Challenges of Third Way Supply Chain Strategy of VF - Essay Example

?E-Logistics2 Table of Contents E-Logistics2 Table of Contents 2 Summary 3 Challenges of “Third Way” supply chain Strategy of VF 3 Recommendation to Chris Frase 11 References 15 Bibliography 17 Summary VF is regarded as one of the biggest apparel companies of the world. Its products are sold across 150 countries by 47000 retailers. It has more than 30 dynamic brands and operates in more than 780 retail stores across the world. VF’s strategy is to become flexible and provide quick response in any business situation. VF has global supply chain and they are continuously increasing the network of supply chain throughout the world (VF Corporation, 2011). This report describes the various challenges in global supply chain strategy of VF and provides recommendation to improve the “Third Way” supply chain system globally. Challenges of “Third Way” supply chain Strategy of VF VF produces apparel products from its own manufacturing plant as well as acquires apparels from other suppliers. The outsourcing strategy of VF focuses on flexibility. VF possesses strong manufacturing capacity and it can also outsource from suppliers to improve the manufacturing process and thus reduce the cost of production. The suppliers of clothing industry use term contract to produce particular garment in particular quantity. This strategy helped VF to shift production among suppliers in different locations for optimizing cost and respond to the changes in any business conditions such as changes in tariff or exchange rates and other factors related to cost. VF had responded to the market condition and implemented “Third Way” supply chain strategy to gain advantage of both in house manufacturing and outsourcing as well. VF had two critical elements in the growth strategy which were to expand sales outside the US and expand the ‘direct to consumer’ business. VF had faced challenges in supply chain strategy which are to preserve the organizational cultures and maintain VF’s unique brand identities. It was difficult for VF to keep the design groups together (Pisano & Adams, 2009). A major challenge for VF was the influence of large mass retailing chains in the apparel distribution channel. Several large retailers developed and started to market their own brand under their own private label. For example, Walmart, one of the largest jeans retailers of the US had launched jeans under their own brand. The apparel companies mostly concentrated on design and marketing rather than production. The production was generally a labour intensive method which had several disadvantages. This enabled the garment companies to outsource the production of their design in high competitive terms (Pisano & Adams, 2009). As the supply chain had become globalized, it was a great challenge for VF to find good supplier and develop good relationship in order to coordinate the production flows. The apparel companies do not possess appropriate skill and good bond for efficient outsourcing in Asian region. For this reason, a few Asian manufacturers had started to modify their business to provide fully incorporated supply chain to the apparel companies (Pisano & Adams, 2009). The economic recession of 2008–2009 was also another challenge of VF. Compared to other competitors, VF had managed the global recession much better, though it has also seen decline in sales by 9% in the year 2009. Their income had reduced by 30% in the same year, but the financial condition of VF was strong. It had relatively lower debt, good credit line and comparatively higher cash than their competitors. The biggest fear for VF was the long term impact of the economic crisis on the supply chain. Several garment suppliers were operating on low margin and did not have any financial cushion. When the volume fell because of low demand of garment products, suppliers were forced to shut down their business. The sudden closure of supplier’s business had proved to be troublesome for VF Company. For example, a supplier of VF had informed that it would close down its manufacturing plant in less than 3 months of delivery. This was a big problem for VF while they had to search for another substitute supplier (Pisano & Adams, 2009). There are other challenges in “Third Way” supply chain which include building up reliable and high quality supply network that require huge time and investment. In case, manufacturing is done in company’s own production plant, then it can provide quick response and vast volume of resource can be sourced inside the organization. However, in case of “Third Way” supply chain, the perspective supplier needs to be visited and their manufacturing performance needs to be appraised carefully. Maximum amount of time is needed to develop good connection with suppliers and only an experienced person can identify their trustworthiness among all suppliers (Pisano & Adams, 2009). There are several incompetencies in “Third Way” supply chain strategy of VF. The company had faced certain challenges in “Third Way” supply chain strategy because of lack of coordination and trust between clothes’ companies and suppliers. It was true that there was less loyalty between clothing companies and their suppliers previously. The contracts with suppliers were limited to short period of time, generally, for one season only. The clothing company always focuses on making low-cost products and competing products. The insistent low cost strategy of clothing companies lead to tough bargains on pricing and they liberally shift their production from one supplier to another. Frequent shift in supplier results in unsecure supply with no guarantee. Each time when suppliers offer new contract to get a new deal from a company, they never give any assurance on production capacity beyond short period. The suppliers prepare products for as many companies as possible to diversify the risk. They never disclose any information regarding production capacity, inventory and production cost with other clothing companies because they believe that such information could be used against them while making any deal in future. This lack of trust can lead to excess inventory (Pisano & Adams, 2009). Another challenge for “Third Way” supply chain is that it is a time consuming method because the list of product price for different designs and features has to be reset again. The clothing companies had to fix the price for each garment through negotiation with suppliers (Pisano & Adams, 2009). Staffing was a major issue for implementing “Third Way” supply chain strategy of VF. It is difficult to find experienced engineer who will be enthusiastic to move across the world and take proper training in manufacturing section of VF (Pisano & Adams, 2009). One of the biggest challenges of supply chain was the sheer difficulties of the product line. For example, the changes of classic product were too little, but the lifestyle brand product had short life cycle. For this reason, the lifestyle brand product requires constant replacement of new style. Approximately half of VF’s SKUs (Stock Keeping Units) generally need new product designs each year, but designers usually do not want