By:

Ryan Johnston 101074349

Rory Fifer 101065358
Chris Chalmers 101039809
Tomas Habte 101037591
Katia Sahnoun 101033362

BUSI 3301A
Shaohan Alan Cai
Nov 19, 2019
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INTRODUCTION

Established in 1963 in a small town in Denmark, ECCO has been an industry leader in
quality footwear. ECCO’s philosophy is to make high quality shoes and make sure the customer
receives the highest quality product. This is done by producing in-house as 80% of its hoes are
manufactured this way. They produce a variety of different shoes that can are both casual and
outdoor shoes for both men, women and children. It had a revenue stream of $3.394 billion
dollars during 2004. |It also exported 90% of its current production to key markets such as the
United States and Japan. There are three main categories of shoes which are 11% children, 47%
women, 30% men and 12% for sport. This case study will focus on the main problem with
ECCO’s supply chain model, an analysis of its current supply chain and a recommendation to
succeed in the future.

PROBLEM IDENTIFICATION

With a growing worldwide market and rising production costs, ECCO is facing a key
problem of deciding to expand production in China with the building of five new factories. This
would allow ECCO to expand production significantly and lower margins to increase profit. One
problem faced with this idea is making sure high quality products are produced with the same
quality in other production facilities. Another problem faced by ECCO is the ownership of these
factories and how much outsourcing will be done to foreign companies. Finally ECCO faces the
problem of their marketing efforts. They are currently being beaten by most of the shoe industry
and are not doing a good job at telling their story to consumers. They need to figure out a way to
get more brand awareness and inform consumers of their high quality shoes.

SUPPLY CHAIN

ECCO’s supply chain is divided into five strategic roles or phases which are Full scale,
Benchmarking, Ramp up, Prototype and Laboratory Production found in ​Appendix C​.
Laboratory production encompasses all the steps required to mass produce shoe pairs. These
aspects of the supply chain are distributed throughout various locations, including Denmark,
Portugal, Slovakia, Indonesia, Thailand and the Netherlands. Portugal, Slovakia and Thailand
produce the majority of shoes. While, Indonesia hosts the most varied production suite with wet-
blue, leathers, uppers and shoes all produced in house.

ECCO incorporates vertical integration into their supply chain. Vertical integration is the
combination of a few stages of production normally completed by separate companies into one.
ECCO has done this by owning the entire supply chain that normal shoe companies such as Nike
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would use Nike would use multiple separate companies. This allows ECCO to own the supply
chain from “cow to shoe.”

ECCO’s value chain is comprised of four main activities; procurement of raw materials,
tanning, manufacturing, and distribution outlined in Exhibit 3 of the case study. Raw materials
includes hides from cattle and skins from goats and sheep. Tanning involves a variety of
operations including pickled, wet blue and crusting. Pickling is referring to the stage of tanning
where the hair from sheepskins is usually removed. Wetblue is the next stage where lime is
added to preserve the skin. The crust is the third stage where the remaining flesh and fat proteins
are removed. Manufacturing occurs through the process explained in laboratory production
above. Lastly, ECCO has 2 distribution centres in the United States and Denmark. ECCO offers
an omnichannel experience with an online store, specialty outlets and multi-brand stores.

In their first decade of operations, ECCO had established a customer presence along with
tremendous growth. With a more recent move towards globalization, ECCO recognized two
leading points of entry into the global market were establishment of a global presence and a
reduction in labor costs, while increasing flexibility. Within a 25-year period, ECCO has
acquired 26 sales subsidiaries and operating facilities in numerous locations around the world to
react to the increase in demand for their products. They are as follows:

Portugal, their first relocation of production, is now more focussed on their high-tech
machines. This is due to the increase in labor costs and more viable options in other plants that
ECCO has around the world. As a result, Portugal is no longer ECCO’s top producer and has
seen almost a 50% decrease in operations.

Indonesia specializes in the shoe uppers of the final product. The facility in Indonesia
satisfies 40% of the top 50% of ECCO’s total demand. The leather goods are processed to
semi-finished or finished state using products shipped from their European operations.

Thailand oversees both tannery and assembly, creating 37% of uppers for the shoes,
along with increasing output. Thailand has a very low employee turnover rate of 7% a year,
while having a very keen eye and craftsmanship, particularly given ECCO’s new segment in the
golf industry. With the increasing workmanship in the Thailand facilities, they have started
producing advanced trekking boots as well.

