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Paying a Real Price for Risk

By APICS CEO ABE Eshkenazi, CSCP, CPA, CAE | 0 | 0 | June 27, 2014



Remember the uproar surrounding those see-through Lululemon yoga pants last year? This week, Stanford’s Graduate School of Business “Closer Look” series dug deeper and outlined the company’s “sheer debacle in risk management.” 

According to the article’s authors, David F. Larcker, Sarah M. Larcker, and Brian Tayan, Lululemon’s risk mitigation strategy failed at many points, starting before March 2013, when the company pulled its store inventory of black yoga pants because recent shipments did not meet quality standards. The action affected 17 percent of the store’s pant inventory for women, but stock prices fell 3.8 percent.

In Securities and Exchange Commission (SEC) filings, Lululemon leaders anticipated that supply chain issues could pose a problem because of the limited number of suppliers. Further, company leaders also noted the significance of their brand to overall business success. After all, Lululemon positioned itself as a provider of high-end, high-quality fitness apparel—and commanded about $100 per pair of yoga pants.

“Still, despite having identified these risk factors in advance, the company was not prepared to manage them when they materialized,” Larcker, Larcker, and Tayan write.

Before the recall, social media had been full of reports on the too-sheer pants. Lululemon first blamed its supplier. The supplier, however, reported it had been certified by the company and met all its requirements. That’s when experts started doubting Lululemon’s quality controls. Those doubts didn’t stop when pants were back on the store shelves three months later.

“Despite Lululemon’s assurance that ‘quality testing has never been better,’ complaints about product quality did not go away,” the authors write. “Customers flooded the company’s website and Facebook page claiming that the pants were still too sheer.”

Instead of apologizing, CEO Chip Wilson suggested consumers were at fault, and the reaction on social media was immediate and powerful. Then, in an effort to apologize, Wilson ended up causing more trouble by not directly expressing regret for his previous offenses. Social media, again, went to work. In December 2013 and again in June 2014, Lululemon issued a profit warning.  

Why does the Lululemon story matter to all business people? The authors list five reasons, including the following:

  • “Companies disclose an extensive list of risk factors in SEC filings. However, there is often a disconnect between identifying risks in advance and being prepared to manage them when they materialize.”
  • Social media can magnify customer dissatisfaction. Companies must respond in a constructive, not defensive, manner.
  • Improper handling of recall and quality issues can create more reputational damage. Consider how risk-related matters can impact the overall brand.

When risks outnumber rewards

While risk is anticipated by supply chain and operations management professionals, it is not always clear how to manage it once it arises. Consider the following from the APICS Supply Chain Risk Folio: “Standard forms of reporting, vocabulary, mapping, and conceptualizing supply chain risk are not complete or have not yet been universally adopted. Even with easily measurable risk data, supply chain complexity makes it a challenge to gather a complete, intricate view of a supply chain’s total risk profile.”

APICS has resources to enable you to navigate the complexities of supply chain risk, anticipate potential risks, and manage them once events have occurred. For example, the APICS Risk Management Education Certificate offers a comprehensive, forward-looking program that prepares you to participate in the development of a global risk mitigation strategy. The APICS Supply Chain Risk Management Seminar, an essential element to the education certificate, will be conducted October 17, 2014, in New Orleans in conjunction with APICS 2014.

Speaking of APICS 2014, the conference will feature a risk and resiliency learning path, which will outline practical and proven approaches for addressing today’s risk challenges. APICS 2014 will be held in New Orleans, October 19–21, 2014. Early-bird registration for APICS 2014 ends Monday, so be sure to register today.

1 Comment

  1. 1 Lin, Junjian 04 Oct
    The case tell us a fact: 
    With the technology developing in internet, social media network is playing a much important role in doing business, this effect on supply chain management as well. The risk increase widely through many ways. As the risk management team, require to have a big picture view on mind and take action quickly when events occurred. Look at the Lululemon company, they failed on risk management and lead to a business loss. 
    Suggestion: start complete and adopted standard forms of reporting, vocabulary, mapping and conceptualizing supply chain risk, gather intricate view of a supply chain's total risk profile.

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