Coming (Back) to America
A decade ago, garment manufacturing in the United States was practically dead as apparel companies flocked to low-cost countries. But then came the economic downturn, and the realization that the time merchandise spends traveling in a container is time not spent on store shelves. Suddenly, America is the new global hot spot.
When Walt Disney said, "You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you," he might have been talking about the U.S. apparel and fashion accessories sector.
The industry has been hard hit by the deepening U.S. recession. Just visit any shopping mall in America, and the reality slaps you in the face—shuttered storefronts, few shoppers, and sale signs shouting 50 to 80 percent price reductions.
But, while U.S. apparel sector statistics add up to bad news overall, there are some bright spots—individual companies holding their own and, yes, even growing. More importantly, leading apparel manufacturers realize that the current adverse economic climate offers an unprecedented opportunity to go back to the drawing board and rethink their entire operations.
And much of that rethinking starts with the supply chain—beginning with where companies source raw materials and rippling all the way through to how they serve their customers.
In some cases, apparel companies are adopting strategies that, 10 years ago, would have been considered heresy. In other cases, they are simply doing the hard work of streamlining every inch of their supply chain operations.
Let’s start with the heresy. It’s called "Made in America."
TRUE RELIGION: Born Again in the USA
When Jeffrey Lubell, chairman, CEO, and creative director of True Religion Apparel Inc., Vernon, Calif., founded the company in 2002, his vision was to make quality, 1970s-inspired jeans, t-shirts, and sportswear—and make them in America.
True Religion sells its expanding product line in high-end department stores and boutiques in 50 countries around the world. The company also operates 40 stores of its own.
Three strategies drive everything the company does:
- Expand and grow the product line
- Expand and grow retail operations
- Grow internationally
True Religion sources raw materials for its products in the United States and a small percentage from Mexico. "We buy materials from vendors in different stages of production, but most of our suppliers are in the United States," explains John Dohm, True Religion’s vice president of IT.
"We benefit from keeping production in the United States because shipping costs are lower and transit times quicker than sourcing from overseas," Dohm says. "For companies just buying or selling goods made in China, and not adding value to the product, sourcing from China makes sense. But we’re in the premium apparel business and need to have control over the product at every step. We can only do that through local production."
"I believe in keeping jobs here in the United States," adds Lubell. "We buy all our fabric, trim, labels, and hardware in the United States. We employ more than 900 people at True Religion Brand Jeans, and another 3,000 to 4,000 between our contractors, warehouses, and vendors."
Speed to Market
Lubell’s made-in-America philosophy also has a practical side: speed to market. "If I come up with an idea, we can impact this season rather than one year from now," he says. "That enables us to stay current with the latest fashion trends." It also prevents store markdowns for out-of-style merchandise.
Lubell’s business strategy appears to be paying off. Net sales in 2008 were $270 million, an increase of 55.8 percent from $173.3 million in 2007. Full year 2008 net income grew 59.3 percent to $44.4 million.
True Religion’s success has also caused some growing pains—straining the company’s original supply chain IT infrastructure, for example.
"When I joined the company, we had an order entry inventory management invoicing system, a basic financial accounting system, and a third-party retail store management system," recalls Dohm. "Nothing was integrated."
While the three systems supported True Religion’s operations, the company had grown to the point where integration was necessary. "For example, we needed suppliers to be able to enter order status directly into the system so we could stop making phone calls to track down product," Dohm says.
True Religion’s senior executive committee conducted a high-level review of what areas to invest in to support the company’s growth. The board of directors elected to focus improvement on three areas: systems integration, financial accounting, and order management.
Believing in a WMS
Part of that IT investment was allocated to a new warehouse management system (WMS). Under the previous system, the company placed a purchase order, received goods into the warehouse, and put them away in bin locations.
"To fill orders, workers would run around to the bin locations with pick tickets, scan them, pick products, write the number of remaining product on that carton, then pack and ship the order out," Dohm explains. "The only way to scale the operation was to increase labor."
Because True Religion’s products are high-value, inventory velocity is a priority. The retail stores stock very little inventory, so replenishment can be daily in some cases, depending on sales.
To scale up its business, True Religion’s first step was to implement an ERP system: Oracle on Demand.
"Originally, we wanted to use Oracle’s shipping capability to manage our warehouse operations," recalls Dohm. "But our warehouse manager didn’t think the system would meet his requirements."
UPS introduced True Religion to a small systems vendor (in which it had invested) called Deposco, suggesting that because Deposco is a software as a service (SaaS) solution—it resides on the Web rather than as an installed solution—integration costs would be low and implementation time would be short. That combination appealed to Dohm because "an installed system is costly and time consuming," he says. "We want to run our IT systems as light as we can."
