley Fool, May 4, 2007. Online at http://www.fool.com/investing/highgrowth/2007/05/04/ugly-shoes-pretty-profits.aspx (accessed May 7, 2007). extension? Should it grow organically or through acquisition? Would potential growth paths exploit Crocs’ core competencies or defocus them? CROCS, INC. In 2002, three friends from Boulder, Colorado went sailing in the Caribbean. One brought a pair of foam clog shoes that he had bought from a company in Canada. The clogs were made from a special material that did not slip on wet boat decks, was easy to wash, prevented odor, and was extremely comfortable. The three, Lyndon “Duke” Hanson, Scott Seamans, and George Boedecker, decided to start a business selling these Canadian shoes to sailing enthusiasts out of a leased warehouse in Florida, as Hanson said, “so we could work when we went on sailing trips there.”4 The founders wanted to name the shoes something that captured the amphibious nature of the product. Since “Alligator” had already been taken, they chose to name the shoes “Crocs.” The shoes were an immediate success, and word of mouth expanded the customer base to a wide range of people who spent much of their days standing, such as doctors and gardeners. In October 2003, as the business began to grow, they contacted Ronald Snyder, a college friend, to become a consultant for the company. Snyder had been an executive with Flextronics, a leading electronics contract manufacturer, heading up the company’s design division. He had extensive experience in manufacturing operations, mergers and acquisitions, and sales and marketing. When he first started consulting with Crocs, Snyder said, “I thought I would work a few hours a day. I thought it would be restful.”5 But seeing the rapid growth of the company based on word-ofmouth marketing, Snyder joined Crocs in June 2004 as its president, becoming CEO in January 2005. When Snyder joined the company it was headquartered in Colorado, but essentially distributing shoes made by the Canadian manufacturer Finproject NA. One of Snyder’s first moves was to purchase 4 Diane Anderson, “When Crocs Attack,” Business 2.0, November 1, 2006. 5 Ibid. David Hoyt and Amanda Silverman prepared this case under the supervision of Michael Marks, Professors Chuck Holloway and Hau Lee as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Stanford Graduate School of Business. Reprinted with permission. 492 sch25243_case_433-530.indd Page 493 03/10/12 11:07 AM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage 493 Finproject, which was renamed “Foam Designs.” Crocs now owned the formula for the proprietary resin “croslite™” that gave the shoes their unique properties of extreme comfort and odor resistance. The company now also controlled manufacturing. Snyder encouraged the company to think big. He brought in a number of key executives from Flextronics, and built infrastructure in preparation for growth. (See Exhibit 1 for Crocs executives and directors.) He also launched the product worldwide. EXHIBIT 1 Crocs executives and directors. Executive Background Ronald Snyder, President, CEO, Director With Cross since June 2004 (consultant since October 2003). Senior executive with Flextronics. Founder of The Dii Group, which was acquired by Flextronics. With Crocs since April 2006. Previously EVP, CFO, and treasurer of publicity held sports apparel and accessories company. With Crocs since January 2005 (consultant beginning in 2004). Previously an executive with Flextronics and The Dii Group. With Crocs since January 2005. Led Crocs sales group as a consultant beginning in October 2003. Previously, founder and executive with an apparel and merchandising company. Peter Case, SVP, Finance, CFO, Treasure John McCarvel, SVP, Global Operations Michael Margolis, VP, Sales and Marketing Director Background Raymond Croghan Board member since August 2004. Prior to retirement in 1999, ran a healthcare information technology consulting firm. Also on the board of several privatelyheld companies. Board member since 2006. Vice Chairman of Saks Fifth Avenue. Background in global retailing. Board member since August 2004. Member of Kohlberg Kravis Roberts & Co., a private equity firm, as a member of the firm since January 1, 2006. Chairman of Flectronics. Previously, he was with Flextronics from 1991–2005, serving as CEO and chairman. Also a director of SanDisk Corporation and Schlumberger Limited. Board member since 2006. Background in the apparel business, including Limited Brands, Inc., Gap, Inc., Banana Republic, and Ann Taylor. Board chairman since April 2005. With Circuit City from 1982 to 2002, serving as president, CEO, and chairman. Also a board member of Flextronics (formerly chair). And of Carmax, Inc., the nation’s largest specialty retailer of used cars and light trucks. Board member since April 2005. With Flextronics since 2000, as CFO, and SVP of finance. Previously SVP, CFO and treasure of The Dii Group, Inc., which was acquired by Flextronics. Also serves on the board of ADVA AG Optical Networking. President of Crocs. See background above under Executives. Ronald Frasch Michael Marks Marie Holman-Rao Richard Sharp, Chairman Thomas Smach Ronald Snyder Sources: Crocs website, “Board and Management Profiles,” http://www.crocs.com/company/Investor_Relations/Board_Management.jsp (April 23, 2007), Crocs Proxy, October 2006. sch25243_case_433-530.indd Page 494 03/10/12 11:07 AM user-f502 494 Part Six /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Case Studies Snyder explained the rationale behind launching worldwide at an early point in the