Annual Report 2021

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Sourcing and production

Strategic focus on increasing efficiency and flexibility

Product availability successfully secured during COVID-19 pandemic

Expansion of own production with strong focus on casualwear

Platform for speed and growth

With its “CLAIM 5” strategy, HUGO BOSS has set itself the target of generating significant growth across all brands, regions, and touchpoints in the coming years. An efficient and robust operational infrastructure forms the basis for achieving the Company’s medium-term financial targets. The strategic claim “Organize for Growth” thus aims at further optimizing and flexibilizing the sourcing and production activities of HUGO BOSS in order to create a strong platform for speed and growth.

The sourcing and production of high-quality products is an important factor for successfully meeting high customer requirements on design, functionality, comfort, and longevity at all times. In addition to ensuring these quality characteristics, HUGO BOSS is constantly striving for best-in-class solutions to further increase the efficiency and flexibility of its global sourcing and production activities. In this context, a key element is the further digitalization along the entire value chain. This enables the Company to respond even more quickly to changing market trends in future and thus to best meet customer demand. In this context, HUGO BOSS has set itself the target of reducing product lead times by around 30% by 2025. In addition to modular and digital product development, this will be mainly achieved through the further optimization of the Company’s sourcing and production processes. A prime example of short development and production cycles are the capsule collections from BOSS and HUGO, which, already today are being developed and produced in just a few months. Research and Development

HUGO BOSS also intends to fully exploit the potential of digitalization in further increasing flexibility in production and logistics. In 2021, for example, the Company implemented a supply chain dashboard to improve the visibility of goods availability and the tracking of merchandise flows. This is also an important step towards the planned establishment of a “digital twin” of the value chain, which in future will provide important information on production status, inventories and delivery using real-time data. This, in turn, will further enhance the end-to-end visibility, flexibility and efficiency of the Company’s value chain.

In the wake of the COVID-19 pandemic, global value chains are exposed to particular stress. Challenges include bottlenecks in global production and logistics capacities as well as a corresponding increase in material, production and freight costs. Thanks to its resilient value chain and timely and forward-looking actions, HUGO BOSS was able to secure sufficient product availability in fiscal year 2021. The Company particularly benefited from its well-balanced global sourcing mix, the flexibility of its own production facilities, long-term strategic partnerships with suppliers and the successful onboarding of new partners as part of the general business recovery and strong top-line growth in 2021. In addition, HUGO BOSS took new, solution-oriented, and in some cases unconventional approaches to transportation and logistics in the past fiscal year. In addition to shifting early from sea to air freight, for example, a small number of passenger aircraft were chartered to ensure product availability in the short term for the fast and uncomplicated shipment of goods from Asia to Europe.

Sourcing volumes and regional split

In terms of value, 17% of the total sourcing and production volume was produced at the Group’s own production facilities in 2021 (2020: 17%). Unchanged to the prior year, the remaining 83% comprises products sourced from independent contract suppliers or sourced as merchandise (2020: 83%).

Regional split of sourcing and production volume

(in %)

2021 (2020) 2 (1) 49 (54) 49 (44) Americas Europe 1 Asia

Including Middle East and Africa.

HUGO BOSS attaches great importance to a regionally balanced strategic sourcing mix in order to minimize risks such as local or regional capacity shortfalls as far as possible. The increase in sourcing volume in Asia in 2021 resulted from the growing share of casual and athleisurewear in the product mix, which is primarily sourced as merchandise. Within Asia, HUGO BOSS reallocated a significant portion of its sourcing volume in fiscal year 2021, thus also responding to pandemic-related production bottlenecks in individual markets. As a result, China and Vietnam are the most important sourcing markets within Asia, representing 17% and 16%, respectively, of the Company’s global sourcing and production volume (2020: 20% and 12%). As part of several strategic initiatives related to “nearshoring”, in the medium term, the Company plans to shift an additional portion of its sourcing volume to Europe, in particular to Turkey, thus further strengthening its share in the global sourcing mix. The further expansion of own production capacities at the Company’s Izmir site plays a central role in this regard. In future, HUGO BOSS is looking to benefit even more from its proximity to Europe – the Company’s largest sales region. At 24%, already today Turkey accounts for the largest part of the global sourcing and production volume in Europe (2020: 23%). Of that, the own production in Izmir currently accounts for 14% of the global sourcing and production volume (2020: 13%).

