When Michael Dumke took on the role of CEO at Otto International, the company where he started as a trainee many years earlier, he felt very lucky. At the time, the business was struggling, however, it has been a rite of passage for Michael, and nothing less than transformational for the company itself.
After starting out as a management trainee with Otto International in Hong Kong in 1990, Michael had positions in Thailand, Indonesia and Singapore before moving to Milan for the company in 2000. In 2004, he returned to Hong Kong, where he worked for Eddie Bauer and other companies before taking the reins as CEO at Otto International in 2011.
With 1,300 employees and 24 offices in the world’s major sourcing markets, Otto International has built a network of quality suppliers in the clothing, accessory, lingerie, footwear and home living industries, and is also noted for its quality control, audit and supply chain services.
Michael recalls his early experiences as CEO with some equanimity now, but at the time it was a challenging course. “I came in as CEO when business was not good and the company made losses, so the first item on the agenda for me was to achieve a turnaround. Fortunately, we achieved this. The company had tried to go down a different path in a lot of different businesses that were not really close to our heritage – we are a supply chain operation,” he says.
“Therefore, it was important for the Board to strengthen our heritage business and build a very strong relationship again with our customers because they felt that the company had moved in a different direction. That was really a culture change.”
Hermes-Otto has also reverted to its original name of Otto International. It is again focused on its strength as the front end of the whole supply chain. “That was really most important at the beginning for me as CEO – the turnaround, building a strong team globally and focusing on our customers within the Otto Group as well as the external customers,” Michael explains.
The middle man
Alongside his concentration on business rejuvenation, Michael never lost sight of the greater changes taking place in global business practices. Central to those, of course, is the online business and its demands for greater efficiencies and service.
“I call all of us ‘the middle man’ – whether you are in our market or a travel agent or housing agent. Everyone who is a middle man needs to change substantially; it’s a culture change. In the old days, when this kind of business started, the main job was basically just to make sure that your order arrived at the destination on time. We are now a service provider, not just a sourcing agent,” he explains.
“Everyone who is a middle man needs to change substantially; it’s a cultural change.”
Otto International works with many small suppliers, Michael says. “For the majority of our customers, the minimum order quantity (MOQ) is maybe only 100, 200 or 300 pieces, whereas customers like Adidas or Nike place orders of 200,000, 500,000 or one million pieces of a style. It’s a very different approach, but at the same time it’s an advantage, as online business goes very much in our direction because it needs much smaller MOQs.”
Michael has recalibrated Otto International’s approach to suppliers to ensure that materials sourcing, design, manufacture and delivery are always of the highest order, through strict audit and inspection regimes. This has paid dividends for Otto and its global customers.
“Our suppliers have to go through an audit process for social compliance and quality. If they don’t pass this stage, we will not work with them,” Michael explains.
“We make sure that we work only with factories that have the same understanding about social standards. So, that’s in our DNA, and we would never take a supplier on board, or an external customer who has different ideas about these things. We have vendors who have worked with us for 20 or 30 years, so we have long-term relationships, but we also have some new vendors.”
Otto International’s Hong Kong base is ideal for sourcing much of its requirements. Its major market is China, for roughly 35%, then Bangladesh and India with around 18%, and Turkey with about 10%. Vietnam is also important, Michael adds, but it plays a smaller role in the total market mix.
“I’m only as good as my team. I think that’s very important. I’m driving this change, but I’m a pretty easygoing and relaxed CEO.”
“China was by far more than 50% four or five years ago. Now, you see new directions,” he explains. “From South China, the business moved up to Shanghai and Qingdao. And now you see certain business has moved out of China – either it has moved out completely so that Bangladesh, India, Cambodia or Myanmar can take over, or it goes with one of the existing Chinese vendors, who are opening factories in Myanmar or Cambodia.
“Chinese vendors are feeling the heat, and because of price increases in China, they need to move westward. We even have factories close to Mongolia. So we have different developments as Chinese vendors find more efficient areas of production. Bangladesh has had most of the growth in the past few years and we have an office there with 150 people.”
There is a push, Michael says, for sourcing products closer to their final market destinations, for two main reasons – reducing costs and emissions, and the time taken to get them to market. “A big issue in our industry will be the onshore discussion – about being closer to the customer base. Our business is mainly in Europe, so onshore means Turkey, Portugal, Italy and Spain, where we have offices, or Eastern Europe.
“First of all, it’s the transportation, because everything is done by truck within one or two days so you save the long transportation time from Asia. Second, in Europe you have a lot of creativity, because these suppliers are doing a lot in product development and creativity.