company’s life: The plan was, we’re going to launch the world in order to get a brand out that would be a sustainable brand with this funky looking, strange product. Other, larger shoe companies, or even larger apparel companies, could have knocked us off, and could have gone into Europe before we got there if they had infrastructure in Europe. So, being Flextronics guys, and understanding that the world is flat, and you can get everywhere fairly quickly, we said, “we need to launch the world pretty much at once.” We delayed a bit in South America, but now we’re there fairly strong, too. But we needed to launch everywhere in order to have us be the brand that had sustainability. That’s what we’ve been able to pull off at this point. We were in every country you can think of before anybody else had any real capability to ship product in other countries besides the U.S. Certainly, there are knock-offs in all those other places, but they are just known as knock-offs. They are not known as originals, which is what we were hoping to achieve. Crocs started its sales efforts on a grass-roots basis in the U.S. The company participated in many trade shows in every industry that could benefit from the product, such as garden shows, boat shows, and pool supply shows. As stores began carrying the shoes, Crocs personnel worked closely with the stores. Snyder observed, “If you just put up a rack of funny-looking shoes, I don’t think they would have done anything. But we got in there with some of our own people, or our reps, and stood around and got people excited.” Crocs also went to a wide range of events, such as concerts, festivals, and sports tournaments, to talk to customers about the shoes. The company took a similar approach in other countries, but the momentum generated in the U.S. helped foreign adoption. The company initially used representatives and distributors in the U.S., but brought this function inhouse in order to control costs. In other countries, Crocs had its own sales staff wherever possible, but as of mid-2007 had some 3rd party distributors in some locations. In addition to a popular product and a global strategy, Crocs developed a supply chain that provided a competitive advantage. Traditional industry practice was for retail distributors to place bulk orders for each season’s inventory many months in advance, with little ability to adjust to changes during the selling season. The Crocs model did not impose these limitations on retailers—the company could fill new orders within the season, quickly manufacturing and shipping new product to retail stores. The traditional practice, and the Crocs supply chain will be described in detail below. From 2003 through 2006 the company had phenomenal growth. Revenue in 2003 had been $1.2 million. By 2006, it was $355 million, with a net income of $64 million (18 percent of revemk). Crocs went public in February 2006, with an initial market capitalization of over $1 billion. After the Q1 2007 earnings release, the market cap passed $2.7 billion. Sales outside of North America grew from 5 percent of total revenue in 2005 to 25 percent in 2006. In its Q1 2007 earnings release, the company said that it expected 2007 revenue to be between $670 and $680 million. (The company had historically reported results that comfortably exceeded expectations.6) (See Exhibits 2 and 3 for company financial information.) Crocs’ financial performance was far superior in many respects to others in the footwear industry (Exhibit 4). The Crocs Shoe The original Crocs shoe was a clog design. Visually, its two most distinctive features were large ventilation holes and bold colors. The key to the shoe, however, was the croslite material. This proprietary closed-cell foam material molded to the shape of the wearer’s foot, providing an exceptionally comfortable shoe. It was extremely light, did not skid, was odor resistant, and did not mark surfaces. It could also be washed with water. Croslite could be produced in any color, and the company chose bold colors (described by some as “crayon” colors) which further enhanced the distinctive, funky look. Crocs shoes generally sold for about $30—which was not marked down, as retailers found they did not need to unload excess inventory through clearance sales at the end of a selling season. As Crocs grew, it added additional shoe designs. The two original models, Beach and Cayman, accounted for about 62 percent of footwear sales in 2006.7 These two models also formed the basis of some of the other Crocs models. By April 2007, the company had a wide range of shoes and other products. Its website showed 31 basic footwear models, ranging from sandals to children’s rain boots to shoes designed for professionals, such as nurses, who had to stand all day. Some of its shoes were made under a license agreement with Disney, and incorporated Disney characters. In addition, Crocs offered four models of shoes (CrocsRX) that were 6 7 Munarriz, loc. cit. Crocs Form 10K for 2006, pp. 15–16. sch25243_case_433-530.indd Page 495 03/10/12 11:07 AM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage 495 EXHIBIT 2 Crocs’ financial performance through 2006. All amounts in $ millions, except as noted. 