Differentiating Global Production Sourcing Strategy- Samsonite
In late 2005, while leading supply chain management research for IDC, I was asked to help in launching a brand new research practice that would be focused on manufacturers who were considering sourcing supply chain activities throughout China. Readers will recall that this was a period where many global based manufacturers were just discovering China as a low-cost manufacturing hub and IDC wanted to provide clients the insights and watch outs needed to formulate their strategies.
Among the many companies I had the opportunity to interview was Samsonite. Bob Parker, my manager had met Robert Zelinski on a plane ride in 2005. At the time, Robert was Vice President of Sourcing for the North America and was returning from one of his frequent sourcing oversight trips within Asia. He later graciously agreed to participate in our research interviews after we explained the purpose.
We were very interested in Samsonite because the company was one of the very early entrants into China, along with the fact that the manufacturing of luggage products is very direct labor intensive, and was a core capability of Chinese stitch-oriented manufacturers. Logistics costs in moving finished goods in end markets were another critical input to production sourcing decisions.
During our interview sessions, Zelinski explained that Samsonite had already gained a tremendous amount of learning from its initial sourcing activities up to five years prior. Initial sourcing activities centered in factories located in the coastal Pearl River region. Even in late 2005, Samsonite was experiencing increasing direct labor costs in the coastal region and was already exercising plans to move production to the more interior regions of China, along with scouting other emerging low-cost production sourcing areas such as Vietnam. Robert explained that the luggage industry is highly sensitive to direct labor and landed cost analysis and was not at all reluctant to change sourcing strategies when required to meet established margin goals. In 2005, the company was conversely aware that China had an emerging consumer market that would eventually travel more. They were therefore one of the first of our interviews to articulate the tradeoff of sourcing for cost advantage vs. the sourcing for market access, which are too different sourcing decision criteria. While direct labor costs were tracking in the negative nearly seven years ago, the company still had an eye toward China as a producer and as a prime consumer class of its products. The challenge was constantly finding the right balance.
I was thus very interested to read of Samsonite’s latest reported quarterly results that were announced several weeks ago. The company recorded nearly $225 million in before-tax profits, up 62 percent from a year earlier. Revenues climbed 13 percent to $1.77 billion, fueled by increasing demand from traveling consumers seeking new luggage in Asia and North America. Sales in Asia alone grew 40 percent in the most recent quarter. Introductions of new hard-sided luggage lines were noted as facilitating increased sales growth.
In its reporting of Samsonite’s latest earnings, The Financial Times made note that molded plastic luggage had benefitted Samsonite because the stitching required producing the softer nylon luggage made it much more labor intensive as opposed to a hard-sided molded variety. It also acknowledged that the majority of luggage components stem from China.
The takeaway from this Supply Chain Matters commentary is that seven years can sometimes appear to be a lifetime within the short-term, ‘in the moment’ business world of today. Yet, more and more, the impacts of smart supply chain sourcing decisions eventually lead to bottom line and stockholder benefits. In the case of Samsonite, agility and a certain balance supply chain sourcing obviously played a role in a successful business outcome.
Sourcing for efficiency and cost savings is quite different that sourcing for market access and agility. When both strategies come together, the sourcing decision becomes far more beneficial to the bottom line. Balancing the need for near-term results in cost and efficiency savings in the context of longer-term direction and business strategy needs is not often easy, but beneficial. Who really knew seven years ago that hard-sided luggage would return with such attractiveness for traveling consumers.
I do wish that more CEO’s and CFO’s would acquire and support a longer view perspective of global supply chain sourcing needs and decisions. Procurement leaders and supply chain executives need to foster, as much as possible, education as to the differences for both strategies.