Snapshot: Sewing Up the Apparel Supply Chain
Weak supplier relationships, restrictive trade regulations, and brand counterfeiting can put a wrinkle in garment transport. How do apparel shippers keep from getting tied up in knots.
The pants you are wearing were made in China, your shirt in Vietnam, socks in India, and that's a fine jacket imported from the United Arab Emirates.
U.S. apparel companies were driven to global sourcing by two fundamental realities: consumer demand for low prices, and the inability to automate significant parts of production. While some brands have developed expertise in managing long-distance, outsourced relationships, others find plenty of room for improvement.
Apparel runs the gamut from high fashion to uniforms to sports garments. But all companies share the pressure to shorten cycle times, drive down inventory costs, and keep styles fresh and in stock.
Apparel companies are universally challenged to continuously develop unique products, produce and transport them quickly and at low cost, and meet retailer timetables and consumer demands.
"The need to differentiate themselves from competitors via unique designs and speed to market is an apparel company's biggest supply chain challenge," says Paul Muller, senior vice president, global air freight product at Ozburn-Hessey Logistics' Barthco International Division, a third-party logistics company headquartered in Brentwood, Tenn.
While the customer may be king, apparel companies must also satisfy additional audiences—U.S. Customs, which seems to pay particular attention to the apparel market; public and media pressure to be more socially and environmentally conscious; and retailers growing more stringent about quality, price, and delivery times.
Hot Topics in Apparel
Strengthening Outsourcing Relationships
Apparel companies' relationships with contract manufacturers in low-cost countries have historically been transient. Deals sometimes last only a few months as brands continuously pursue the lowest cost. On average, one-third to three-quarters of an apparel company's contractor portfolio turns over every year.
But this relationship-hopping comes with a price: poor product quality and contractors who are unwilling to invest in enhancing operations.
"Flitting from contractor to contractor hinders flexibility, hurts quality, and invites social compliance and visibility risk," says David Aquino, research director of the Industry Value Chain Strategies Service at AMR Research, Boston.
Some brands are ameliorating this risk by taking a more strategic approach and pledging longer-term commitments. They're also putting more feet on the ground—either their own local personnel or in-country logistics or sourcing partners.
They're hoping a rationalization of suppliers and longer-term deals will build the trust required to spur contractors to invest in technology and equipment, boost quality, and prioritize their work.
Apparel companies are also setting up supplier portals to enhance long-distance communications. The most successful companies build global sourcing infrastructure slowly and methodically, rather than rushing in, Aquino says.
"We prefer to stay with the factories we have good relationships with," says Lisa Kuhns, account manager at The S Group, Portland, Ore., which maintains offices in major production countries to offer a local presence to apparel companies lacking the resources to build infrastructure themselves.
"Having strong relationships gives us better negotiating power, and helps hold down prices on behalf of apparel companies," Kuhns says.
In addition, apparel companies are getting more involved in raw materials sourcing, a task previously left to contract manufacturers. It's a strategy designed to shore up quality, which tends to suffer in the move from factory to factory.
Pinpointing New Low-Cost Countries
Rising prices in southern China are driving apparel companies to new low-cost locations throughout Asia, and focus has begun to shift to African and Pacific Island countries. But sourcing from these countries can be risky because they lack apparel production training and infrastructure.
"Critical mass has to build up before large air and ocean carriers can offer fixed-day service out of a new location," says Tom Wyville, vice president of marketing for FMI, a Carteret, N.J.-based 3PL.
It's a challenge to move to less costly, industrialized areas without higher transportation costs wiping out the savings. 3PLs and sourcing partners are helping apparel companies by opening local offices that offer services to hold down logistics costs and provide visibility and quality control. Logistics strategies include blocking out space with air and ocean carriers and operating consolidation centers.
But the number of new sourcing locations is finite. "The world is round, and eventually you come back to where you started," notes Mark Cohen, CEO of Tracy Evans Ltd., an apparel company that has returned to sourcing from Central America after a brief shift to Asia.
Smart apparel companies operate multiple supply chains, balancing near-shore with distant sourcing locations, and maintaining reserve capacity to meet unexpected demand.
Divert in Transit, DC Bypass, and Transloading Strategies
Taking days out of supply chain cycle time can be essential in feeding a new trend.
To cut delivery time, some apparel companies use consolidator facilities in Asia to collect multiple manufacturers' shipments into a container for a single customer, or to sell one customer a full container. They then bypass the manufacturer's U.S. distribution center and deliver directly to the customer's DC.
But coordinating that maneuver is tough. To discourage companies from ducking tariffs by manufacturing in one country and shipping out of a less-restricted one, Customs requires reams of data on the source of each order in a load.