Slovakia operations encompass the assembly of shoes and uppers and primary production
of mens’ products. The reason for a production site in Slovakia are the lower labor costs and a
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strategic placement for major markets around them such as Russia, Poland and other eastern
European countries.

Weakness in firm location is focussed on Portugal and Denmark. With increasing labor
costs, these countries have lower potential for further investment. ECCO likes to invest in R&D
to an extent, considering the sophisticated machinery in the plant. There comes a point where
machine upkeep and labor costs are too great in Denmark and a facility relocation to Asia makes
good economic sense. Asian plants are also located in a great place in terms of logistics and the
three to four week waiting time from Asia is reduced considerably. Once the cost of creating in
Asia outweighs a European plant significantly and when operating margins are not increasing
year over year is when the switch to a longer lead times will be more viable for ECCO.

COMPANY ANALYSIS

There are many pros of ECCO maintaining an in-house production strategy. In terms of
positive factors, ECCO is able to maintain better quality control. By having production in house,
it allows their executives and key employees to tour and monitor the manufacturing process to
ensure it is up to the high standards that ECCO wants to maintain. Another pro is that it allows
less shipping and logistics costs. Since the manufacturing is done in-house, ECCO can have all
its suppliers ship to one location and not have multiple logistics networks, which often create
extra costs. It also can have its tanneries located in the Netherlands ship to Denmark which is
extremely close.

There are a couple of negatives to having in-house production when compared to its
competitors who outsource their production. One con to having in house production is the high
labour costs. In foreign markets such as China, labour costs are lower and don't require the same
amount of benefits or compensation as an in-house production team based in Denmark. Another
con is the production capacity, which is limited by working regulations, manufacturing space and
costs, whereas outsourcing would increase product production capacity. ECCO’s in-house
strategy is correct in that it differentiates them from the competition and ensures a higher quality
product.

After an analysis of ECCO’s distribution network, there are pros and cons to maintaining
Denmark's distribution center in the long term. ECCO has two major distribution centres in
Tonder, Denmark and one in the United States. They have just recently expanded Tonder in 2001
with four additional warehouses totalling 9000 square meters and doubling the capacity from one
million to two million. The majority of products move through Denmark’s distribution centre but
only 6-9% of the shoes are actually sold on the Danish market. The consolidation of Denmark’s
distribution operations in Tonder, Denmark is cost effective but a distinct lack of market share in
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the Danish retail space presents a contradicting vision. ECCO manages skus and distribution
efforts through a barcode system. Shoes for markets outside of Europe are shipped by sea. Also,
they use a variety of retail stores to distribute shoes throughout the 99 countries ECCO is
available in. If ECCO were to look at options for a new distribution facility, they could look at
Asia. The majority of production facilities are consolidated in Asia and it has an established
growing market. Currently, there distribution facility in Denmark is not close to the majority of
customers. There distribution centre in the United States can serve the majority of customers in
North America. While, an Asian distribution facility could help reduce lead times by being closer
to production. Instead of having to transport shoes too multiple locations for production and
distribution, then back to the country of sale, you could further consolidate transportation. Some
examples of locations could be China. They have recently looked at developing large numbers of
production facilities in China, due to its central location. China is within Asia and close enough
too all production facilities. China also borders the Pacific Ocean which allows for simplified
exports and imports. It is recommended that ECCO further research locations and facilities for a
distribution centre in China.

As outlined per ​Appendix B​, the footwear industry is a mature market with stiff
competition. As indicated above, the threat of substitutes is moderate due to low switching costs
and moderate availability of substitutes such as sandals. Although they are not perfect
substitutes, they can still be used instead of ECCO shoes. Buyer power is also moderate for the
same reasons, as well as online shopping, enabling price conscious consumers to compare prices.
The threat of new entrants is low due to several barriers to entry such as consumers being
attached to existing products. Lastly, supplier power is low since ECCO is mainly self-sufficient
and they have many suppliers to choose from when buying raw hides.

