Case Analysis – Analysis – Chapter Chapter 6 VF Brands: Global Supply Chain Strategy 1
Xueyan Mou (88489)
In-House Plant to Extensive Outsourcing
VF was a traditional vertically integrated apparel c ompany when it made jeans in its own plants, it was for which it had been known for. The company then went to an outsourcing strategy when it pursued a global marketing strategy featuring branded life style products. The change of strategy towards massive outsourcing was initiated for several reasons. The number one reason was that outsourcing to low cost countries around the world raised companies’ gross margin, margin, as the production of garments was generally labor intensive and had low barrier to enter. It also saved companies extra costs (transportation and tax costs) by direct productions in sale target countries, especially with restriction of quota and tax tariffs. As a result of o utsourcing, garments companies could focus more on its core business including garment designing and brand building.
Global Supply Chain Challenge
While what the majority of apparel companies we re doing was to source where labor was in incredibly cheap, it was not going goin g to be the differentiator anymore. VF needed nee ded to look for others
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This case was prepared by Professor Roger A. Kerin, of the Edwin L. Cox School of Business, Southern Methodist University. Copyright © 2011 by Roger A. Kerin.
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benefits like speed to market, material utilization, lower inventories, less work in process and lower cost to quality, with still being able to lower co st and minimizing investments in fixed plant and equipment, as investments were better utilized and had high ROI when used in building brands and improving retail operations. What Chris Fraser, President of Supply Chain International for VF Brands, should tackle was h ow to incorporate benefits from both traditional outsourcing and internal manufacturing, and eliminate their risks and shortcoming as the same time. “Packaged Sourcing”
Outsourcing production to third parties as described as "packa ged sourcing" had the benefit of low cost, as companies could choose between a number of suppliers in different locations based on economic factors, such as labor cost and transportation costs, and trade quota or tariff considerations to get cheapest price for finished goods. Also it allowed apparel companies to put more energy and investment of human capital and money in more critical fields like brand building and retailing. However, “Packaged Sourcing” also came with several risks that dragged VF away from higher efficiency of supply chain. Inflexibility of change was the first one. The apparel supply chains were very inflexible, as they usually needed to place the order 8 to 10 months prior to a particular season, and wouldn’t have enough time to add on more or cut down order by the time they received feedback from customers when the products actually hit the market. Retailers suffered the costs of both excess inventory and stock-outs. Secondly, lack of coordination/trust, or price-war of suppliers. Most contracts between apparel companies and apparel suppliers were short-term (mostly for one season), and suppliers needed
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to re-bid for contract each season as companies were aggressively looking for even low er cost locations and always bargaining with suppliers for cheaper con tracts. And suppliers kept production information from the apparel companies to avoid it being used against them in the bidding. As no order guaranteed and frequent change of production targets for suppliers, they usually tried to bid with as many companies as they could to diversify their risks, while these companies were competitors for most cases. Thirdly, kneeling down a clean deal with suppliers could be a time-consuming process, as there was no pre-set price list for different designs each season, contract prices needed to be renegotiated each time, even if there is only a slight change to the existing design. Fourthly, supplier often lacked the intention of p rocess improvement. Garment contractors operated on razor-thin margins, which made them invest little in process technology and productivity improvement. If they were to encounter technical issues or problems, they generally added more labor or scheduled overtime. Third Way Sourcing Strategy
The Third Way Sourcing was designed to be a halfway point between full integration and traditional outsourcing to make supply chain more efficient by building a true partnership with VF’s suppliers and integrating VF’s internal technical and supply chain expertise into external suppliers. By building and signing contracts of long -term partnership (such as an agreement on production of a specific product line of VF), VF would be able to achieve: Volume forecast for a number of years instead of just a season in the case o f traditional outsourcing; Keeping contracts from taking competitors’ orders in the same category; 3
Production lines dedicated to VF’s products, with investment in building, machinery, equipment, labor supervision, logistics services, and administrative infrastructure to manage high efficiency of the supply chain process; Flexibility from customized schedules and collaboration on process improvements; Higher efficiency of investment resulting from division of work and letting the suppliers specializing in manufacturing management with the help from V F (such as getting lower purchasing prices of raw materials by utilizing VF’s purchasing capability), and thus VF could better invest its money in brands and retail operations;
Recommendation – Sourcing Portfolio
Perkins felt the real benefits of the Third Way strategy had not even been seen yet, because they lay in the design process. He commented, “If you think about speed to market, which is always one of the challenges of the supply chain, about two-thirds of the time is spent in the product development process. Only one-third is the time it takes to go from the order to the delivery to the store shelf. I think we also need to focus on those first stages to see how we can shorten lead times.” The Third Way strategy had reached a critical cross-road. VF’s ambitious international expansion goals, particularly for Asia, meant that the y would need to bring on significant new capacity over the next several years. They could do that by expanding Third Way sourcing, expanding internal manufacturing, or by simply doing more traditional sourcing.
Even though we’ve seen all the benefits that Third Way Sourcing could bring, it also brought concerns including loss of flexibility, continued close of internal plants des pite their strong
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performance, and most importantly, sharing of VF’s hard-earned proprietary expertise with outside suppliers from other departments within VF. Despite the objections, Fraser and Green didn’t tr eat these as real concerns as they only focused on using the skillsets of internal manufacturing to improve supplier performance in terms of cost, quality, and speed without transferring VF’s proprietary of equipment, and they persisted on the Third Way projects.
In terms of staffing, instead of riffing existing experienced engineers who had been working in VF in-house plants for years, VF could actu ally utilize and let them participate in mentoring programs in which they could travel to new partner supplier sites and train local fresh graduate engineers and operators.
Further justified by financial results, Third Way actually achieved lower n et cost and shorter lead-time in both Bangladesh and Morocco in India. The only problem to counter was the instability of external parties as most of them were small sized and sensitive to economic movement, and VF could not have control of their overall financial and corporate management. Therefore, selection of suppliers to partner with was the most critical task to ac complish. The qualified suppliers should be in good stand financially and in a steady economic environment, on the condition that the suppliers were open enough to accept the new concept of “True Partnership” with VF.
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