True Religion Goes for It
After deciding to implement Deposco’s WMS, True Religion conducted a wall-to-wall inventory count. "We scanned every item in the warehouse," says Dohm. "That gave us an immediate benefit—knowing the location of every product in the warehouse."
The company began pilot-testing system functionality within one week of completing the physical inventory—around the beginning of 2009. It is currently testing picking, receiving, and stock movement functionality, running Deposco parallel with its old systems. Once testing is complete, the company will integrate the Deposco WMS with Oracle on Demand.
"We’re already seeing benefits," Dohm reports. "We can increase total warehouse capacity without having to add space, and overall pick accuracy has improved as well.
"We’re not trying to build an IT empire," he adds. "If we can keep our cost structure low and agility high, we can grow cost-effectively."
True Religion should realize a 30-percent reduction in warehouse labor costs when the system is fully integrated and operational, says Andy Berry, Deposco’s vice president of sales and marketing.
"The company will see a huge improvement around positioning of product in the warehouse," Berry says. "That will save a lot of footsteps, and boost inventory to 100 percent. Shipment errors will drop because they don’t have to double count every product that goes out the door. True Religion will see a return on investment in less than one year."
AMERICAN APPAREL: An American Believer
Serving the young adult basic apparel market segment, Los Angeles-based American Apparel is a Made in America believer. The company hypes its "Made in Downtown LA" operations in advertising campaigns that have attracted attention worldwide. This messaging has contributed to significant brand awareness and a cult status, the company believes.
American Apparel operates 260 stores worldwide, with 2008 retail sales of $341 million, a 62-percent increase over 2007. The manufacturer, distributor, and retailer of branded fashion basic apparel also operates a leading wholesale business that supplies t-shirts and other casual wear to distributors and screen printers, and an online retail sales channel. Today, American Apparel is the country’s largest domestic clothing manufacturer.
American Apparel employs a vertically integrated business model that minimizes the use of sub-contractors and offshore labor. Knitting, dyeing, sewing, photography, marketing, distribution, and design all happen in its Los Angeles facilities.
"Clothing manufacturing is a tough job, but we’ve always tried to do things differently," says Dov Charney, president and CEO. "Years ago, we talked about ‘sweatshop-free’ manufacturing. Today we talk about it less, however we continue to provide the same benefits—and more—to our workers.
"For us, ‘sweatshop-free’ was never about criticizing other business models; it was about attempting something new," Charney continues. "It comes down to this: not blindly outsourcing, but rather knowing the faces of our workers and providing them the opportunity to make a fair wage."
REI: Velocity Rules
T o ride out the current economic downturn, many U.S. retailers are taking steps to lean out their operations. Reviewing production sourcing strategy is one step, but for outdoor gear retailer Recreational Equipment Inc. (REI), velocity of product once received is just as important.
REI is the nation’s largest consumer cooperative, providing clothing, equipment, and other items through 100 retail stores and a robust direct-to-consumer channel that delivers direct to homes or allows customer pick-up at stores. 2008 sales were slightly less than $1.5 billion.
Scaling Up the Supply Chain
Shortly after being hired in 2001, Dave Presley, REI’s vice president of distribution and logistics, saw that the company’s growth was outpacing the capacity of its single-facility distribution model. REI’s 650,000-square-foot distribution center (DC), located in Sumner, Wash., was supporting nearly $1 billion in sales.
Scaling up the supply chain became a priority. REI opened a new 550,000- square-foot DC in Bedford, Pa., last year that now successfully services the East Coast.
Opening a new DC was only half of the velocity improvement effort.
"We established the ‘velocity project’ to improve lead times to customers and stores while also optimizing our inventory requirements, improving in-stock levels, and reducing expenses," says Rick Bingle, global supply chain director.
The velocity project began with differentiating REI’s supply chain model by developing two different supply chains. The first deals with products with a high degree of forecast volatility. These are delivered from vendors into the warehouses, processed, then shipped out to stores under a new rapid replenishment model. This model involves three-times-a-week delivery and significantly reduced transit times.
The second supply chain handles commodity or more predictable products. These products are received from the vendor and immediately crossdocked for store delivery.
Here’s how the first supply chain works, using the company’s red performance coat as an example.
"We sell about 2,000 coats each winter, but it is challenging to predict where snow will fall, and how many red coats to stock at the stores," Bingle says. "Under our old supply chain model, we just sent a certain number of those coats to stores and waited for the snow to fall. But the snow never fell where we predicted it would, so we had too many coats in some stores and not enough in others."
