“Lululemon: A Sheer Debacle in Risk Management” by Larcker, Larcker and Tayan

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Larcker, Larcker and Tayan of Stanford University have published an engaging short-case of operational failure escalating into a strategic debacle: Lululemon: A Sheer Debacle in Risk Management.

Lullulemon Athletica were aware of the operational risk faced due to having a limited number of fabric suppliers for their yoga pants. In Spring 2013 Lullulemon were also aware of customers claiming on social media that the quality of products made with the company’s proprietary Luon fabric had deteriorated. On March 18, 2013 Lululemon withdrew from sale women’s black yoga pants made from Luon fabric claiming that recent shipments had not met the specifications. The supplier disputed this claim, it was claimed by Lululemon that quality control had been tightened, and the products were restocked in June. The complaints started up again. The company chairman then went on television to blame the customers: “The thing is that women will wear seatbelts that don’t work [with the pants], or they’ll wear a purse that doesn’t work, or quite frankly some women’s bodies just actually don’t work for it. They don’t work for some women’s bodies.” The adverse reaction to this interview then led to Wilson issuing a video apology, but apologising to his staff rather than to his customers. This was then picked up by the mainstream media, feeding off social media complaints. So the debacle featured in a segment on ABC’s Good Morning America, with Lululemon refusing to comment.

This case is a beautiful example of how not to manage quality: the risk of quality failure wasn’t managed effectively and when the failure became apparent, the firm failed to take responsibility, allowing the reputation damage to snowball through social media.

Larcker, Larcker and Tayan, coming at this case as an example of corporate governance failure, identify four questions for companies managing operational risk:

1. How to close the gap between identifying risks and being able to manage them when they occur?
2. How can senior managers be sure that strategic risks are tracked and responded to?
3. How can perceptions shared on social media be monitored and acted on?
4. At what point does the significance of an operatioal failure reach a level that it should be dealt with at board level?

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