Own production as a competitive advantage

As part of its “CLAIM 5” growth strategy, HUGO BOSS intends to significantly expand its own production in the coming years. In addition to greater independence from external factors, the main reason for increasing own production capacity is to enable the Company to react quickly and flexibly to any changes in customer demand and to gain important expertise in the further development of production technologies and quality standards. The five own production facilities are located in Izmir (Turkey), Metzingen (Germany), Radom (Poland), Morrovalle (Italy) and Coldrerio (Switzerland).

Further strengthening the Izmir site, the Company’s largest own production site by far, plays a key role in this. Today, the Izmir site mainly manufactures formalwear products such as suits, jackets, shirts, coats, and womenswear. Thanks to the digitalization of a large number of production processes and workflows in recent years, existing capacities can now be used even more flexibly. For example, in 2021, in addition to formalwear, a certain share of casualwear products such as trousers, jackets, and jersey products was also produced. In addition, the Company plans to invest around EUR 10 million in capacity expansion and further digitalization of the site in the coming years. In this context, around 1,000 new jobs are to be created on site. Thanks to the expansion of the jersey production lines at the Izmir site, the focus of own production will therefore also be on the production of casualwear going forward. In doing so, HUGO BOSS intends to further strengthen its position in the important casualwear segment and, in particular, to establish BOSS as a true 24/7 lifestyle brand. Group Strategy, “Product is King”

The production site in Metzingen mainly produces tailored “BOSS Made to Measure” suits, along with prototypes and sample styles. In addition, the “Made in Germany” collection, specially developed for the Asian market, was also produced in Metzingen in 2021. In addition to formalwear products, it also includes casualwear products for the first time. Business shoes and sneakers are the main focus of production in Radom and Morrovalle, while “BOSS Made to Measure” shirts are produced in Coldrerio. In future, HUGO BOSS intends to further shift production towards important sales markets. In 2022, the Company will be testing the refinement of jeans and other denim products at a “city factory” in Los Angeles.

Network of experienced and specialist suppliers

In order to ensure excellent processing quality and full availability of its products, HUGO BOSS works together with an extensive network of experienced and specialist suppliers. In fiscal year 2021, the number of suppliers of finished goods continued to decline as a result of the continuous optimization of the supplier portfolio. As a result, HUGO BOSS obtained finished goods from a total of 142 external suppliers (2020: 156) using 169 production facilities (2020: 185). The Group procured raw materials from 341 external suppliers (2020: 315) using 366 production facilities (2020: 338). The increase compared with the prior year is directly related to the expansion of own production at the Izmir site to include casualwear products as well as the general securing of product availability against the backdrop of pandemic-related shortages of materials.

HUGO BOSS aims at establishing and maintaining long-term strategic partnerships with suppliers. Within these long-term collaborations, HUGO BOSS also sees itself as an advisor that provides suppliers with support in the further development and professionalization of processes and workflows. Within the framework of its own “Manufacturing Excellence” program, HUGO BOSS invests in suppliers in a targeted manner in order to create an even more competitive value chain and further increase production efficiency together. In doing so, HUGO BOSS conveys important expertise in terms of personnel, processes, and technology, such as in the area of quality management and lean management. For closer networking between the Company and its suppliers, HUGO BOSS also established a digital collaboration platform to facilitate the efficient and rapid exchange of product information with suppliers.

Alongside economic criteria, HUGO BOSS attaches great importance to the careful selection of suppliers, in which social and environmental aspects play an essential role. The cooperation is based on respect for human rights, compliance with applicable working standards, and occupational health and safety. The HUGO BOSS Supplier Code of Conduct forms the basis for all supplier relationships and provides an important framework for the structuring of business activities. The Company reviews compliance with the Code of Conduct in the form of regular audits in the production facilities and supports its suppliers with training on relevant topics. At the same time, the Company is strongly involved in the further development of international standards and plays an active role in external collaborations to shape sustainable textile supply chains. Combined Non-Financial Statement, Respect for Human Rights