Strauss & Co. Puts an Original Spin on Mass Customization
Levi Strauss & Co. has been a leader in the world of jeans since it introduced the first pair in the 1870s, which quickly became de rigeur among gold prospectors. But in the 1990s, Levi's lost touch with trends and tastes in a fickle youth market it needs to win. Meanwhile Levi's faces new competitors, many of which have gone off shore to produce lower-priced jeans.
Levi's is less worried about the accelerating price war than it is about recapturing the imagination and loyalty of younger consumers. To this end Levi's has created a production, marketing, and sales strategy to deliver customized jeans on a mass scale, giving consumers not just a pair of jeans, but a memorable shopping experience. For mass customization to succeed, Levi's must combine technology and business savvy to achieve ultra-efficient supply chain management on the back end and clever marketing and sales on the front end.
Levis Strauss & Co. is in a tight squeeze. After years of being the top jeans producer, the company that invented the rugged, riveted denim pant is losing ground to dozens of competitors from private-label discounters, to rivals like VF Corp. (which owns the Lee and Wrangler brands), to designers like Calvin Klein and Tommy Hilfiger.
What went wrong? To start there was a major fashion misstep. While baby boomers are still loyal customers, their children aren't, because Levi's lost touch with the tastes of a new generation. "We simply stopped paying attention to our younger shoppers," says Sanjay Choudhuri, the company's director of mass customization. Indeed, Levi's didn't notice that young people preferred the legs of their pants to be wider than wide until two years after kids began to wear that style with labels of other jeans makers on them.
There's also a matter of value. With many manufacturers making lower-cost knock-offs in Asian factories, blue jeans have become a commodity, with prices dropping to as low as $15 a pair. But despite the market's brutal price war, Levi Strauss has resisted both moving its production for North America overseas, and seeking other ways to match the prices of competitors that do. The problem was, Levi's selection wasn't giving consumers a compelling reason to pay more. Says Choudhuri matter-of-factly: "Customers wanted more value for the price they were paying for our jeans and we weren't giving them enough."
These factors have taken their toll. VF Corp. has increased its share of the mens jean market from just over 22 percent in 1990 to 31 percent in 1996, while Levi's nearly 50 percent share in 1990 fell to 27 percent in 1996, according to marketing consultants Tactical Resource Solutions. Private-label discounters, like J.C. Penney and Sears Roebuck now have close to a 20 percent share, up from 3 percent nine years ago.
Overall, Levi's share of mens and womens denim jeans slipped to 18.7 percent as of June, 1998. Revenue dropped nearly 5 percent from $7.1 billion in 1996 to an estimated $6.8 billion in 1998.
Levi Strauss's senior management has taken extensive and difficult steps to regroup. It's been re-engineering business processes for five years, has closed a third of its plants in North America, and recently proposed shuttering some plants in Europe. With that, Levi Strauss has let go 7,000 people in North America 19 percent of its worldwide work force in the past two years.
But Levi's is branching out, too. Besides its signature jeans, Levi's is successfully building brands in nondenim sportswear with its Dockers casual wear and Slates dress pants lines. Further, the company is currently spending more than $100 million a year on advertising, in particular for ads targeting young people. Stark, minimalist television commercials are little more than monologues by teenagers on such subjects as capitalism, favorite cheeses, and guys who cheat on their girlfriends. Consumer print materials like the one below, featuring the 4 Ray Dog rock band leader, equate Levi's with hip sensibilities and jean selections.
But for Levi's much of this is playing catch-up. The real breakthrough strategy to leap ahead of the competition is much more ambitious one that no other jeans maker has attempted. It's called mass customization or mass-produced goods and services tailored to the individual.
Levi's goal is to produce jeans cost-effectively one pair at a time to fit each consumers's body measurements, satisfy other personal preferences, and offer a positive, memorable shopping experience. "We need to convince customers that if they come to Levi's for the 20 minutes they spend buying jeans, they will get the best shopping experience and the product they want," Choudhuri says.