Because trends are so volatile, retailers want to delay decisions about how to allocate a new garment order across stores. That's challenging supply chain managers to be flexible in how they pack and move goods.
"There is a big demand for reallocating in transit," says FMI's Wyville. "Companies that have supply chain visibility at origin can make diversions, reallocate in transit, and cut delivery time."
Another timesaver is transloading—terminating the ocean container at the port and moving goods onto domestic trailers—to avoid delays associated with rail. Transporting sealed containers to inland ports for Customs clearance also helps avoid port congestion backlogs.
Some fashion-forward apparel companies catch trends by employing a combination of ocean and air transport. An initial shipment moves by air, then a similarly designed item follows by ocean carrier at a lower price point to sustain sales.
Free Trade Agreements and Tariffs
The impact of free trade agreements, tariffs, and Customs regulations are a constant concern for the apparel industry.
"U.S. Customs is currently coming down hard on the textile industry," says Gloria Columbe, textile team leader and licensed customs broker for St. Albans, Vt.-based logistics service provider A.N. Deringer. "It's one of the most monitored industries."
Quotas on China textile products conclude at the end of this year, but the possibility of new quotas or other restrictions looms whenever evidence of dumping arises.
For example, in April the U.S. Commerce Department said it will impose a five-percent tariff on cotton socks imported from Honduras for six months to protect U.S. manufacturers. Moves like this make it difficult for apparel companies to project costs.
A new controversy is brewing over a U.S. Customs and Border Protection proposal, made in January, to eliminate the "first sale valuation." Importers use the first sale rule to reduce their duty payments.
Ordinarily, an importer declares the customs value based on the price the importer pays to its vendor. Under the first sale rule, however, the importer declares the customs value based on the lower price the vendor pays to the manufacturer.
"This rule has been followed for more than 14 years based on well-established court decisions. Customs is proposing to eliminate the first sale rule, and instead require Customs value be declared based on the last sale prior to importation of the goods into the United States," according to The Foreign Trade Association of Southern California. This move could significantly impact duties paid.
Fighting Counterfeiting and DiversionApparel is a tempting target for counterfeiters. Protecting the brand becomes significantly more challenging as apparel companies outsource production.
"There is a low barrier to entry for manufacturing apparel. All you need is a sewing machine and relatively unskilled labor," notes Paul Chamandy, vice president of new business development for Avery Dennison, a Pasadena, Calif.-based maker of pressure-sensitive labeling materials that integrate brand protection features.
A comprehensive brand protection strategy might include tightly controlled label production and application, separate manufacture of sub-components, use of specialized or serialized tickets, and visibility to ensure product flows through authorized channels. It's also tough to build trust with contract manufacturers when factory turnover is high.
"Companies that are most successful at protecting their brands invest a lot of time training Customs on their security measures and supply chain," says Chamandy, so the agency knows to question goods that fall outside those guidelines. "Data analysis helps detect abnormal trading patterns."
RFID has yet to take hold as an anti-counterfeit tool. "Many apparel companies can't justify the cost solely for the purpose of brand protection," says Chamandy. "As item-level RFID tagging goes mainstream for inventory visibility through the supply chain, however, using it as a brand protection tool will certainly follow."
Many retailers want to cut out the middleman and differentiate their brand by increasing their private label use.
At the same time, apparel brands are creating new business divisions to bypass retailers and get right to the consumer. All that has organizations scrambling to build expertise outside their core competencies.
"These confusing dynamics are further muddled by the push to divest more design, development, manufacturing, and logistics to third parties," notes AMR's Top Technology Trends report. "The gloves are now off: retailers and manufacturers will slug it out for consumer interactions."
The report found 41 percent of respondents planned to start a new e-commerce or catalog sales channel, sometimes requiring each-picking and small package delivery infrastructure for organizations built on case-level distribution.
Environmental and Social Responsibility
Headline-making exposures of human rights violations in Asian factories already had the entire apparel industry on edge as they increased outsourcing to low-cost countries.
The effort continues as the industry steadily builds out infrastructure in-country to monitor factories for work conditions compliance, product quality, counterfeit protection, and order visibility, either through agents or internal representation.
Now add the growing pressure for companies of all types to go green. While still early, the apparel industry is making strides toward reducing waste.
Many apparel SKUs are shipped already on the hanger to make it easier to stock stores. Nearly two decades ago, the The Voluntary Interindustry Commerce Solutions (VICS) Association developed a standard to ensure consistency in those hangers.