ECCO’s competitors spend a large amount of their budget on marketing. For instance,
Nike emphasizes the importance of marketing in which they promote their products by having
celebrities, and professional athletes advertise them, this creates global brand awareness.
ECCO’s lack in their marketing budget in comparison to their competitors is something they will
have to work on. It is an essential channel to reach their consumers by creating brand awareness
and customer loyalty. Since ECCO values the consumer and the importance of providing a
quality product. Spending a larger portion of their budget on marketing will help ECCO
dominate markets globally and continue to be successful.

ECCO has many different categories of products which created challenges to ECCO’s
supply chain. Since 80% of their shoes are made in house the remaining 20% were outsourced.
For instance, the ladies’ shoes required specific thin soles that were not manufactured in-house.
Ensuring constant quality will be more challenging with outsourcing since it is not within their
reach and they lose control of how some tasks are being monitored and performed. Also, with
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lead times involved in transporting goods from international suppliers, the impact of quality
failure will be more severe and will cause disruptions within the supply chain.

Another challenge faced by ECCO’s supply chain was the ever-changing consumer
demands. Since different product categories have different demand because of consumer tastes
and preferences that constantly fluctuates. This will complicate their supply chain as they will be
required to have different forecasts for each product category. This is time consuming and can be
costly for the company if the demand doesn’t relate to the forecasted one . Accurate forecasting
will help ECCO make informed decisions that will help cut costs, understand their market
demand and make appropriate decisions to increase supply chain efficiency.

A SWOT analysis of ECCO was conducted as outlined at ​Appendix A​. ECCO has many
strengths that have helped their company grow over the past decades. Their main strength is their
control over their supply chain. ECCO has developed a supply chain that allows them to take raw
resources and create a final product. They manage every part of the value chain from “cow to
shoe.” This is a major strength for many different reasons. It helps keep risks such as poor
quality low and increases efficiency and it also ensures ECCO is more resistant to price increases
by suppliers. It has also allowed ECCO to incorporate innovative production technology into its
factories without risk of competitors copying the same techniques. Another strength is the
strategic partnerships ECCO has formed with other companies globally. Their number of
partnerships increased from 18 to 43 in 2004. These partnerships allow for ECCO to access and
penetrate markets more effectively and increase revenue. Finally ECCO is a family owned
business. This has allowed them to take risks and not have the potential legal ramifications for
every choice they make. This also allows them to have freedom to develop and profit from
Research and Development (R & D) as they see fit.

One major weakness of ECCO is the size of their marketing budget. Being more quality
and production focused, they have not emphasized marketing when compared to some other
marketing-oriented firms such as Nike. This can be important when trying to attract new
customers and develop brand image. ECCO has started brand endorsements from celebrities and
sports stars, which is one of the most common methods in the shoe industry. For example, Nike
spent $8 Billion dollars on sports advertisements alone between 2002-2015.

The SWOT analysis outlines many opportunities for ECCO. The first major opportunity
is to expand manufacturing operations in China. This will allow ECCO to expand production at
lower costs and as demand increases in Asia, they can keep pace with it. Another opportunity for
ECCO is expanding into the sport market for shoes, specifically golf shoes. This market is
growing and ECCO has already had significant sales in this segment so ECCO could target even
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more categories to expand sales. Lastly another opportunity faced by ECCO is expanding into
existing markets such as North America.

One major threat facing ECCO is the strong competition from rival shoe companies and
new companies entering the market. As new companies are entering into the lifestyle casual
segment from sportswear, they have huge capital and assets to compete with ECCO
competitively. This threatens sales and loss of customers to these companies. Another threat
faced by ECCO is the replica/fake shoe market, which can steal sales and brand image from
ECCO for personal gain.

ECCO can improve its supply chain to take advantage of opportunities by expanding
production in China. This will allow production capacity to increase for ECCO and expand
product sales. It will also lower production costs and increase profits. Furthermore, it will enable
the Chinese market to have its own manufacturing plants and lower shipping costs from other
overseas production facilities. ECCO could also open a distribution in foreign markets such as
the Central Asian market to have cheaper logistics, as well as more flexibility in terms of time to
ship.

Another way ECCO could improve its supply chain to deal with major threats is by
having stricter policies in effect to control loss of intellectual property. ECCO needs to increase
their legal department and ensure their lawyers are working to go after replica manufacturers.
ECCO also needs to work with local enforcement and government officials to ensure that replica
manufacturers are punished and shut down. Lastly ECCO could implement a barcode or QR
code into its products so customers know they are buying a legit ECCO product.