2006 Revenue Cost of goods sold Gross profit Gross profit margin SG&A expense Depreciation & amortization Operating income Operating margin Net income after taxes Net profit margin Geographic distribution of revenue (% of total) North America Asia Europe All Other Shoes as percent of total revenue 2005 2004 2003 2002 354.7 154.2 200.6 56.5% 97.2 108.6 47.8 60.8 56.0% 30.6 13.5 7.2 6.4 47.0% 7.2 1.2 0.9 0.3 23.3% 1.4 0.0 0.0 0.0 33.3% 0.5 8.1 95.3 26.9% 64.4 18.2% 3.3 26.9 24.8% 17.0 15.6% 0.7 (1.6) — (1.5) 0.1 (1.2) — (1.2) 0.0 (0.4) — (0.4) 265.5 (75%) 54.4 (15%) 30.3 (9%) 4.6 (1%) 96% 102.8 (95%) 4.7 (4%) 1.0 (1%) 0.1 94% 13.5 (100%) — — — 81% Selected Balance Sheet Items (Calendar year end, all values in $ millions) Cash Net receivables Inventories Net fixed assets Accounts payable Short-term debt Long-term debt 2006 2005 2004 2003 71.2 69.3 86.2 34.8 71.2 0.5 0.1 37.8 20.0 28.5 14.8 37.8 8.5 3.2 6.9 3.3 2.4 3.7 6.9 1.0 1.4 0.5 0.2 0.4 0.3 0.5 — — Sources: Hoovers. Product and geographic distribution of revenue from Crocs Form 10K for 2006, pp. F-27, 28. EXHIBIT 3 Financial results, Q1 2007. The following results were released May 3, 2007, for the quarter ended March 31, 2007 (dollar values in millions, except as otherwise stated): Revenues Gross profit Gross profit (% of sales) SG&A expenses Net income, after tax Net income (% of sales) Net income per share, diluted Source: Crocs Press Release, May 3, 2007, loc. cit. Q1 2007 Q1 2006 % Change 142.0 84.4 59.4% 47.3 24.9 17.5% $0.61 44.8 23.7 52.9% 13.7 6.4 14.3% $0.17 317% 356% 345% 389% 359% sch25243_case_433-530.indd Page 496 03/10/12 11:07 AM user-f502 496 Part Six /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Case Studies EXHIBIT 4 Industry comparisons. Comparisons of Crocs with companies selected as “best of group” and industry median. Crocs Annual sales ($ million) Market capitalization ($ million) Profitability Gross profit margin Pre-tax profit margin Net profit margin Return on equity Return on assets Return on invested capital Operations Inventory turnover Receivables turnover Valuation Price/Sales ratio Price/Earnings ratio Price/Cash flow ratio Growth 12 month revenue growth 12 month net income growth 12 month EPS growth 355 2,102 Deckers Outdoor 304 897 Nike 14,955 10,065 Timberland Industry Median 1,568 1,306 56.5% 27.2% 18.2% 56.7% 34.1% 51.1% 46.4% 17.8% 10.4% 16.1% 13.7% 15.9% 43.7% 13.1% 8.7% 21.6% 14.4% 18.4% 47.3% 10.4% 6.8% 19.5% 13.0% 19.0% 24.5% 3.2% 2.7% 15.5% 3.4% 4.7% 3.5 8.0 5.0 6.0 4.3 6.5 4.7 7.4 5.6 6.6 5.9 30.4 170.3 3.0 28.3 18.5 1.3 20.0 14.1 0.8 15.3 11.7 0.8 20.1 10.6 227% 280% 239% 15% (1.0%) (2.3%) 0.1% (35.3%) (31.5%) 7.5% 53.2% 50.0% 8.8% 0.4% 2.9% Source: Hoovers Online Competitive Landscape (April 27, 2007). Crocs growth numbers are for calendar years 2005 and 2006. Crocs inventory turns from Crocs. designed to meet the special needs of those with medical problems that affected the feet, such as diabetes. The company offered 17 models of collegiate models that were made in school colors, with the school logos. Universities such as USC, UCLA, Notre Dame, Cal, and Ohio State participated in the program. (By the start of the 2007/8 academic year, Crocs expected to include many other institutions in its catalog of university logo shoes.) Crocs sponsored the AVO beach volleyball tour, and offered two models with the AVP logo.8 (See Exhibit 5 for photos of selected Crocs products.) While shoes comprised 96 percent of company revenues in 2006.9 Crocs also branched out into other accessory products, such as caps, shirts, shorts, hats, socks, and backpacks. It had products such as kneepads and kneelers that utilized croslite to provide functionality. It also sold decorative inserts that could be put into the shoe ventilation holes, originally made by a family-owned company (Jibbitz) that Crocs purchased in December 2006. 8 Product links from Crocs homepage: http://www.crocs.com/ home.jsp (Accessed April 24, 2007). 9 Crocs Form 10K for 2006, p. F-27. Crocs made other acquisitions in 2006 and early 2007 in the sports protection equipment and apparel market, and in action footwear. These acquisitions further broadened the company’s product line, and introduced products that incorporated conventional materials such as leather. (See Exhibit 6 for a list of Crocs acquisitions.) Producing a Crocs Shoe The raw materials for the croslite in Crocs shoes are relatively inexpensive chemicals purchased in pellet form from suppliers such as Dow Chemical. These chemicals are then combined in a process called “compounding,” in which they are converted into a slurry, mixed, and then reformed into new pellets. As part of the compounding process, color dyes are added. The compounded pellets are then ready to be molded into croslite products. Croslite components for Crocs products are made by injection molding. This requires an injection molding machine, and molds for each style and size. After the parts are molded, they must be assembled. This might involve gluing croslite parts together, or stitching, in the case of components made of leather, canvas, or other materials which had been added to sch25243_case_433-530.indd Page 497 03/10/12 11:07 AM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage 497 EXHIBIT 5 Selected Crocs products. beach cayman disney beach Beach was the company’s most popular model. Beach and Cayman accounted for 62 percent of 2006 shoe sales. Beach and Cayman were the first two Crocs products, and formed the basis for some other shoe models. Disney beach was a version of the Beach model produced under license from Disney. j i b b i t z ™ professional jibbitz Professional was intended for people such as nurses who spent all day working on their feet. Jibbitz were used to customize Crocs shoes by filling the ventilation holes in the shoes. crocs 1” wristband Crocs offered branded accessories ...
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School: New York University

