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Technology’s Impact on Industries Recognized as More Profound- Is the Supply Chain Prepared?

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A change is underway across many industry sectors, one that was profound implications for businesses and their associated supply chains. Investors are now realizing the threat of new digital based business models, and CEO’s are some of the recent casualties for businesses deemed to be laggard.  Supply Chain Matters submits that the added question is whether the supply chain is prepared. SCM 250 76 Technologys Impact on Industries Recognized as More Profound  Is the Supply Chain Prepared?

Over the past several days, The Wall Street Journal has published two opinion commentaries that reinforce a message that CEO’s must grasp the implications of technology on their businesses and on their industries like never before. The casualty list is growing.

The first profiles J. Crew CEO Mickey Drexler, (Paid subscription required) a fashion genius noted for building brands such as Banana Republic, Old Navy and Madewell. Drexler, who is further recognized for:” … redefining Gap in the 1990’s and transforming J. Crew into a household name, is now scrambling to keep the company he took private in a leveraged buyout from ending up in bankruptcy.” In this report, Mr. Drexler readily admits that he missed the biggest trend of all- “how quickly technology would change the retail industry.” The commentary goes on to observe that today, retail competitors with high-tech, data-driven supply chains can copy styles faster and move them into retail channels in a matter of weeks. Posed is the question: “Who would have predicted that in 2017 the No. 1 online retailer of clothing to millennials would be Amazon?”

A second WSJ commentary, CEO’s Must Grasp Tech Like Never Before, (Paid subscription also required) opens with the statement: “Investors and boards long obsessed with quarterly profits are now hunting for leaders to make big, fast bets to fend off upstarts shooting for the moon.” Observed is the recent sudden replacement of the CEO at Ford Motor, as well as other CEO’s whose companies have faced tech-heavy competitive disruptors within their industry. This commentary observes how some manufacturers and retailers are making big bets on disruptive, tech-driven businesses, protecting them as they develop and willing to absorb losses in the short-term.  The prime takeaway seems to be that today’s new business leaders are caught between the proverbial rock and hard place. While activist investors continually call for more short-term profitability and dividends, other investors are becoming more consumed with industry disruptors who are becoming more prevalent and visible. The theme is that CEO’s must possess the rare skills of being able to nurture new disruptive businesses while maintaining an existing business. One example provided is General Electric and its nurturing of its Digital Business unit. The commentary concludes with the observation that the advantage of bigger companies in this transition, is the manufacturing and supply chain infrastructure sufficient to deliver newer businesses and products globally.

Given the themes that regardless, the supply chain plays a critical enabling role, Supply Chain Matters feels compelled to add some other thoughts.

Industry supply chains are once again caught in the web of the need to continue to reduce overall value-chain costs, while at the same time, having the ability to nurture the required capabilities for digital transformation. From our specific lens, one of the most destructive forces underway in some industry settings is the zeal of zero-based budgeting techniques.

The same messages related to CEO’s and their ability to grasp tech trends and move toward new digital-based business models more quickly equally applies to senior supply chain leaders. That requires added investments in supply-chain wide process innovation, along with needed skills and augmented talent. To do this, supply chain leaders must be able to effectively communicate a dual-mission, one that can support ongoing needs for added productivity and costs-savings for existing traditional businesses, while investing in the new capabilities that will make digital based models more successful. In some cases, supply chain leaders will serve as a communicator and change agent for the broader senior management team.

Leaders can make such tradeoffs if they are willing to communicate and contract with the CFO and CEO on a parallel cost savings and investment plan.  As an example, for every dollar of cost savings achieved, a certain amount of such savings can be put aside for re-investment in required new capabilities in people, process, and technology. Likewise, senior management incentives and bonus plans must reflect parallel capabilities, that of building a new business while managing the needs of existing business.

Another equally important risk is one of complacency in timing.  One criticism that this independent analyst has of certain top-tier analyst firms is their tendency to context certain technology changes in rather long timing windows.

As an example, by 2025, eight years from today, a certain technology will become more mainstream in utilization. From my lens, such generalizations are a dis-service to industry leaders. Such predictions are much to generalist, serving to protect the brand or aura of the industry analyst firm in terms of prediction accuracy than to depict more boldness and detail related to a technology’s impact. A current example relates to Internet of Things (IoT) focused technologies and its impacts to traditional businesses. By our research lens, for some industries, the disruption brought about by new IoT driven business models will come sooner, rather than later, and despite current challenges in data security and standards.