ALTERNATIVES

1. Invest in China and own the plants; develop a moderate marketing plan.

China has been on ECCO’s radar for an extended period based on trips that focussed on
location, competitive wages and services. ECCO has found a location in Xiamen that has been
received favourably from local authorities to the community. Moreover, China has become a
recent member of the WTO, which will allow ECCO to own 100% of their production sites.
Finally, ECCO has made an investment in China over the next 5 years of around $500 million
DKK (approximately $90 million USD, 2005) which will be used towards the equipment and
construction of five new production facilities. These facilities would satisfy five million pairs of
shoes, and advanced tanning equipment, including a beam house to convert raw cowhides.
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The capabilities of this plant would represent enormous economies of scale. The China
plant would increase the production volume by 42% when up and running. This means that the
new plant would be the top producing plant that ECCO has in operation, and will include a wet-
blue end production site, which would increase their production of cowhides significantly.

ECCO must also pursue the thought of becoming a bit more like “NIKE” and
“Timberland,” two of their main competitors, who focus more on the marketing aspects, while
still producing high quality products. To this end, ECCO must contribute at least $15 to $20
million DKK on marketing efforts to remain competitive with them and to stay relevant, stylish
and trendy in their industry. With little effort being expended to date on their marketing
campaigns, this must change in order for ECCO to achieve the sales quotas they want and need
to stay alive with an ever so small operating margin. With this investment, ECCO will be able to
transform their slim margins into prosperous margins and increase overall efficiency. By
investing $100 million DKK at a 3% interest rate, ECCO would have more than sufficient funds
to invest in marketing.

2. Outsource the five facilities with a heavy marketing plan.

Option two would slightly differ in capital structure and overall plan from the first
alternative. ECCO would not have the burden of taking on the capital-intensive plan like the first
alternative of $500 million DKK. Instead ECCO would find Chinese factories ready for use to be
leased by ECCO and used for the production of their products.With more money in the bank,
ECCO will be able to heavily invest in a long-term marketing strategy to broaden their target
markets.

With operations at a fraction of the cost of owning new facilities, this would leave ECCO
with a large amount of resources to focus on marketing. The average cost to run a facility is
significantly lower than most of ECCO’s current factory locations. This will drive the yearly
operating costs to an estimated $4 million DKK a year for the factory and employees, not
including materials. The rest of the net profits will be used towards developing a marketing
strategy like other competitors that focus heavily on marketing. This would include
endorsements, given they have 9 out of 10 of the recommended golf shoes in North America to
their more casual wear shoe. Marketing is a very capital intensive segment but is the most
valuable in terms of gaining market share in new and existing countries. With the switch towards
leasing and major marketing changes, ECCO has exponential gain within the industry.

3. Refinance facilities and have a 50% split between owning and outsourcing.
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The last alternative and viable option of ECCO is to refinance half or sell half of their
facilities and lease out from their buyers in a long-term relationship, while increasing their
marketing plan with the extra cash. ECCO should consider the fact that leasing gives them a
much bigger cashflow without having to pay for all of the capital intensive work required to
build new facilities.

ECCO should also evaluate some of their existing facilities like their Portugal plant. The
labor wages are increasing heavily and there are more viable options for the company to operate
from, including Asia. If the margins produced out of the Portugal location are below 10%, they
should consider closing it indefinitely and finding a new place. Furthermore, ECCO should lease
out the new facilities in China that they have been considering and shut down some other
existing locations that don’t make margin requirements. In terms of Portugal, we can see the
visual line (Exhibit 6 of the case study) indicating ECCO has lost roughly 50% of their
production from 2001 to 2004. This is due to increased wages and laid off employees, which can
only mean that the plant is beginning to become unprofitable.

Finally, ECCO should create a marketing campaign that will expand their horizons and
keep their products relevant in the fast paced and changing industry of shoes. Combined with
selling facilities and leasing out, while also expanding into new markets like China, this creates a
great opportunity for ECCO to hit customers with a strong advertising plan. ECCO would have
more than enough cash to expand and increase their customer base with the action of this new
plan.

