Sourcing and production

In order to meet the high quality standards of HUGO BOSS and to dress BOSS and HUGO customers perfectly for every occasion, the sourcing of high-quality fabrics and trimmings has top priority. The goal of offering the best products in the industry directly contributes to the Company’s vision of being the most desirable fashion & lifestyle brand in the premium segment. Group Strategy

In terms of value, 17% of the total sourcing volume was produced at the Group’s own facilities in 2018 (2017: 18%). The remaining 83% comprises products sourced from independent contract suppliers or sourced as merchandise (2017: 82%). The slight increase in the external sourcing volume reflects the rising demand for casualwear and athleisurewear. HUGO BOSS primarily sources these products from external suppliers.

The Company derives important expertise in the ongoing development of production technologies and quality standards from its own production facilities. The four own production facilities are located in Izmir (Turkey), Metzingen (Germany), Radom (Poland) and Morrovalle (Italy). Izmir is by far the largest own production site. Primarily high-quality businesswear products such as suits, blazers, shirts and coats as well as the full range of womenswear are produced here. The Technical Center in Metzingen is mainly used by the Company to develop and produce prototypes such as sample and material testing pieces. Tailor-made suits and limited collections such as the “Made in Germany” collection presented in 2018 are also produced at the Metzingen site. High-quality business shoes are made in Radom and Morrovalle.

Within Eastern Europe, Turkey accounts for the largest share of sourcing and production volume. Of the sourcing and production volume in Eastern Europe, roughly 30% is attributable to the Group’s own production facility in Izmir. China is by far the largest sourcing market in Asia.

HUGO BOSS attaches key importance to the careful selection of suppliers and the establishment and maintenance of long-term strategic relationships. In addition to economic criteria, strict compliance with internationally recognized environmental and social standards is of crucial importance in this respect. In countries where the national statutory requirements fall short, the HUGO BOSS Social Standards set a minimum standard. Product quality, a key element in the selection of suppliers, is comprehensively analyzed and evaluated in advance in test orders. Last year, HUGO BOSS procured finished goods from 180 external suppliers (2017: 175) using 210 production facilities (2017: 202). The Company procured raw materials from 312 external companies (2017: 357) using 334 production facilities (2017: 371). In the interests of risk mitigation, the Company ensures as balanced distribution of sourcing volumes as far as possible. Thus, the largest independent supplier accounted for only 9% of the total sourcing value sourced in 2018 (2017: 9%). This relates to a long-term partnership for the sourcing of high-quality casualwear and athleisurewear products. Combined Non-Financial Statement, Respect for Human Rights Report on Risks and Opportunities

The fabrics and trimmings sourced by HUGO BOSS are mainly outer materials and inner linings, buttons, yarns and zippers. The most frequently used materials are cotton, wool and synthetic fibers. The Group purchases most of its required fabrics from suppliers in Europe. HUGO BOSS works with long-standing partners, mainly from Italy, particularly in the area of suits. For products made under contract, HUGO BOSS provides suppliers with the fabrics, trimmings and the required patterns. In this way, the Company ensures that the manufactured products meet its high quality standards. The suppliers, which are mostly based in Eastern Europe, primarily produce businesswear requiring high levels of production expertise and technical equipment. The share of products made under contract in the sourcing volume remained unchanged at 38% (2017: 38%). The merchandise sourced by the Group is primarily composed of athleisurewear and casualwear products. In this case, the suppliers, which are mostly based in Asia, Eastern Europe and Africa, only receive the patterns but they source the materials and trimmings themselves. Compliance with the high quality standards of HUGO BOSS is ensured by regular audits. At 62%, the share of merchandise in the sourcing volume is at the prior year’s level (2017: 62%).

In 2018, the own production site in Izmir has made further progress in its transformation to a “smart factory.” The target is to create a full-scale “digital twin” of the facility, making it possible to simulate the production process before it actually starts. In 2018, the focus was on the generation and analysis of important production data. HUGO BOSS was thus able to gain important insights into measuring data in order to predict potential defects in a production machine or possible production errors with a high degree of probability. On the basis of this analysis, employees are optimally assigned to the respective work steps with the target of increasing quality. This way, error-free production could be increased by more than 20% straight away. In order to optimize further defect detection during seam sewing, HUGO BOSS has developed a camera system that automatically detects missing stitches and thus avoids reworking. This system will be rolled out to other machines in 2019.

Ensuring high quality standards not only plays a role in the company’s own production, but a continuous quality control and improvement process also takes place within the framework of numerous initiatives. Thus, members of the Managing Board and product managers meet for monthly round tables and regular quality walks to discuss a wide range of different quality aspects. The aim of the round tables is to analyze products with qualitative irregularities and use the improvement potential identified for future product development. The quality walks evaluate individual product groups in terms of workmanship, fit, design, material and trimmings with the aim of identifying further potential for optimization. In addition, wearing tests are an important tool for testing products under real conditions and for obtaining direct customer feedback. The tests last several months and are backed up by regular feedback discussions. Customer surveys are also used to compare the Company’s quality expectations with customer perceptions.

HUGO BOSS issues its partners standardized quality, workmanship and process manuals to ensure that they meet the Company’s high quality standards. In addition, HUGO BOSS regularly conducts training courses on aspects such as cutting and production management and technology at the suppliers’ production facilities. Compliance with production standards is monitored by controls that are integrated into the production process as well as regular samplings. The focus is on fit, workmanship and dimensional accuracy. Quality criteria are also included as an integral part of the semi-annual supplier assessments.