This is a radical departure for any company in the retail textile industry, which is wedded to mass production and squeezing out costs through plant efficiency and low overhead. But Levi's is convinced the potential pluses of mass customization are worth the change:
Levi's first mass-customization program, Personal Pair (now in its second iteration and called Original Spin) was hatched in 1994 in Hong Kong. Sung Park, a former IBM software developer on vacation there, was unexpectedly called to a business meeting. He needed a suit in a hurry, so he paid a tailor to make it in a day. Park was so pleased with the results, he was inspired to develop a system that could design a garment from personal data entered through a point-of-sale terminal, generate instructions to cut and sew it, and then track the item through shipment to the customer.
Within a year Park sold his system to Levi Strauss, which quickly formed a team of marketing and information technology (IT) specialists to modify the system so it could be installed in the company's stores. Operating on a crisis timetable, and encouraged by top management's constant reminders that this project was a priority, the group finished the effort in months. By the end of 1994 the custom-jeans offering was being rolled out in two dozen Original Levi's Stores.
One reason the system was built so fast is it was added on to Levi's vast logistics and distribution network, which is among the best in the textile industry for tracking inventory and replenishing stock for thousands of retailers. Each Levi's channel whether owned by the company or a department store carries approximately 130 ready-to-wear pairs of jeans for any given waist and inseam. Inventory is constantly refreshed.
The Original Spin mass-customization process is built around a computer-aided design (CAD) system linked with marketing and logistics databases. A customer at a kiosk, with the help of a salesperson, picks from a menu of style options depicted with graphics on the screen. The options are as follows: First, there's the type of jean classic, low-cut, or relaxed. Then there's color, for example, authentic stonewashed, light indigo, black, or putty. Then comes the leg opening tapered, straight, boot cut, flare or wide and finally the fly, either zip or button. Three body measurements (hip, waist, and inseam) are punched into the computer, along with other personal options. The customer could choose to name the jeans, for instance.
Based on these measures, the consumer tries on one of 242 samples in the store, and tells a salesperson how it feels. Then the salesperson adjusts the order to just the right relaxed-fit or slim-cut jean the consumer wants. This sample system is critical to the mass-customizing process: While not made-to-measure like a Hong-Kong custom-tailored suit, each pair suggested for a consumer is based on a prototype that as closely as possible matches a person's dimensions, and the look and feel they want from their jeans.
The order is sent via the internet to a server at Levi's factory in Johnson City, Tennessee. There, a CAD machine reads the customer's choices as an algorithm that directs the computer to cut separate pattern pieces out of denim using automated cutting. There are upwards of 12,000 possible pattern combinations that the computer can make. Then, Levi's workers manually sew the pants together. A bar-coded label with an individual customer number as well as the date and time to the millisecond that the jeans were made is heat-sealed onto the inside pocket to identify and track them as they're shipped to either the customer's home or the store where they were bought.
The whole process, from kiosk to delivery, takes two to three weeks. The jeans cost $55, or about 35 percent more than a traditional pair of Levi's. With their measurements and preferences in Levi's database, customers can order additional pairs of jeans, and if they want to, they can change attributes like leg opening or color by calling a Levi's store.
The IT infrastructure for a mass-customization system like Original Spin requires fundamentally different information architecture and technology than is required for mass-production systems. While the latter can often be constructed from off-the-shelf software, Levi's has invested in proprietary software development, which reinforces the notion that packaged applications typically only give a customer generic, undifferentiated capabilities. To create market differentiation and innovation still requires custom development or innovative solutions from smaller vendors.
As a private company, Levi's won't disclose the exact cost of its investments in hardware and software to develop its custom production capability. But GartnerGroup's experience suggests that a large company like Levi's may have to invest tens of millions of dollars in new software and process changes to go from mass production to mass customization. And Levi's is likely to spend millions more to make continuous improvements, such as adding patterns, speeding up production, and shortening delivery time to customers.
Unlike personal computer companies, Levi's must charge a premium for its Original Spin jeans. For instance, the difference in price between a mass produced and a customized PC made by Dell, Compaq, or Gateway is only about 10 percent or more than one third less than Levi's premium. That's because jeans aren't made of components with tumbling prices. Plus, unique jeans require skilled, high-cost labor to sew virtually from scratch one pair at time. (By contrast, mass-produced jeans are cut and sewn in batches of 30.)
Since Personal Pair for women was launched in 1994, almost one fourth of the jeans sold at Levi's stores to women are customized. The male version of Original Spin was just launched, so no sales figures are available yet.