Now the association is spearheading a standard that calls for thinner, recyclable hangers that use 30 percent less plastic than the original VICS standard hanger.
The association is also trying to reduce empty backhauls by creating a portal allowing participants to list empty miles opportunities with their private or contracted fleets.
Sizing Up Technology Patterns
Managing long-distance production relationships requires visibility. But apparel companies are lagging in the necessary technology investments.
"Apparel companies talk a good game about the steps they want to take to improve speed to market, innovation, and streamlining operations, but many are still reticent about investing in technology," says David Aquino, AMR Research. "Many global sourcing groups still work in Excel spreadsheets."
The apparel industry was projected to grow technology spending by nine percent during 2007, but that growth is expected to slow to an average of 1.6 percent during 2008, according to AMR Research's January 2008 report, Technology Trends in the Apparel Market: The Second Annual Apparel Research Study and Analysis.
But apparel companies sorely need to invest in technology to manage global issues such as quota management, work-in-process visibility, export compliance, and trade laws associated with reducing tax liability, the report says.
The Voluntary Interindustry Commerce Solutions (VICS) Association creates voluntary guidelines for retail and consumer industries, including EDI standards to simplify global trade. Its latest project is developing standardized materials definitions for use by global trading partners, first via written description and later numerically.
"Major retailers say they can reduce lead time by 50 percent via such collaborative product development," says Joe Andraski, president and chief executive officer of VICS.
Case Study: The Limited Supply Chain's Unlimited Scope
When you're both a manufacturer and retailer, managing international logistics means striking a balance between the "we-need-it-now" interests of the retail arm and the cost-saving goals of the logistics organization.
Now add a massive sourcing operation that uses contract manufacturers in 60 different countries, and you have the head-spinning challenges that drive daily operations for vertically integrated Limited Brands, the $10-billion, Columbus, Ohio, retailer of lingerie, personal care and beauty products, apparel, and accessories.
The company's Limited Brands Logistics Services provides global logistics management and leadership to support its six retail businesses.
"We have a large number of logistics programs in place, and we are challenged with leveraging information to manage our supply chain versus throwing people at it," says Chris Robeson, vice president of international logistics for Limited Brands Logistics Services.
"It requires a lot of integration work to ensure data flows in from multiple systems and that we can synthesize it to have full visibility to product flows."
In addition to volume, fashion's volatility is The Limited supply chain's biggest challenge.
"The season's top-selling styles lead our business to different parts of the world because certain locations are better at manufacturing some products than others," Robeson says.
So transportation capacity at each location ebbs and flows, a challenge to a supply chain organization seeking to control costs through predictable transportation use.
A source of contention in many retailer-supplier relationships is the need for retailers to postpone allocation as long as possible, while suppliers prefer performing the required store-level sorting and packing before they ship.
Vertically integrated companies can strike a balance between the competing forces, but conveying the benefits of DC bypass or early allocation isn't always easy.
"By postponing, retailers are tying our hands from a logistics perspective," says Robeson. "We communicate with them and try to extol the benefits of pre-allocation. On the retail side, there is less concern with cost versus how quickly they can get product to market."
But the organization has found ways to cushion the impact. For example, it profiles five to six store types and designs store-level cartons to suit, which eases sortation once goods hit the United States.
For launch merchandise, the company developed an initial presentation assortment guideline, then asked suppliers to flow products down their production lines according to those designated size ranges, rather than producing a single size at a time. This process slows the cycle as the supplier slowly builds up inventory until it has a full assortment.
Domestically, The Limited sources lotions, soaps, and other personal care products from a number of suppliers in close geographic proximity. But the company was lacking the visibility to consolidate inbound product flows among those plants.
To gain better control over domestic traffic and improve carrier communication and relationship management, Limited Brands Logistics Services deployed Transportation Planning and Shipment Execution applications from JDA Software, a Scottsdale, Ariz., developer of merchandising and supply chain software. While the company expected to achieve 10-percent savings on domestic transportation costs, the software delivered about 15 percent.
The company is exploring use of the software to manage international transportation; 30 to 40 percent of which moves by air. Currently, the company's freight forwarders and consolidators are charged with providing visibility by funneling data into an in-house solution. Suppliers dial into a single point of communication to access purchase orders, advance ship notices, customs documents, and other paperwork.
This approach is helping The Limited come within one point of its target 95-percent on-time rate for each of the last few years.
Using data and tools to predict, understand, and control merchandise flow plays a key part in that metric. By using the suite of JDA and Manugistics tools, The Limited eases the impact of the volatile fashion business on its supply chain.
The goal is "balancing the demand plan and how product flows to retail, reducing spikes through the network," Robeson says.