“Environmental issues – CO₂ emissions and so on – are certainly an issue, because when you need a quick order you have to put it on a plane. Some customers think it’s better to place it in Europe because the total cost is probably not such a big difference, as air transport is expensive. So, onshore is a big topic for us, and that’s why we have a strong presence in Europe and Eastern Europe, because I believe in the next few years this will become even more interesting.”
But China remains the largest market for Otto International, and is likely to remain so for quite some time yet. “I don’t think this will change because when you look at the whole package – resources, capacities, logistics, flexibility – China has everything, whereas all other markets don’t have the separate resources to that extent, but at the same time, the share of Bangladesh, India and Turkey will further grow,” he says.
The digital divide
As for most other industries, the internet has changed forever the way Otto International does business. With online shopping comes a dramatic shift in the way retail customers expect to choose and receive their purchases. That has repercussions back up the line to Otto’s sourcing and procurement decisions.
“Digitalisation is a big issue, which will change our industry,” Michael says. “For example, we have a large department where we do 3D product development and also 3D fitting, which takes away completely in one day the whole sampling cost; here we don’t work anymore with samples.
“That’s pretty cool when you think about it, because you can develop a style in 3D and put it on an avatar – it looks like a model, but it’s not a real model. And you can move that picture online right away. So, you don’t have any material samples, you don’t have any costs for photo shooting and you do the whole fitting in 3D so you don’t need product samples. That’s definitely the future. So we are investing in this area.”
Online business also means that Otto International must reshape its own organisation to suit a global market. “It’s important that we are a global organisation,” Michael explains. “We really are the competence centre for our customers, so we are changing our organisation.
“Coming from a local office structure, we are changing the whole operation with full customer-centricity and building global customer teams who are taking care of the needs of customers on a global basis. That is, for us, a huge task because this will require a complete mindset change in our organisation, and this is currently what we are working on.”
The online jungle
Online businesses such as the Otto Group, Amazon and Alibaba have changed the whole landscape of retail business completely, putting pressure on retailers of all shapes and sizes to go multi-channel and address new customer expectations. That will be difficult for some, Michael says.
“I expect that some retailers and also brands might disappear in the next couple of years because they face difficulties changing their business to a multi-channel, or at least online, business. Expectations are very different because online requires a much faster turnaround and faster speed,” he notes.
“That’s why we are changing our organisation now so dramatically, because we have to make sure that we really support every single customer’s needs, because every customer’s order is different in terms of product, product lifetimes, and expectations. There’s not one fit for all anymore.”
Otto Group – a humble beginning
In 1949, Werner Otto established a mail-order company, Werner Otto Versandhandel (Werner Otto Mail-Order Company), and hired three staff.
The company’s first catalogue is comprised of 300 hand-bound copies of 14 pages with photos pasted into them showing 28 pairs of shoes. The company’s motto was ‘Trust for Trust’, and it was the first mail-order company to introduce payment by invoice.
Within 10 years, the company had 1,000 employees and an annual turnover of DM100 million. The first machine-printed catalogue of 28 pages offered an expanded selection of products to include briefcases, raincoats and trousers.
Head of the table
With a total staff of 1,300, Otto International needs strong direction from the top, but Michael prefers not to look at his role in quite those terms. Instead, he takes a more pragmatic approach of instilling an ethic of teamwork.
“As the CEO of this company, I’m only as good as my team. I think that’s very important. I’m driving this change, but I’m a pretty easy going and relaxed CEO. When I’m in my office, I’m very approachable,” he says.
Michael holds regular live streams with all offices globally for providing business updates, and staff can ask him unchecked questions at any time. He encourages open feedback in the organisation – it is not common in Asia to encourage people to speak up, he says, especially feedback to share failures and not just achievements.
“That is very important because you learn much more, from my point of view, from failures rather than achievements. I’m not saying we’re already there, but we are doing a lot in regard to this. We now have ‘chill-out’ areas, we have an open area where people can meet and we have much more colourful decor. These are all small things, but we want to make the environment better for our people and support the cultural change in our company also in this way,” Michael explains.
“You learn much more, from my point of view, from failures rather than achievements.”
“We even have home-office days and flexible working hours, which were, in the beginning, a huge issue here in Asia. For middle management that means loss of control.
“This culture change is not done. It’s a work in progress because we certainly have a lot of cultures, for example Chinese, Bangladeshis, Indians, Germans, and to change a culture in a company with long history is a challenge. But we see great progress in many areas and we are on the way to secure a truly global organisation. ‘People First’ is not only a slogan; we mean it, because our staff is our asset and everybody in our organisation is important for the success.
“That’s why, for me, it’s very important that everybody in Otto International understands ‘It starts with me’ – that means every employee needs to be engaged and involved in the change process, and certainly the management team has a special role by leading by example.”
That really does make Michael Dumke the man in the middle.
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