Technology’s impact on businesses is indeed accelerating, and potentially more CEO’s will pay the price for not recognizing the timing, and for not moving the business fast enough to stay ahead of the challenge.  The same risks apply to supply chain leaders who opt for the conservative path of driving added cost savings regardless of external threats.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Vital Link in the Global Apparel Supply Chain- Third-Party Refurbishers

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The following is a contributed Supply Chain Matters Guest Contribution from Jeff Glassman, CEO of Darn It! Inc, a third-party refurbisher specializing in apparel and general merchandise inspection, repair, cleaning, kitting, and warehousing.

 

The apparel industry’s supply chain crisscrosses the globe. In concept, that’s pretty exciting. In reality, it’s fraught with complications. Glitches can occur, errors can be made and consistent communication can be at-times, be challenging.

The supply chain can be interrupted due to all kinds of issues – some can be quite surprising!

Often, quality issues in apparel supply chains stem from a few key factors:

  • As retailers pressure offshore manufacturers to meet tight timeframes, an overwhelmed factory may subcontract work. This is a prime opportunity for a breakdown in communication, resulting in garments that don’t meet specifications.
  • When a retailer begins working with a new supplier, it can take time before the factory fully understands the retailer’s quality expectations.
  • If offshore manufacturers seek to increase profit margins, they may substitute inferior fabric or trim.

As a third-party apparel refurbisher, my company often receives frantic calls from apparel manufacturers, distributors, and retailers in the midst of a supply chain crisis. They have received a problematic shipment and need help getting first-quality garments on the shelves and online.

Here’s a sampling of just three situations that have interrupted our customers’ supply chain:

 

  1. Cartons of clothing had soaked in salt water – Due to a storm at port, a retailer’s shipping container with 20,000 pairs of pants had been submerged in salt water. (This is not your typical supply chain challenge!) We conducted an ozone shock treatment to remove mold and mildew, then pressed, re-ticketed, and repackaged the pants – all in time for the company’s big promotion.

 

  1. Correcting 56,000 mislabeled t-shirts – A retailer’s entire shipment of t-shirts arrived from the overseas manufacturer with the wrong size screen-printed on the shirts. After completing an inspection to determine correct sizes, we used a cover-up heat transfer label to overlay the correct size.

 

  1. 43,000 stuck zippers put $2 million in sales at risk – Beyond broken buttons, apparel often requires a variety of sewing repairs. In one case, we repaired the zippers on 43,000 sweatshirts (the zippers had the wrong slider). In another case, we replaced the red drawcord on 8,000 pajama bottoms (the dye was bleeding and staining the pajamas). In another example, the retailer’s durability test uncovered an issue with 5,000 men’s sleeveless shirts – the armholes needed to be repaired and properly reinforced. In yet another example, we repaired 16,000 lady’s wool pants with inseams that were randomly too long or too short; clearly, the garment measurements didn’t match the original factory specifications.

 

Mistakes are made from time to time – it’s a fact-of-life. Combine this with the notions that many retailers have implemented just-in-time inventory strategies. As a result, when apparel is produced offshore but doesn’t meet quality specs, it’s too time-consuming and costly to ship the product back.\

Unfortunately, apparel refurbishment services are an inevitable reality of today’s globally extended apparel supply chain.

Who bears the cost of refurbishment?

Depending on the contractual relationship, the retailer may charge the cost back to the original manufacturer. What if the specs were unclear? Retailers prize their relationship with quality apparel manufacturers so, in some cases, the retailer and offshore factory may share the cost.

A U.S. or domestic based refurbisher can help to minimize fall-out rate, avoid consumer returns, and return garments to first-quality condition. An experienced third-party refurbisher is an important link in the apparel supply chain, helping to ensure manufacturers, distributors, and retailers can quickly get products into customers’ hands.


Jeff can be contacted at Jeff@darnit.com .

 © Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Apparel and Footwear Supply Chain Meets Industry 4.0 Adoption

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The first notions of what is today ‘s prolific global industry supply chain presence began with the apparel and footwear industry. Now this same industry is moving in the direction of Industry 4.0.