Attached.

Outline
Introduction
Body
Conclusion
Reference


Supply chain management
Student’s name
Institutional affiliation

Croc’s core competencies
An experienced management team
Management involves organization, coordination, controlling and monitoring of both human
and financial resources to achieve a particular goal.

To achieve optimum returns an

organization needs to have an experienced management team that knows how best to
combine resources to achieve organizational goals. The active and experienced board
members influenced the success of crocs. Most members of the board were formerly part of
management teams for other successful companies which gave them confidence and business
understanding. The understanding of the market enabled them to lay strategies that turned out
to be useful in Crocs success. For example, CEO Snyder had been a part of Flextronics as a
senior executive which gave him vast experience in strategic planning.
Global strategy
When Ronald Snyder took over as the CEO of crocs, he led the company to adopt a global
strategy. This was possibly influenced by his experience with Flextronics who were already
excelling in the global market. He understood how contract productions and distributions
worked and decided to implement it at Crocs. As it turned out, this was one of the best
decisions the company had made. The volumes of sales were significantly improved due to
the vast market possibilities that the strategy provided. Crocs were not limited to the local
market which could quickly be saturated, and this provided an all year business opportunity
for the business.
Supply chain
Crocs developed a unique supply chain management system that had not been adopted by any
other company in the industry. The supply chain allowed the company flexibility in
production to meet changing demands in the market. Their production was dependent on the

dem...

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