RECOMMENDATIONS

We believe that alternative one “invest and own production plants in China” would be the
most beneficial to ECCO’s future revenue and market growth. Major aspects for the reason why
we believe choosing alternative 1 will increase high future growth is; Increased market
scope,in-house quality, large amounts of cash flow and foreign direct investment. By
constructing the 5 new plants in China this will overall lead to an increased global production
growth by 42% at the end of constructing in 4 years. Further, this production increase in China
will allow for ECCO to penetrate the Chineese market and gain loyalty in a huge market
potential. Moreover, with almost a 50% production increase this will lead to vast amounts of
more cash flow for the company. ECCO can take advantage of this to invest in different areas of
the company but most importantly their marketing campaigns for the future.Lastly, with the
recent agreement with the World Trade Organization, China has allowed for 100% foreign direct
investment with leads ECCO to invest more into the country.

IMPLEMENTATION
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Since, the construction of the 5 connected facilities is estimated to take 4 years, our
implementation plan will be across a 4 year timeline as per ​Appendix D​. First, within 6 months,
ECCO must begin the construction of the 5 facilities in China on the land acquired. They also
must look at fulfilling China’s requirements for 100% ownership of foreign direct investment.
Second, within a year, they need to create marketing communications to “tell the story” of
ECCO’s unique production strategy. Also, ECCO must acquire advertisement time slots for
social media, broadcast television and strategic positioning within retail stores such as end caps.
In the following 2-4 years ECCO must begin marketing communications strategy and maintain
dialogue along with semi-annual follow ups with construction partner. Lastly, at 4 years plus,
ECCO’s construction of the 5 connected production facilities should be complete and they
should be able to begin production. Also, ECCO should analyze acquired marketing data
concerning sales and shift marketing content if necessary depending on what resonates with
consumers.

KEY PERFORMANCE INDICATORS

There are a few key performance indicators that ECCO has set to ensure they reach their
business objectives. The first key indicator is to increase revenue from $3.394 to $3.8 billion by
2005. This will be done multiple different ways such as increasing marketing budget and
increasing chinese market presence. Another key indicator is to increase production by 40%
within 5 years. This will be done by the new chinese production facilities opening and increasing
production capacity greatly. Lastly, ECCO wants to increase market share to control 18% of the
footwear market by 2006. This is directly related to revenue but ECCO needs to limit the growth
of other companies by showing their product is superior in quality.

CONCLUSION

After considering all alternatives, option one is the best decision for ECCO. As the
Chinese market expands, this will provide great opportunities for ECCO in terms of increasing
sales. The size of this market, combined with its lower costs of production and high production
capacity, will help increase ECCO’s global revenue. By owning all manufacturing plants in
China, ECCO can ensure its high standards of quality are being followed, a core value of the
company. This option also calls for a moderate marketing plan to enable the company to become
better known and to create brand loyalty, especially in a competitive industry like footwear.
There are several risks involved in implementing option one which can be mitigated (​Appendix
E​) but this opportunity is worthwhile for ECCO to take on.
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Appendix A: SWOT Analysis of ECCO

Strengths Weaknesses

1. ECCO manages every part of value chain 1. ECCO has a small marketing budget when
from “cow to shoe.” This allows ECCO to compared to industry competitors.
ensure quality and materials sourcing.
2. 80% of ECCO shoe production is done
in-house, allowing for complete control
over production.
3. Production technology has greatly
improved manufacturing efficiency.
4. ECCO has developed 34 Strategic
partnerships allowing them to enter new
markets easier and build relationships
with more established brands

Opportunities Threats

1. China manufacturing operations. 1. Strong competition from industry

2. Sports segment, specifically Golf Shoes, competitors.
is expanding. 2. Replicas/fake shoes are becoming more
3. Expanding sales to international markets common on internet sites.
such as the United States and China which
are enormous.
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Appendix B: Porter's Five Forces

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Appendix C: Supply Chain Diagram

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Appendix D: Implementation Timeline

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Appendix E: Risks and Mitigation

Risks Impact Likelihood Mitigation

Late construction projections High Low Partner with a construction company that has a
positive track record and complete semi-annual
follow ups

Slow market growth in China High Moderate Increase marketing efforts in the Chinese
market

DC over capacity Medium Moderate Find opportunities to allocate space in the

Chinese production facility for distribution
centre or expand the facility