A posting by Digiwaxx Media’s TheBlast  observes that German based apparel and footwear manufacturer Adidas will soon start the marketing of shoes manufactured by robots within Germany.

This posting notes:

More than 20 years after Adidas ceased production activities in Germany and moved then to Asia, Adidas unveiled the group’s new prototype “Speedfactory” in Germany.”

The German footwear provider is also planning to operate similar “Speedfactory” in the United States along with one in Western Europe. Both the German and U.S. automated factories are initially being planned to produce upwards of half a million pair of shoes annually, and according to reports, would be priced similarly as those produced in Asia.  Addidas Futurecraft MFG 300x145 Apparel and Footwear Supply Chain Meets Industry 4.0 Adoption

The basis of the supply chain strategy is to produce closest to the major areas of product demand, thus avoiding added global transportation and inventory carrying costs. What has brought this strategy closer to fruition is the combination of higher direct labor costs in high volume manufacturing areas such as China, meeting the technology convergence of faster, more dexterous, and cheaper robots.

In his book, Thank You for Being Late, An Optimist’s Guide to Thriving in the Age of Accelerations, internationally recognized author Thomas Friedman has an entire chapter devoted to what is described as The Supernova. Noted by Friedman:

With each new (computing and technology) platform, the computing power bandwidth and software capabilities all meld together and change the method, cost, or power and speed in which we do things, or pioneer totally new things we can do that we never imagined- and sometimes all of the above. And these leaps are now coming faster and faster, at shorter and shorter intervals.”

Many publications cite the statistic that it took 50 years for the world to install the first million industrial robots while the next million will take only eight years to reach that milestone. That includes the wide-scale adoption of automated assembly techniques within China itself. Thus is the opportunity being provided to apparel and footwear providers, as well as other industry supply chains that have a high sensitivity to direct labor costs within respective products. Noted is an estimate from German robot producer Kuka indicating that a typical indutrial robot can cost in the area of 5 euros an hour to operate.

Nike was one of the first shoe manufacturers to pioneer the 3D printed Flynit athletic shoes five years ago and now, Adidas is pioneering its application of automated shoe manufacturing.

In the not too distant future, apparel manufacturers will do the same. Industry disruptors focused on “fast fashion” business strategies have been leveraging supply chain near-shoring strategies to provide far more agile responses to the latest and most prominent fashion trends. Their appeal to higher margin, in-demand fast fashion supports higher pricing and thus flexibilities to support near-shoring of fast production. The key to fast fashion has proven to be more agile supply chain sourcing strategies and such strategies will be enhanced further when robotics is applied to the precision cutting and sewing of fabrics.

Of course, there are many social and workforce implications to these trends, all very important to social responsibility practices. That topic deserves a more detailed blog commentary.

Suffice at this point, to close with the takeaway that an industry that was noted as one of the earliest adopters of global based, low-cost manufacturing outsourcing is now on the verge of adopting Industry 4.0 supply chain practices.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Challenging Few Weeks for Certain Myanmar Apparel Producers and Branded Customers

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This past week provided stark reminders for apparel retailers and their suppliers on the realities of chasing the lowest cost producer, and of the blowback to the brand and its consideration of social responsibility.

Two different yet disturbing incidents involving suppliers located in the country of Myanmar have came to light.

Reuters reported that workers of a Chinese-owned factory making clothes for Swedish fashion retailer Hennes & Mauritz, conducted what was described as a violent demonstration that literally destroyed the production line of the factory. According to the Reuters report, production at Hangzhou-Tex Garment (Myanmar) Company, one of 40 H&M suppliers in that country, have been halted since February 9, nearly a month to-date. The worker dispute started with a strike in late January following the termination of a local labor leader advocating for an improved performance review system and healthcare coverage. Video observed by Reuters described dozens of female workers physically assaulting a factory manager. In late February, hundreds of workers were reported as storming this factory and damaging facilities including machinery, computers, and surveillance cameras. The Chinese embassy in Myanmar described the incident as an “attack” and filed a “serious request” to local government authorities to hold those involved accountable.