The high womens sales data, though, is significant because Original Spin purchases are worth more to Levi's bottom line than revenue from traditional jeans based on the potential to increase retention, and move more consumers to the higher-priced custom line.
The reorder rate over a one-year period for Personal Pair was about 18 percent, which is good for an experimental program, according to Choudhuri. While the new Original Spin program is young, Choudhuri expects it will have even better results than Personal Pair, because the range of product features is broader and Levi's is being more attentive to the value in the one-to-one relationship building process.
The database that Levi's is building about jean customers is a byproduct of mass customization that no other apparel company has. Levi's is able to keep up with changing consumers preferences and to communicate with individuals to learn about other features in a pair of Levi's jeans that would please them.
With this information, Levi's hopes to boost repeat business and be the first not the last to jump on trends, as the company was with the wide leg. Already, the introduction of new colors like khaki putty and oiled bark is a result of the database. "Learning about customers is the best way to get a competitive advantage," says business manager Jen Crook.
The initial success of Original Spin has brought an increased appreciation for the value of technology as a marketing and selling tool a culture change that has the jeans maker finally shedding the notion that traditional retail methods are the only way to sell pants. Levi Strauss has had a marketing site on the Web targeted to young consumers since 1994, but only started selling its clothing online in November 1998 at two cyberstores, www.levi.com and www.dockers.com.
Levi's is the first among jeans competitors to have its own store on the Web. Planned next is the ability to reorder Original Spin jeans via the Web and eventually even to customize them on Levi.com so returning customers don't have to go to a physical store.
Its mass-customization experiment helped Levi's discover something that many companies still overlook: When prices tumble, price wars aren't the only option. In creating Original Spin, Levi Strauss management moved boldly just as revenue and margins were falling precipitously, when many firms become more conservative. Levi's leaders decided a tough time was actually the best time to make a sharp break with the past. Plus, hesitating would only have dragged the company deeper into a price war it didn't want to be in and couldn't win.
With mass customization Levi's has proved it can charge more for jeans and at the same time build customer loyalty among time-starved and service-hungry consumers. But that has required many changes. One major philosophical change has been a priority shift from solely keeping retail customers stocked and happy to a nearly tunnel-vision focus on the end-consumer, using the customization process to gather trend information and build relationships with individuals. "For too long, the retailer distracted our attention from the consumer," Choudhuri says.
This sets up a new challenge: "If we want people to pay $55 for a pair of jeans, we have to keep adding value for that same price," Choudhuri says. "But we have to figure out what value is. Is it purely tangible content like the material of the jeans or is it the experience that the consumer has in buying the jeans? I think it's both."
That's why the jeans maker no longer feels it can view its products as just items of clothing. "Levi's needs to service a consumer's holistic needs," Choudhuri posits. Levi's plans to use its Web site as well as the in-store Original Spin kiosks to reposition itself as a "styling consultant" for jeans. The idea is that consumers who see value in the actual buying experience will pay more for a great experience they can count on. Management consultant Joe Pine calls this the experience economy in his July-August 1998 Harvard Business Review article and a soon-to-be published book, which looks at many industries including retailers, hotels, and airlines.
Pine, who pioneered the idea of mass customization is now touting the experience-economy concept as its offshoot. But he cautions firms that try to add value to products with personal services to be creative. In Levi's case, for instance, Pine suggests a vanity play: "Why not ask the customer what size he wants to put on the label so that a man with a 42 waste can look like he's wearing a 36." Other options might include custom embroidery on the jeans, or letting younger people design their own labels.
While the experience economy, or mass customization for that matter, is not for everyone (VF Corp. has shown no signs of following its rival), GartnerGroup believes manufacturers generally need to stop thinking about product as only the physical item they sell. New dimensions might involve the purchasing or post-sale experience. Today Levi's offers minute-by-minute status information about consumer orders. But it's a long way from offering a 24-hour delivery service that would give it a hard-to-duplicate edge. Levi's knows that three weeks to get jeans to consumers is too long, and its working on a solution. This is critical. As competitors move to mass customization, the company that is the most responsive at the lowest cost will win. Levi's current goal is to cut turnaround time from kiosk-to-delivery to about five days.
