I teach the supply chain management course at Northeastern University’s Executive MBA program, and this year I included a relatively new case study in the syllabus: “Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage by Michael Marks, et al.  The case was published in June 2007, and it highlights how Crocs developed an “extremely flexible supply chain” that allows it to “adjust to changes in the marketplace” thus enabling its rapid and highly-profitable growth.  In the first quarter of 2007, near the time the case was written, Crocs reported revenues of $142 million (more than 3X its sales in Q106) and net income of $0.61 per share (almost 4X greater than the previous year).

Less than two years later, Deloitte & Touche, the company’s financial auditors, expressed “substantial doubt” about Crocs’ ability to continue as a going concern (as disclosed in the company’s most recent 10K report).  Revenues were down 32 percent in Q1 2009, compared to the previous year, and the company reported a net loss of $22.4 million.  Since the first quarter of 2008, the company has reduced its inventory by 51 percent.  The following paragraph, also from the company’s 10K report, nicely summarizes the company’s quick rise and fall:

“From our inception [in 2002] through the year ended December 31, 2007, we experienced rapid revenue growth and had difficulty meeting demand for our footwear products. During this period, we significantly increased our production capacity, warehouse space and inventory in an effort to meet demand. This pattern changed in 2008.  Our revenue growth moderated and then began to decline during 2008 when compared to 2007. Accordingly, we evaluated our production capacity and operations structure and, in 2008, we discontinued our Canadian manufacturing operations and consolidated our Canadian distribution activities with other existing North American distribution operations, we abandoned certain equipment and molds that represent excess capacity, we discontinued manufacturing operations at our Brazilian manufacturing facility, we decreased our fixed costs by consolidating our global distribution centers and reducing our warehouse space and we reduced our global headcount by approximately 2,000 people over 2008 and into the first quarter of 2009.”

What happened to Crocs’ competitive advantage?

Based on the information in the case study, and information publicly available (including this video interview with Edward Collins, Senior Director, Global Logistics at Crocs ), here are some of my impressions/speculations:

• Crocs’ flexible supply chain model, which included having excess manufacturing capacity beyond the actual manufacturing plan, worked extremely well when actual demand exceeded forecasted demand (pre-booked orders), but was not robust enough to handle the opposite scenario.  In other words, the model was “optimized” for large upswings in product demand, thus allowing the company to manufacture products within a selling season, but was “sub-optimized” for large downswings in product demand, which is what happened when the economy tanked (and is what happens to many “fad” products in the footwear/apparel industry).  I think this is a perfect example of why optimizing supply chain networks is not enough; companies should also simulate them under a variety of scenarios.  An “optimized” supply chain network, whether for cost or responsiveness, is not necessarily a robust one.
• Did Crocs have real-time visibility to actual demand and downstream inventory-i.e., visibility to point-of-sale, sell-through, and inventory-on-hand data?  I don’t know, but my impression is that the company’s primary “demand signal” was not actual demand, but orders from retail customers.  If so, then Crocs was a victim of the classic “bullwhip effect,” which has affected many other companies in this economic downturn (see “Lasik for Supply Chain“).  The fact the company was using a home-grown planning solution, until at least mid 2007, probably didn’t help either.
• There was no “crawl, walk, run” evolution to Crocs.  The company came off the blocks like Usain Bolt, and its supply chain processes and IT infrastructure simply couldn’t keep up.

The moral of this story, in my opinion, is that there’s no such thing as a sustainable competitive advantage in supply chain management.  A supply chain that is best-in-class today, within a given set of conditions, can quickly lose its luster tomorrow, under a different set of conditions.  The challenge is building supply chains that are robust enough to withstand a broad range of scenarios, and having enough forward visibility to economic changes and supply chain activities so that companies can take preemptive corrective actions.

This case also reminds me of Robert Frost’s famous poem “Nothing Gold Can Stay,” which begins:

“Nature’s first green is gold,
Her hardest hue to hold.”

The same is true with Crocs.