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Majority of production by independent suppliers

As a company with international production activities and business operations, HUGO BOSS relies on well-rehearsed, standardized and system-enabled sourcing and production processes as a key success factor. This is the only way of ensuring the timely availability of goods on the shop floor and the outstanding quality that customers of HUGO BOSS products expect. 20% of the total procurement volume is manufactured by HUGO BOSS’ own factories (2013: 20%). The remaining 80% comprises products sourced from independent contract suppliers or as merchandise (2013: 80%). As the Group produces a substantial part of its classic tailoring range in-house, it secures and continually expands crucial expertise, further develops quality standards and optimizes the availability of goods.

The Group’s own production facilities are located in Izmir (Turkey), the Group’s largest production facility, Cleveland (USA), Metzingen (Germany), Radom (Poland) and Morrovalle (Italy). The Izmir plant mainly produces coats, suits, jackets, trousers, shirts as well as tailored womenswear across all product groups. Apart from prototypes, sample pieces and individual orders, the Metzingen site mainly produces suits, jackets and trousers in small series. This is also where HUGO BOSS tailors its Made to Measure suits. Production activities in Radom and Morrovalle are focused on shoe manufacture. The plant in Cleveland (USA), where suits for the American market had been produced to date, will be closed in the first half of 2015 based on a comprehensive site analysis. The volume so far manufactured in Cleveland will be relocated to own production facilities and existing Group suppliers, respectively. In contrast, capacity at the Group’s own production facility in Izmir are to be increased in 2015 with the construction of a new production hall. This underscores the Group’s commitment to concentrating crucial production expertise at a smaller number of larger locations.

Strategic management of the supplier network as a success factor

HUGO BOSS offers a wide range of apparel and accessories in the premium and increasingly also in the luxury segment. Given the resulting complexity of the range, it relies on a sufficiently large network of experienced and specialized suppliers. The number of suppliers was reduced again last year through optimized capacity utilization. In the areas of merchandise and contract manufacturing, for instance, the Group partnered with around 280 suppliers in 2014 (2013: 300). The sourcing volume is generally distributed across a global network of suppliers in order to spread risk and maintain the greatest possible independence from individual procurement markets and producers. The largest single independent supplier accounted for only 8% of the total volume sourced by the HUGO BOSS Group last year (2013: 7%). Report on Risks and Opportunities

Quality requirements the most important factor in the selection of suppliers

HUGO BOSS imposes very demanding requirements on its suppliers and works exclusively with carefully selected partners. The most important criterion in the selection of suppliers is the ability to meet the high quality and finishing standards. Additional key criteria include the supplier’s reliability, technical equipment and innovative capacity, financial robustness and cost efficiency. Strict adherence of production sites to the social standards contractually agreed upon is a non-negotiable precondition for the establishment of a business relationship. The observance of quality and social standards is monitored in regular on-site audits. Sustainability

Sourcing modes depend on product groups

Sourcing activities are broken down into the procurement of raw materials, contract manufacturing and purchased merchandise. The raw materials sourced are mainly fabrics but also include additional items such as lining, buttons, thread and zippers. The majority of raw materials processed in-house or under contract come from Europe. Fabrics are predominantly sourced from long-standing partners in Italy.

Coats, sportswear jackets, suits, jackets and trousers are primarily made under contract manufacturing arrangements. In these product groups, HUGO BOSS mainly works with companies in Eastern Europe. For products made under contract manufacturing, the supplier is provided with the requisite patterns as well as the fabrics and other components. By contrast, sourcing in the area of sportswear has a greater focus on merchandise, which is mostly sourced from Asia, Eastern Europe and North Africa. With this kind of sourcing, suppliers obtain the necessary patterns from HUGO BOSS but independently source their raw materials. With the exception of the classic shoe collection that is produced at the Group’s own factories in Italy and Poland, the product categories shoes and leather accessories are mainly sourced from business partners in Asia and Europe.

Eastern Europe remains most important sourcing region

Measured by value, almost half of all HUGO BOSS products are produced in Eastern Europe and Turkey (47%; 2013: 49%). The Group’s own factory in Turkey plays a leading role in this respect, accounting for 15% of the total volume sourced (2013: 15%). Asia is the source of 33% of products (2013: 32%), and China is still the most important supplier country in this region. The remaining goods are obtained from Western Europe (11%; 2013: 10%), North Africa (5%; 2013: 6%) and the Americas (4%; 2013: 3%).

Regional split of sourcing and production volume (in %)

Regional split of sourcing and production volume (in %) (pie chart)

Establishment of strategic relations with suppliers of crucial importance

The Group has a keen interest in maintaining long-term strategic relations with its suppliers. Joint efforts to enhance manufacturing expertise are essential in order to ensure the excellent finishing quality for which HUGO BOSS products are renowned worldwide. Precise synchronization between the production companies and technical development departments within the HUGO BOSS Group is essential in order to enable a quick response to market trends and minimize lead times. Production-related considerations are factored into the product development process at a very early stage, for instance. Feedback from suppliers on the fabrics and patterns processed in the last collection is taken into account in new designs. Innovative processing techniques are repeatedly tested in close consultation with production partners so that new developments in processes, IT systems and machinery can also be rolled out at partners’ facilities once testing is complete. Last year, for example, a manual on processing down-based filling was prepared in conjunction with selected suppliers and machinery for automatically filling down products was installed at the participating suppliers’ facilities. Research and Development

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