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* Venerable British firm under threat from nimbler rivals
* Core clientele increasingly fashion-conscious
* M&S hires former Next sourcing gurus, poaches other staff
* Bid to lift proportion of products designed in-house
By James Davey and Emma Thomasson
LONDON, March 4 (Reuters) - Shoppers usually blame dowdyclothes and tired stores for the painful decline of Britain'sformer retail powerhouse Marks & Spencer. But the partsof the business that customers never see could hold the key toits revival.
After hiring new designers, overhauling its online offeringand giving a facelift to stores, M&S still needs to push homeits most ambitious project: overturning more than a century ofretail history by taking full control of its supply chain.
The drive to design more products in-house and then sourcethem faster and more flexibly is a radical departure for acompany that, since its founding in 1884, has relied onthird-party suppliers to create, manufacture and ship most ofits garments.
Long-term relationships with those mostly British-basedfirms, based on big orders and long lead times, helped M&S keepprices down and build a reputation for quality.
But as its most loyal customers - women aged 50-plus - havebecome more fashion-conscious, the middlemen have hampered M&S'sability to quickly refresh supplies of fast-selling items beforeshopper interest tails off.
"There's a killing to be made if they can serve older womenbetter," said Patsy Perry, a lecturer in fashion marketing atthe University of Manchester. "Unless you have money to buydesigner clothes, it's hard to find what you want on the highstreet unless you want to look like your daughter."
Even as new M&S womenswear collections won praise from thefashion press, shoppers often found the clothes were sold out intheir size or were not appropriate for the weather.
In contrast, nimble retailers like Zara-owner Inditex, H&M and Next, which have more directcontrol over factories, replenish their stores faster and offera more frequent turnover of styles.
LEARNING FROM NEXT
Pressure mounted on M&S Chief Executive Marc Bolland after amild winter and delivery problems at the new online distributioncentre hit Christmas trading, leading to a 14th consecutivequarterly sales decline in the clothing side of the business.
But investors seem prepared to give Bolland more time afterhis revamp of the supply chain started to bear fruit.
M&S's gross margin - gross profit as a percentage of sales -rose 150 basis points to 53.7 percent in the first half of 2014,helped by sourcing gains, but still lags an estimated 64 percentat Next and 59 percent at Inditex.
While taking tighter control of the company's supply chainstarted several years ago, the final push is being marshalled byHong Kong-based brothers Neal and Mark Lindsey, whom Bollandappointed as joint sourcing directors last year.
The pair previously worked at Next, where they pioneered"virtual manufacturing", a process that enables designers toproduce patterns and layout plans for cutting fabric so they cangive precise instructions to distant factories.
Adopting the Next model is a big shift for M&S, which untilrecently ordered most of its stock through so-called fullservice vendors -- companies that designed, made, shipped andwarehoused products before sending them to M&S for sale.
Relationships with those suppliers often went back decades,and with one, Dewhirst, to the founding of the company: MichaelMarks borrowed five pounds from wholesaler Isaac Dewhirst tolaunch a chain of penny bazaars in the northern city of Leeds.Dewhirst also introduced Mr Marks to Tom Spencer.
As competition mounted in recent decades, M&S pushedpartners like Dewhirst to move production overseas: 78 percentof its general merchandise now comes from Asia compared to just22 percent from Europe, including Turkey, Italy and Britain.
M&S has already taken control in the last few years of mostlogistics for the 40,000-odd shipping containers it fills ayear, leaving detailed product design and factory liaison as thelast jobs to come in-house.
"All of us had to learn how to manage the supply chain, howto manage third-party logistics providers, how to managefreight, how to manage working capital on a much earlierpurchase than previously," said Zen Yaworsky, head of supplychain operations at M&S until 2010.
"M&S now have to develop negotiation capability to go into afactory and negotiate from a position of intelligence," saidYaworsky, who runs his own consultancy.
IN-HOUSE DESIGN
That is easier said than done, according to experts who usedto help M&S do just that.
"At a board level, it makes a lot of sense. At theoperational level, it is a lot more difficult," said Bill Mills,a textile industry consultant who used to manage factories forM&S suppliers Courtaulds and Coats Viyella.
"On the one level there are some cost savings, but on theother hand M&S will have to place resource in their buyingoffices, whether that be UK or local, to manage the factories.It is not a panacea."
M&S says it is already making big progress. It has halvedthe number of fabric suppliers in the last couple of years, soit can secure better prices at higher volumes from preferredmills.
Bolland, in the job since 2010, wants to increase theproportion of products designed in-house to 60 percent by 2017from 25 percent last year. He recently poached Next's head ofmenswear design Simon Hawksworth and last year hired two topbuyers from Next.
The first garments sourced by the Lindsey brothers arecoming into stores for the spring/summer season: "Spring/summeris bought at the moment with at least a lot more flexibilitythan it was done last year," Bolland told analysts in January.
A bigger proportion of orders will be left "open to buy"depending on demand and M&S is moving to deliver new products in12 phases a year, up from six to eight, with some coming on athree-weekly basis - closer to Zara-style "fast fashion".
But that is unlikely to be enough to regain the role ofBritain's omnipotent, omnipresent retailer.
"They recognise the need to be different, more flexible. Butthere is a new trading environment and they will probably end upstabilising the business rather than recapturing what it oncewas," said one former M&S manager who now works as a consultant. (Writing by Emma Thommasson, who reported from Berlin;Additional reporting by Tom Pfeiffer and Clare Baldwin; Editingby Mark Trevelyan)
