Objectives. The Role of Sourcing. Beyond Design 3/1/12

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1 Copyright 2009 Fairchild Books Beyond Design By Sandra J. Keiser and Myrna B. Garner PowerPoint developed by Elizabeth Law All rights reserved. No part of this presentation covered by the copyright hereon may be reproduced or used in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems without written permission of the publisher. ISBN: GST R Objectives The Role of Chapter 13 Beyond Design Understand how sourcing decisions affect product development process, particularly production calendar and price point Understand options in determining appropriate sourcing mix Be aware of how global trade agreements influence sourcing decisions 3 4 1

2 Objectives Learn to evaluate potential sourcing partners Understand how sourcing decisions influence product s price The Role of Today s consumer expects wide array of apparel products that provide both style and quality at good value Developers and retailers need to meet demands while remaining profitable Apparel industries part of global production system to use worldwide resources and create value for consumer 5 6 The Role of Manufacture means to make, but many apparel manufacturers no longer make apparel; they are virtual manufacturers - practice of procuring materials and production elsewhere mix combination of resources utilized for production The Role of In the last few years, the percentage of imported apparel sold in the U.S. has increased from 60 percent to over 90 percent 7 8 2

3 Options Must be dynamic network of sourcing partners provides balance of capacity, flexibility, value, and efficiency All partners must be able to manage continual change in global environment Includes several types of domestic and offshore sourcing options to meet these changing needs Domestically Domestically owned more control, but difficult to stay price competitive Domestic contracting manufacturing facilities in same country as product developer (but not owned by developer) Advantages: quick response, ease of communication, quality inspection less costly, shared paradigms, no risks with quotas, etc Offshore Predominant model for acquiring production capacity Most nations have apparel production, with many offering unique qualifications (lower costs, expertise or availability of materials and labor) U.S. imports from almost all nations, unless government embargo against them Where Goods Are Sourced European Union (EU) small percentage of U.S. market Source of design trends and higher-priced goods Woolen tailored goods from Eastern Europe China by far largest supplier Some nations quickly gaining market share (Vietnam)

4 Rationale for Offshore Cost-Saving apparel industry is laborintense; requires many workers in low-paying locations with otherwise high unemployment to complete each product Source fabrics close to production site to save time and cost Drawbacks Understanding design concepts Understanding figure types of consumers here Interpreting quality standards Alternatives Domestically Owned Offshore Facilities Increase control of production processes and scheduling Risks and responsibilities initial investment, political climate, finding employees, fixed asset Opening plants in free trade zones, which allow for duty-free movement of equipment and supplies, avoids some risks Alternatives Joint Ventures shared ownership of facility with business based in another country Less risky Offshore owners know culture and legalities Capacity guaranteed, more control Start up cost lower and time less, local access greater Alternatives Licensing Domestic licensing extends brand value without having to produce it Major brands can use name recognition by granting rights to use their label to companies with complementary core competencies Receive a royalty in return for use of name or symbol

5 Alternatives Licensing (cont.) International licensing alternative to exporting, establishes presence in global markets without having to manufacture offshore Contract with business partner gives right to use brand name The licensee (producer) does all marketing and distribution The Role of in Product Development Firm s sourcing team identifies risks in quality, timing, or price; tracks costs to final production, works with contractors Contractor prices quoted as free on board (FOB) ownership transferred to importer when goods are loaded on transporting vessel; importer pays shipping Landed price includes total product cost plus shipping and duty Strategies Determined by strategic plan and marketing strategy Prevalence of offshore sourcing major stimulus to deverticalization in U.S. Domestic developers concentrate more on Product development Brand building and marketing Outsourcing production Strategies Off-shore contractors becoming more vertical Going beyond production Offering services such as patternmaking and grading Evaluate Core Competencies These will determine sourcing requirements Experience levels of product development team affect sourcing needs

