Supply Chain Configuration

Read this article, which examines the challenges western nation manufacturers currently face. Specifically, it covers firms in industrial products, toys, fast fashion, and designer furniture.

Methodology: A framework for network configuration

Case-study company 3 - Fast fashion

The fast fashion company is a leading player in its field. Just a decade ago, it could be described as a traditional production company; however, the competitive environment has made it necessary to change the profile of the company. The changes involved a transition from production to sourcing, which has had a number of implications for the operations capabilities of the company. The operations governance has changed from the tight control of the production process with total control over materials to trimming the products to a set-up based on arms-length contractual relationships. As the company started this journey, it lost control of the piece goods, reducing the activities to trimming, which is associated with buttons, zippers, and interlining. With the closure of the last production facilities in 2005, the company's role was reduced to design and quality control. The finished items are today sourced from suppliers based in China/Hong Kong with 70% of the volume, Bangladesh with 15%, and India with 10%. The remaining volume is purchased from Pakistan and Vietnam. The changes in the production platform were mainly driven by an increased price-sensitive market. Even though aspects such as Corporate Social Responsibility, ecology, and clean and environmentally friendly products have become more important, price remains the most significant parameter when choosing suppliers. This is also the reason why production is moving from China to Bangladesh, Vietnam, and Pakistan. The COO predicts that within three years, the volume share will change so that China delivers 40%, Bangladesh, 20%, Vietnam, 15%, and Pakistan, 10%. There are two main reasons for moving the production: (1) access to cheap materials and (2) cheap labor. Wages in Pakistan are higher than in Bangladesh and Vietnam; however, they are one of the largest producers of cotton and fabric, which entail low material costs. In China, the sewing facilities are moving from the traditional production areas such the Pearl River Delta to more remote areas, where the labor cost is lower. The old facilities work as shell companies, which aid in establishing and managing the new facilities while handling the customer relations.

Currently, 200-225 suppliers are used, 3-4 of which are regarded as main suppliers with a volume turnover of 10-20%. They are also the only suppliers where general or framework agreements have been made. The agreements imply that the company promises to purchase a certain share of the production volume, which may ensure a faster response to market changes. However, this conflicts with normal practice of autonomous individual brands. It becomes difficult for the individual brands to control such things as quality and price levels in accordance with brand identity. This practice ensures that the division of responsibility is very clear when something turns out either above or under budget. However, the general tendency is to have fewer suppliers and to increase the number of framework agreements in order to gain access to the right prices and better-performing suppliers.

The focus has changed from production to development of new collections and sourcing, which have now become the heart and soul in the company. The other leg for a successful business is being able to create benefits from high volume, hence being able to source at the right price at the right quality from the right location. The activities performed by the brands can be summarized to design, product development, sourcing, selling-in, and whole sales management. Selling-in includes preparing agents for selling the products to the retail link. Wholesale management encompasses activities related to supporting the retail units and includes follow-ups on sales, local accounting, branding, and advertising.

Sewing and fabricating cloth are very labor-intensive tasks, as machines do not possess the flexibility required for trimming the cloth to the right dimensions. The task of sewing has not changed significantly since the introduction of the sewing machine. Thus, the manufacturing of cloth has two significant cost drivers: (1) labor and (2) raw material. Since consumers are very price-sensitive, the pursuit of ever lower costs has had an unavoidable impact on the textile and clothing industry's internationalization process.

As the company started to shut down its factories in Denmark, new plants were established in southern and Eastern Europe. At the same time, it started to source from external partners for the first time. Partnerships with tailors were made in Yugoslavia, Portugal, Greece, Morocco, Albania, and the Baltic countries. During the same period, the company decided to expand its business scope to cover more customer segments, as they believed that the old brand, with its up-market position, could not create sufficient growth. The purpose of introducing new brands was to capture a larger share of the clothing industry. This was done by acquiring and establishing new brands, which were structured like individual companies. The process of developing new brands has continued since then, and today the group has 17 individual brands in its portfolio. The same applies to the sourcing activity, which has become a central parameter for success. Due to the never-ending goal of reducing costs, the internationalization and relocation of activities have continued. With the economic liberalization of China, the fabrication of cloth moved to the Pearl River Delta and Southeast Asia. Today, cloth manufacturers have moved to Vietnam, Bangladesh, Pakistan, and more remote areas in China.

In 2008, the company closed down its last production facilities in Poland and Bulgaria. Today, the activities are focused on the input and output ends of the value chain. The restructuring of the company was intended to create a service platform that could support and release resources in order to enhance value-adding activities. These include brand development, design collection, sourcing, wholesale management, sales, and marketing. The COO recognizes that the competitive situation in the textile and clothing industry forces the company to continuously trim and develop the value-adding activities. However, he also recognizes that the activities related to the input of the value chain are difficult to copy, as they require intangible knowledge about Scandinavia fashion, trends, and market needs. In addition to the sudden changes in fashion, the frequent relocations of production sites to low-wage areas have determined the locations of companies in the upper right cell of figure 3. Furthermore, the strategy of supporting the growing number of individual brands in defining and maintaining their unique identify calls for the loose coordination of the operations network.

The case illustrates how competition with respect to price leads to frequent shifts in production sites. This calls for a production engineering capability to quickly establish production at a new site, often in a new country, and it identifies the importance of the strategic role of benchmarking and ramp-up. Also, a frequent reconfiguration of the network structure is called for.