Under the new supply chain model, REI still makes the same investment in red coats. But because of its shorter transit times and more frequent store deliveries, the company can hold merchandise in the warehouse and release the red coats in the right sizes and quantities to the location that is actually moving that product.
"By doing this, we increase sales and reduce obsolescence and markdowns," Bingle explains.
The second supply chain handles predictable items such as energy bars. Weekly store sales are consistent, highvolume, and predictable.
"There is no benefit to storing energy bars in the warehouse when we can just receive them once a week, crossdock them, and move them right to the stores," Bingle says.
Going Outside Logistics
Collaboration across REI departments was key to the velocity project’s success.
"We recognize that speeding up the supply chain involves the goals and objectives of departments outside logistics—such as retail, merchandising, and financing," says Patrick Wellnitz, REI process improvement manager. "Over the past 18 months, these groups worked to understand the benefits and remove barriers to speeding up the process."
Another prime objective of the velocity project was to reduce the requirement for storage capacity in the stores. Through the project, REI has already achieved a 10-percent reduction in units in the stores’ back rooms.
"That number will increase as we fully implement the crossdocking velocity program," Bingle says. "We plan to cut warehouse space in the stores, increase sales floor space, and reduce the number of store employees managing inventory. We would prefer our employees to help customers rather than spend time in the back room.
"Right now, we’re crossdocking about 20 percent of our products through our DCs," Bingle concludes. "We expect that to grow to 50 percent in 2010. We’re moving product faster and our in-stock percentages at stores are at historically high levels."
Dynamic Decision Making
Whether done in America or globally, apparel sourcing will always be dynamic. For exported apparel, larger economies such as China and India are seeing considerable reductions, while Sri Lanka, Bangladesh, and Vietnam are growing.
Apparel companies speak with their feet when it comes to manufacturing, and they do so quickly. At the moment, they are moving away from China to lower-cost countries.
"When making transportation choices, shippers are looking out for every cent," notes Charles Brewer, DHL’s senior vice president and general manager for the northeast region. "Samples and swatches still move via air express; finished goods move via slower modes."
"Apparel is both time-constrained and market-sensitive," adds Bill Aldridge, executive vice president, Global Ocean Products, CEVA Logistics. "Shippers need a dynamic platform that allows them to make different decisions around what, when, and where they receive products."
The apparel/fashion industry is undergoing some radical changes. Some companies are rethinking their business models and choosing to source in America. Others continue to scour the world in search of the next low-cost manufacturing base.
Regardless of their strategy, one thing is certain: Apparel companies are rethinking all aspects of their supply chains and looking in every corner for ways to lean out their operations, reduce inventory, and increase inventory velocity—all the while enticing customers to buy.
From China With Speed
While some apparel/fashion companies are coming back to America, many continue to take the low-cost country sourcing route. One such firm is International Inspirations (II), a quintessential small company start-up success story. The New York City business, co-founded and owned by husband-and-wife team Shaya and Mandy Reiter, markets costume jewelry and hair accessories to mid-tier specialty retailers across the United States. Their product is priced to sell—retailing for an average of $5.99 to $44. The company has grown between 100 and 200 percent a year since its founding in 2005, according to Shaya Reiter.
"My wife Mandy designs the jewelry, and six factories in China manufacture it," Reiter says. The factories, located in remote regions of China, first produce samples, which II displays in its New York showroom. Retail buyers can either visit once a month to make their selections, or II can send them new product photographs—with samples—so they can place their orders.
"We create 6,000 new styles and designs every month," Reiter reports.
Once buyers place their orders, II sends an order to a Chinese factory. The factory, in turn, sends II approval samples, which II forwards to the customer. Once the customer approves the samples, II orders the factory to go into production. Ninety percent of II’s shipments from China move via DHL’s air express service.
"With jewelry, you have to be on top of the trend," notes Reiter. "Our orders are booked three months out, but we design six months out. If a trend suddenly pops up—peacock feather headbands, for example—we can design and deliver new product to customers within 20 to 30 days. That’s half our standard delivery time."
II flies the majority of its product in from China and offers quick delivery to customers. "If a factory finishes an order Monday, I can ship it from Shanghai, receive it in New York on Wednesday, and get it to customers’ stores by Friday," Reiter explains. "That speed is a critical component of II’s value proposition, which is ‘design, price, and delivery.’"
As a start-up company, Reiter admits he had no idea how to find manufacturing sources for his product, so he turned to the Internet.
"We found our first production source through alibaba.com, an online marketplace that connects business buyers with sellers," he recalls. "We found our second factory on globalsources.com.
"Once we began doing business and paying our bills on time, other factories heard about us; we started getting calls and emails from them," Reiter says. "We also found two new factories by attending a trade show in Hong Kong."