Case Study: Supply Chain Revolution from Crocs

In the traditional practice, footwear companies showing around the world their upcoming products for the fall season in January, and buyers would place their orders during the shows. Orders placed would then be manufactured during the next months and shipped out in August, September, October and November. In this way, the manufacturers usually face great risks due to the difficulty in predictions. They have to conduct prediction in trends to design the new product; they also have to predict on the demand of the market.

Usually, manufacturers would add 20% of the pre-booked orders to production, and ambitious manufacturers would add in 50%. Should there be anything wrong with their prediction, both the manufacturers and retailers would either face empty shelves in the store or run clearance for unsold stock at the end of the season. Yet Crocs see the supply chain in a different way. They focus on customer’s needs and try to produce what was needed when it was needed. What does that mean? Think about the traditional model as a manufacturer, what can you do if the hot product runs out of stock?

Due to underestimation of the demand, you could only sigh and regret for the profit in front of you but you are unable to grab, because you can’t make more shoes to catch up with the season this year. And this reason is what Crocs worked on – to respond rapidly to the changes of demand and make more shoes during the season when it is needed. This enabled Crocs to take full advantage of the current trend to maximize its sales while at the same time minimize safety stock for both its own inventory and those of the retailers’. Retailers are also less pressured when they place pre-orders.

Crocs experienced 3 phases to achieve such capability and success. The first one was “taking over production”. In Crocs supply chain, raw materials were purchased in Europe or United States and then shipped to a third-party company in Italy for compounding. Compounded and colorized pellets would be sent to the manufacturing company – Foam Creations in Canada to get molded and assembled. In the end, the finished products were shipped to a third-party distribution company in Denver for warehousing, packaging and distributing.

In June 2004, Crocs bought the manufacturer of its shoes (Foam Creations in Canada) to gain the proprietary croslite resin and control the manufacturing. In 2005, Crocs started production in China with a large contract manufacturer, which marked its second step – “Global Production Using Contract Manufacturers”. Raw materials were still sent to Italy for compounding, but the pellets were sent to both Canada and China since then. Shoes made in China were also shipped to Denver for packaging and distribution.

The flexibility, high volume capacity, and quick respond to changes of third-party manufacturers in China greatly satisfied Crocs. The efficiency provided by such manufacturers helped the company to achieve better manufacturing control to meet demands, and also helped it with its Asian market entry. Yet manufacturers outside Asia were unable to adopt the company’s supply chain model. In addition to China, Crocs also added capacity through contract manufacturers in Florida, Mexico, and Italy to better support its worldwide launching strategy.

In the third phase, Crocs brought “Global Supply Chain in-House”. To adopt its supply chain model worldwide to achieve efficiency in the chain, Crocs developed company-owned manufacturing operations in Mexico, Brazil, Italy, and India. It also signed conditional contracts with third-party manufacturers in Romania and Bosnia. In 2006, Crocs created compounding facilities in Canada, Mexico, and China to eliminate the inefficiency of shipping pellets from Italy around the world and to increase manufacturing flexibility in each location.

Since then, complete production lines were set up in these 3 countries to achieve better flexibility in manufacturing to meet demands around the world. In the addition to the above mentioned practices, Crocs also adopted different methods to deal with orders from small stores and large retailers. For small stores who fax their orders to Crocs, these orders would be forwarded to warehouse and arranged shipping directly to the stores.

For large retailers who have their own distribution centers and place electric orders, those orders went directly to the nearest factory and shipped to their distribution centers, which saved the shipping and handling cost for both parties. Crocs also shifted its production of different kinds of products among different countries to help lower the total duty payments. It’s not hard to see that saving cost to gain greater gross margin also drives the practice of supply chain decisions.