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LONDON (Reuters) - Shoppers usually blame dowdy clothes and tired stores for the painful decline of Britain's former retail powerhouse Marks & Spencer (MKS.L). But the parts of the business that customers never see could hold the key to its revival.
After hiring new designers, overhauling its online offering and giving a facelift to stores, M&S still needs to push home its most ambitious project: overturning more than a century of retail history by taking full control of its supply chain.
The drive to design more products in-house and then source them faster and more flexibly is a radical departure for a company that, since its founding in 1884, has relied on third-party suppliers to create, manufacture and ship most of its garments.
Long-term relationships with those mostly British-based firms, based on big orders and long lead times, helped M&S keep prices down and build a reputation for quality.
But as its most loyal customers - women aged 50-plus - have become more fashion-conscious, the middlemen have hampered M&S's ability to quickly refresh supplies of fast-selling items before shopper interest tails off.
"There’s a killing to be made if they can serve older women better," said Patsy Perry, a lecturer in fashion marketing at the University of Manchester. "Unless you have money to buy designer clothes, it’s hard to find what you want on the high street unless you want to look like your daughter."
Even as new M&S womenswear collections won praise from the fashion press, shoppers often found the clothes were sold out in their size or were not appropriate for the weather.
In contrast, nimble retailers like Zara-owner Inditex (ITX.MC), H&M (HMb.ST) and Next (NXT.L), which have more direct control over factories, replenish their stores faster and offer a more frequent turnover of styles.
Pressure mounted on M&S Chief Executive Marc Bolland after a mild winter and delivery problems at the new online distribution center hit Christmas trading, leading to a 14th consecutive quarterly sales decline in the clothing side of the business.
But investors seem prepared to give Bolland more time after his 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 percent at Next and 59 percent at Inditex.
While taking tighter control of the company's supply chain started several years ago, the final push is being marshaled by Hong Kong-based brothers Neal and Mark Lindsey, whom Bolland appointed as joint sourcing directors last year.
The pair previously worked at Next, where they pioneered "virtual manufacturing", a process that enables designers to produce patterns and layout plans for cutting fabric so they can give precise instructions to distant factories.
Adopting the Next model is a big shift for M&S, which until recently ordered most of its stock through so-called full service vendors -- companies that designed, made, shipped and warehoused 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: Michael Marks borrowed five pounds from wholesaler Isaac Dewhirst to launch 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 pushed partners like Dewhirst to move production overseas: 78 percent of its general merchandise now comes from Asia compared to just 22 percent from Europe, including Turkey, Italy and Britain.
M&S has already taken control in the last few years of most logistics for the 40,000-odd shipping containers it fills a year, leaving detailed product design and factory liaison as the last jobs to come in-house.
"All of us had to learn how to manage the supply chain, how to manage third-party logistics providers, how to manage freight, how to manage working capital on a much earlier purchase than previously," said Zen Yaworsky, head of supply chain operations at M&S until 2010.
"M&S now have to develop negotiation capability to go into a factory and negotiate from a position of intelligence," said Yaworsky, who runs his own consultancy.
That is easier said than done, according to experts who used to help M&S do just that.
"At a board level, it makes a lot of sense. At the operational level, it is a lot more difficult," said Bill Mills, a textile industry consultant who used to manage factories for M&S suppliers Courtaulds and Coats Viyella.
"On the one level there are some cost savings, but on the other hand M&S will have to place resource in their buying offices, 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 halved the number of fabric suppliers in the last couple of years, so it can secure better prices at higher volumes from preferred mills.
Bolland, in the job since 2010, wants to increase the proportion of products designed in-house to 60 percent by 2017 from 25 percent last year. He recently poached Next's head of menswear design Simon Hawksworth and last year hired two top buyers from Next.
The first garments sourced by the Lindsey brothers are coming into stores for the spring/summer season: "Spring/summer is bought at the moment with at least a lot more flexibility than 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 in 12 phases a year, up from six to eight, with some coming on a three-weekly basis - closer to Zara-style "fast fashion".
But that is unlikely to be enough to regain the role of Britain's omnipotent, omnipresent retailer.
"They recognize the need to be different, more flexible. But there is a new trading environment and they will probably end up stabilizing the business rather than recapturing what it once was," 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; Editing by Mark Trevelyan