H&M issued a statement indicating that it was deeply concerned about this recent conflict and is monitoring the situation closely to include dialogue with concerned parties. What makes this news more troublesome is that H&M has been widely viewed as being outspoken among apparel retailers in promoting worker rights and fair wages. H&M was one of several retailers that demanded labor reforms and improved working conditions after the devastating 2012 Tazeen Fashion and 2013 Rana Plaza factory fires in Bangladesh that cumulatively killed upwards of 200 workers and injured over a thousand workers. In its reporting, Reuters cites H&M as ranking high in sustainability indexes.

A report also indicates that H&M has plans to influence apparel suppliers within the retailer’s supply chain to digitize payments for workers.  A report conducted by the Better Than Cash Alliance indicates that 80 percent of factories in Bangladesh pay employees in cash notes. A review of 21 garment factories already utilizing digital payments pointed to significant savings in administrative time handing out cash to workers as well as some security for workers themselves with a more transparent way to receive money, provide more accurate data on wages paid, and afford greater economic independence to female workers.

Separately, a published report by The Wall Street Journal indicates that Europe private equity firm Apax Partners, which controls Germany based retailer Takko Holding, is facing questions from some influential investors after Takko Holding was found to be sourcing production at a garment factory in Myanmar that employed underage workers. Such findings were reported in February by the Dutch based Centre for Research on Multinational Corporations, known as SOMO. That report indicated that several apparel factories in Myanmar had unsafe working conditions, paid low wages or enforced long worker hours. Besides Takko, the SOMO report identified 12 factories utilized by six other Western retailers.

The WSJ report notes that Influential investors of Apax Partners include the California State Teachers Retirement System as well as the Greater Manchester Pension Fund. Each of these investors are highly sensitive to corporate social responsibility and human rights practices and each was vocal to express direct concerns about the latest reports.

Both Supply Chain Matters and apparel industry observers and participants continually point to an industry sourcing model where individual garment factories produce for multiple brands, and in some cases, factories will sub-contract to other factories often without the knowledge of the branded customer. As the WSJ concludes, brands certainly have influence in demanding certain working standards but have little direct control, other than continuous audits.  Another ongoing challenge identified after the Bangladesh tragedies was factory owner access to capital to make necessary factory improvements to achieve minimal safety standards, with owners themselves seeking financial subsidies from apparel industry associations who source production in a particular country.

In the specific case of Myanmar, Reuters cites International Labor Standards data indicating that line worker wage rates average $63 monthly as compared to $90-$145 monthly wage rates in Vietnam and Cambodia. Yet in Myanmar, the government has yet to establish a standard for garment factory safety and labor practice standards.

Thus, the challenges of social responsibility continue to persist with the addition of a new lower-cost manufacturing region with a new set of workers becoming impacted by industry practices that weigh direct labor expense as a prime sourcing determinant. It would seem, though, that the risks get higher.

Most apparel retailers and brand producers have declared social responsibility statements and supporting practices. We all know that supply chains are driven by customer and consumer desires and needs, and in the case of apparel, that demand translates to continual variety and the lowest cost. Quality, or perceptions thereof, is sometimes overridden by the attraction of cost, when styles have a short market life.

We continue to submit that we, as consumers of apparel, have the ultimate voice on the weighting of social responsibility practices in the selection and consumption of our apparel choices.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


A Supply Chain Matters Conversation with the American Apparel and Footwear Association

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Earlier this month, Supply Chain Matters unveiled our 2017 Predictions for Industry and Global Supply Chains (Available for complimentary download in our Research Center). Our last grouping of predictions focused on unique, industry-specific supply chain challenges, and included apparel and footwear supply chains. Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel, and the new trade agenda being pursued by President Donald Trump has the potential to provide significant impact to this industry’s supply chains.

The geopolitical forces of increased trade protectionism are expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing North American Free Trade Agreement (NAFTA), the goods flow freely and duty-free across borders in North America.

Since publishing our specific apparel and footwear industry specific prediction, this Editor had the opportunity to reach out to the American Apparel & Footwear Association (AAFA) to garner additional insights on the industry and its challenges in the coming year.

We spoke with Nate Herman, senior vice president of supply chain at AAFA regarding current industry challenges and impacts. Our discussion referenced a report from global business network CNBC regarding the potential impact of a trade war among the United States and Mexico. We provided AAFA a copy of our 2017 predictions related to the industry and the impact of revisiting the existing North America Free Trade Agreement (NAFTA) governing trade among the United States, Canada, and Mexico.

