The Burberry Women’s Sportswear and Accessories Department has experienced an unfortunate confluence of circumstances that has had a negative impact of the supply chain by increasing raw material costs. These negative events leave the company with operational problems in terms of being able to maintain inventory, and financial problems in terms of being able to maintain current levels of profitability. There are three options, and Burberry should embrace a combination of all three to respond to these situations. “When faced with rising raw material costs, companies can respond three ways. First, they can maintain existing selling prices and consequently operate with lower margins. Second, they can pass the cost increases along to customers in the form of higher prices. Third, they can try to lower their raw material costs” (Holmes & Dodes, 2010).
There has been severe weather in Peru, which has made obtaining aspects of our raw materials difficult. The impact of severe weather can be significant but it is generally a transient impact. For that reason, I believe the company should simply accept lower margins for a period of time. Burberry could pass on the increased costs to its customers, but it doesn’t make sense to do so for such a short-term issue. We can re-evaluate this position if the effects of the severe weather persist.
The issue of rising fuel prices in some of the countries where the company obtains some of its synthetic materials requires a different response. Burberry should pass the increased costs directly on to its customers. People are generally used to the idea that rising fuel prices mean increased cost, so there is no reason that the company should not take advantage of this existing perception. ”They [consumers] are more likely to accept the increase if it’s tied to higher costs, such as a fuel-price surcharge” (Aliawadi & Farris, 2013). Passing along the increased costs is a good choice in the short term, but we should explore other options in the longer term. Hedging contracts are one example of a long-term option to protect against higher fuel prices. “if you need to hedge your exposure to potentially rising fuel prices you can do so by purchasing a futures contract” (Mercatus, 2016).
The issue of smaller herds from which Burberry gets its leather requires a different approach. Given the fact that people are becoming more aware of some of the animal rights issues inherent in leather products, Burberry should look at finding alternatives to leather in its apparel products. There are a number of leather alternatives readily available for the company to utilize.
Holmes, E,; Dodes, R. (2010). Cotton Tale: Apparel Prices Set to Rise. Wall Street Journal. May 19 2010.
Aliawadi, K; Farris, P. (2013). How Companies Can Get Smart About Raising Prices. Jul 21 2013. Retrieved 4/25/2017 from https://www.wsj.com/articles/SB1000142412788732373… (Links to an external site.)Links to an external site..
Mercatus (2016). A Beginners Guide to Fuel Hedging – Futures. Dec 7 2016. Retrieved 4/25/2016 from https://www.mercatusenergy.com/blog/bid/81549/a-be… (Links to an external site.)Links to an external site..
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