6 Levels Cut, Make, and Trim (CMT) Utilize domestic or offshore contractors for cutting, manufacturing, and finishing garments Product developer provides Designs Pattern Fabrics Control over creative Eliminates product developers financial investment in factories and labor 21 Levels Full-Package Suppliers Contractors, trading companies or agents Source materials Provide all other services Design Patternmaking CMT Quality assurance Packaging and shipping Major burden of financing on contractor Developer files letter of credit to pay creditor once goods are loaded on vessel 22 International Trade Policy A Brief History of International Trade Policy Historically relied on tariffs and quotas to level playing fields between developed and developing countries; protected domestic industry and enabled it to complete with lowcost imports Tariff tax on imported goods assessed by the country of import A Brief History of International Trade Policy Quota annual limit on the volume of a product (by category) shipped from exporting country to importing country Embargo prohibition from importing products from exporting nations Countries began negotiating bilateral agreements (between two countries) to set quota levels

7 A Brief History of International Trade Policy History 1947 General Agreement on Tariffs and Trade (GATT) signed to liberalize trade, create more global markets 1995 World Trade Organization (WTO) replaced GATT as permanent organization steep rise in Chinese exports caused re-institution of protective quotas on specific Chinese products Regional Trade Blocs Seek to develop loyal trading partnerships in free trade climate within region that shares strategic concerns Prevent flood of increased imports from lower-wage countries, to protect manufacturing in region, to encourage regional trading after quota restrictions eliminated Regional Trade Blocs The Americas The North American Free Trade Agreement (NAFTA) Eliminates tariffs and quotas over 15-year period in Canada, U.S., and Mexico Regional Trade Blocs Europe European Union (EU) 27 European countries act as a single internal market, while retaining political autonomy Adoption of common currency, the Euro (except in Britain, which kept the pound) Free trade among member nations; negotiating with other blocs

8 Regional Trade Blocs Asia Association of Southeast Asian Nations (ASEAN) Asian Free Trade Area (AFTA) 1992 Asian Pacific Economic Cooperation (APEC) 1989 includes members bordering Pacific Ocean beyond Asia Current Status of U.S.Trade Policy Quotas on Chinese apparel were extended through 2008 Pursuing, approved many bilateral trade agreements with individual nations Multilateral agreements African Growth and Opportunities (AGOA), etc. Final decision on duty charges by Customs and Border Protection (CBP) Evaluating Options Take stock of strategic position and evaluate how sourcing will affect it Each operation evaluated in effectiveness relative to core competencies and channels of distribution Evaluating Options Political Stability and Economic Climate Welcomes foreign investments Fair labor and wage practices Stable economy Stabilizing influence on developing countries

9 Evaluating Options Infrastructure Transportation and communications system Resources for both labor and management Quality-of-life for company representatives Evaluating Options Costs Not only lowest wages to consider Identify partners for long-term; once established, protect investment Costing concerns hidden Ability of contractor to finance materials and reserve quotas Evaluating Options Quality Standards Skill of workforce (Asia versus Latin American) Caliber of management personnel Accuracy of written communications and instructions from product developer (specs and samples) Contractor s capacity limits Evaluating Options Production Capabilities Asia textile innovation, workable minimum yardage, excellent sewing skills China largest exporter of apparel in world Latin America close proximity to U.S., quick response time, competitive labor, free trade, but lacks sewing skills and high-caliber management pool

10 Evaluating Options Response Time Timely delivery is key Responsibility is two-way street (example: zippers) Success of Zara and H&M has been due to speed-to-market strategies Evaluating Options Working Conditions Human rights guidelines serious consideration; sensitivity in U.S., negative press Worldwide Responsible Apparel Production (WRAP) International Labor Organization (ILO) Evaluating Options Channels of Communications Accurate communication of: Standards and specifications Honest and complete quotes Status of lab dips Fabric and garment testing Prototype and product samples Electronic information sharing has diminished physical distance in offshore sourcing 39 10