The CNBC report included some definitive data on apparel and footwear retail categories exported from China to the United States. We asked on specifics related to Vietnam and Bangladesh. The AAFA referred us to the U.S. Department of Commerce, International Trade Administration, Textiles and Apparel Import Report. The latest reported dated February 7th, for the category: United States Imports of Cotton, Wool, Man-Made Fiber, Vegetable Fibers Except Cotton ad Silk Blend Textiles provides the following data related to Top-Ten import countries for 2016. (Data expressed in million square meter equivalents-SME)

Textile Imports 2016 e1488404460790 A Supply Chain Matters Conversation with the American Apparel and Footwear Association

 

 

The data indicates that total U.S. imports of textiles and apparel was down 1.0 percent in 2016 over that of 2015. That is an important indicator of product demand. Of the top ten countries importing to the U.S. China remains as top exporter of apparel to the U.S., but overall volumes were down 2.4 percent from the year earlier period. India ranks #2 with a significant 5.8 percent increase while Vietnam ranks #3 with a 2.5 percent increase. Mexico ranks #5 with a 2.4 percent increase while Honduras ranks 9th with a 2.5 percent decrease.

Besides NAFTA, there is also the Central America Free Trade Agreement (CAFTA) that includes trade with the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. We wanted to explore whether a cross-border or import tax involving the existing CAFTA would have an impact to existing industry supply chains. Many supply chains of U.S. based apparel and footwear providers extend to Central America, as well, now estimated to be as much as 15 percent of total U.S. imports. The region is particularly to manufacturers and retailers that are anchored in quick turn-around “Fast Fashion” supply chain response.

We asked Herman if the Trump Administration has made any indications toward revisiting the CAFTA agreement in addition to NAFTA. His response was that there has been little reference thus far. Today, advanced yarns and fabrics produced in the U.S. transit to Central American countries under duty-free conditions where they are cut and sewn into finished apparel and distributed back to U.S. entities. Herman further pointed to the appointment of Wilbur Ross as the new Secretary of Commerce and chief strategist for trade policy.

Ross’s previous business investment interests included in 2005, combining the then bankrupt Burlington Industries and Cone Mills, a leading supplier of Levi Strauss denim, to create International Textile Group. Ross then lobbied for what became CAFTA. Thus, the industry currently views Ross as knowledgeable of U.S. centric apparel supply chains flows and needs for access to lower-cost, duty-free manufacturing sourcing.

We then asked if higher volume apparel products can be economically produced solely in the United States. Herman indicated that since 2009, there has been a small but sustained 50 percent resurgence in domestic apparel manufacturing. The trend is likely to continue but there are also certain realities relative to any higher-volume manufacturing presence. They include the need for advanced factory automation and access to a trained and skilled workforce, not to mention a inherent domestic based supply chain. The Administration’s current anti-immigration environment could prove to be a detriment to growth in domestic manufacturing. The fact remains that much of apparel’s supply chain value-added remains sourced in lower cost manufacturing regions.

We honed-in on the fast fashion sector where brands tend to rely on Central America and Mexico for sewing and production. We asked if U.S. trade policy changes could impact this specific sector. Herman believes that fast fashion provides great opportunities for the Western Hemisphere to regain market share from Asian producers, and that the industry should be moving in this direction. That stated, the industry was stated as being “in-pause” pending the outcome of any Trump Administration trade policies.

Specifically regarding Vietnam, which would have been a significant benefactor of the now in-doubt, Trans-Pacific Partnership Agreement (TPP), AAFA cites this country as a #2 supplier for clothes and shoes imported into the U.S. The industry views this country as a growing supplier currently growing at double-digits. One of the important tenets of TPP was protections for intellectual property as well as counterfeit goods protections among trading partners. Such provisions remain a concern for U.S. importers.

As the industry moves forward in 2017, Herman indicates that AAFA’s mission is to make sure association members have all the information related to any changing trade policies, but the current perspective is that it’s anyone’s guess as to what’s in the cards for trade policy changes. It will require constant diligence and analysis by AAFA and its industry members.

To that end, Supply Chain Matters will check back at mid-year to ascertain any additional industry developments.

We would like to thank Nate Herman and the American Apparel & Footwear Association for their time and perspectives on what supply chains should anticipate in 2017.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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