As Levi Strauss sheds its single-minded focus on mass-production retailing and moves to selling more on the Web, it still needs to be just as attentive to retail customers. Levi's has already encountered retailers' fears of being bypassed by the Web. It has wisely recognized it needs to keep various channel partners in the Original Spin loop. Levi's recently installed kiosks in a few retail stores other than its own, and may do more if it works well. If it did not do this, Levi's could easily alienate key retail relationships at a time when competitors with different strategies are moving in, especially in lower-end markets. VF Corp., for instance, is working with its retailers to set up advanced just-in-time inventory systems to track product and inventory mix and replenish stock based on sales data from specific stores.
Dozens of companies have adopted mass customization from computer and pager makers, to bicycle and window manufacturers, to vitamin and CD outlets, to financial services firms. Some, like Levi's, have proved its possible to charge more for customized products, and use it as a competitive weapon.
However, not all mass customizers do this. Dell Computer charges less than competitors for some of its PCs, and National Bicycle charges close-to-mass-production prices. And long term its likely to get harder to get consumers to pay more without strong justification.
From a market perspective, success with mass customization over the long haul will depend on consumers seeing and paying for the value in customization, although eventually price premiums will disappear as more competitors adopt the approach. At that point the firm with the best supply chain process (e.g., most responsive at lowest cost) will have the edge. That's why sustained success with this strategy requires that companies create an agile manufacturing environment and understand supply chain principles, such as redesigning products to have as many common subcomponents as possible, and moving the final stages of production closer to the customer.
Other insights Levi's has gained from its experience with Original Spin include:
Being first once isn't enough. Levi's impressive, just-in-time inventory logistics system made it a huge retail success in the 1970s and 1980s. With Original Spin, Levi's is discovering again the clear value of being the first in the industry to use new technology. It has also been prudently aggressive in expanding its Web presence. With new customization technologies for the Internet rapidly emerging, Levi's needs to stay on top of what works and what other clothing companies are using to keep spinning Original Spin's unique experience, and developing other personalization techniques.
Dialogue makes mass customization work. Levi Strauss understands that it has to educate consumers about the uniqueness of different pants and the quality that top-flight textile companies can produce. "We need to mimic the computer industry", Choudhuri says. "The computer consumer is much more knowledgeable today than five years ago. Megahertz and megabytes roll easily off their tongues and they're much more comfortable telling Dell what they want. We need to teach jeans buyers to talk inseams, fit, color and style." Likewise Levi's is doing some learning too, specifically leveraging the mass customization process to promote dialogue and interactivity with end-consumers to glean what value means to a jeans buyer at the same time that it educates them about how to customize their jeans.
Mass customization will be as important to the 21st century as mass production was to the 20th century. Internet technology will enable many more companies to have one-to-one relationships with customers. At the same time, today's customers are more demanding and less patient. All companies, regardless of how deeply they pursue mass customization must build agility into their corporate processes and IT systems to meet customers' individual needs. GartnerGroup estimates that four out of five companies that fail to use customer information and to develop more agile supply chain operations to support strategies like mass customization will lose market share over the next five years.
Still, this strategy is not without risk. For instance, before the company has a chance to teach customers about customization, its rivals could wound the jeans maker severely as the price war accelerates. It's a gamble that Levi's is ready to take to recapture the number one spot, even if it slips a little today to get there.
Bavarian-born Levi Strauss arrived in San Francisco in 1853 to sell dry goods, including rugged canvas pants that became standard for gold prospectors. Twenty years later Strauss changed the pants' fabric to a durable cloth known as denim, dyed the material indigo, and added copper rivets for reinforcement, which completed the design for the first Levi's jeans. Levi Strauss & Co. markets its brand-name apparel in more than 60 countries, and has registered its Levi's® trademark, one of the firm's most valuable assets, in more than 200 countries. Levi's also manufactures and markets clothing under the Dockers and Slates brands.
In the 1960s the company added women's attire and expanded overseas. Until the late 1990s Levi Strauss & Co. was number one in jeans sales worldwide. In 1971 it went public to finance growth and diversification. But CEO Robert Haas, a fifth-generation descendent of Levi Strauss, took the company private again in 1984, hoping to rekindle its community-based and small business traditions.
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