to make changes in design for the sake of manufacturing purposes (Pisano & Adams, 2009). Another challenge for supply chain was the contrary needs and requirements of brand coalitions. For example, in the American market, jeans were a non-fashion clothing item, but in Europe, jeans were worn as a fashion item. In the production line of VF, cost is not an important factor. The product designers mainly focus on creating exiting products that can spank the fashion (Pisano & Adams, 2009). The supply chain is renowned to be inflexible in case of garment industry. The major challenge for apparel companies in case of third way supplier is the estimation of the most feasible inventory. Apparel companies which use “Third Way” supply chain in their business normally place their orders before 8–10 months of any particular seasonal sales. Thus, they had shortage of time to adjust their inventories according to actual demand of customers. Due to this reason, most of apparel companies find that their products had run out and they probably lost prospective sales. Another problem for supply chain is that if any apparel company experience disappointing sales in any particular product because of excess inventory they will be forced to provide discount on those products to a large extent. Thus, a company can face loss because of both excess of inventory and limited inventory. VF had resolved this problem by implementing VMI (Vendor Managed Inventory) and retail replenish program to successfully manage the required inventory (Pisano & Adams, 2009). In the past, VF used ‘in-house manufacturing’ and ‘arm length sourcing arrangements’ strategy. There are several challenges in the in-house manufacturing strategy as globalization is changing the structure of apparel industry. The imports had become cheaper than past which makes many manufacturers to look for competitive advantages and restructure their operations. A few had modified the business model and some modified the production in relation to the final customers. The “Third Way” supply chain becomes important for every apparel companies because it can enhance the effectiveness and increase the flexibility to meet the changing needs of businesses, demands for products and services. Furthermore, it can boost the operating performance of a company by improving the management and control with better risk management. Through “Third Way” supply chain, a company can develop its brand image by connecting with superior suppliers. It helps to decrease the investment in asset and thus company can use the savings in other profitable purposes which can generate cash. “Third Way” supply chain helps apparel companies to achieve new market entry and enjoy business opportunities by means of the supplier’s network. Thus, it can expand the sales and production capacity. “Third Way” supply chain can reduce the cost of products by providing superior performance due to low cost structure of supplier. This strategy can help companies to transform fixed cost into variable costs. Apparel companies have several reasons to implement supply chain. Outsourcing through supply chain can provide too much specialized products which are precarious to manufacture when the company has limited knowledge about the success of the product in market. If manufacturing a product needs specific knowledge or modern technology then a specialist can deliver high quality product. Secondly, outsourcing is the sole solution in case of insufficient production capability. In that case, the third way supplier is needed which can provide optimization of machinery and better distribution at a cost which is lesser than the company can afford. Thirdly, when the cost of supplier is cheaper than internal manufacturing cost of company, it will be beneficial to outsource the products from supplier. Fourthly, outsourcing can help to divert the attention of company to other activities such as new product development, broadening the business and other organizational problems. Fifthly, outsourcing helps company to become more active and ready to accept changes and can face any new modification of business or economy. The market, financial terms, competition and technology are changing rapidly. To adjust with the changes a company requires immense resource adaptability. By outsourcing, the risks can be divided among several companies because suppliers never invest on behalf of one company rather they invest according to all the clients. The sharing of investment helps to reduce the risk of company. Sixthly, outsourcing can increase the production because many products are manufactured outside in short period of time and thus the company resource can be directed towards main objectives. Furthermore, outsourcing can increase the efficiency and competence of employees and management. Employees are included in those jobs where they possess required skills and thus it can increase the self-esteem of the employees (Pisano & Adams, 2009). Besides, there are many challenges of outsourcing which VF can face. While outsourcing, the managers must be cautious about mitigating the risks. Working with suppliers, companies require a completely new method of management techniques. VF needs to make in-house routing committee to monitor the work of the suppliers. The work of committee should not influence the regular working of employees. VF’s own technical and mechanical staff, their knowledge, interest may be different from the interest of independent supplier. Relation with third way supplier has the tendency to develop more in future. It can cause dominating position in company’s business relation where at times suppliers control the relation. It will be difficult for VF to establish trustworthiness to the new supplier, in case of changes of supplier or switching to other suppliers. The salaries of developing countries are increasing rapidly and will increase further in future. In addition, third way supplier can change their pricing strategy which will be a big problem for VF. If the supplier is dishonest and witty, the relationship with supplier can end in an unpleasant way. The supplier can work with the competitor of VF at the same time while working with VF. In this way, the trustworthiness of the business may be hampered. Supplier can use the relationship competitively against VF (UEA portal members, n.d.). Recommendation to Chris Frase VF needs flexibility to meet the changing needs of supply chain. Various sourcing strategies had become obsolete today. For example, many of the US brands had abandoned the manufacturing of ‘blue jeans’ in the US, which was one of the selling products of VF. Besides, VF had formed new supply strategy with ‘Liberty’ (Supply Chain Digest, 2009). VF should not depend every time on third way supplier when a new fashion is introduced in the apparel industry. Though third party supply chain is less time consuming method, VF can reduce the ‘in-house manufacturing’ time in several ways. The most efficient way to reduce production time is to decrease the transportation period. Having a direct shipment from provider to customer can decrease the delivery time of final products. VF can allocate multiple levels and multiple locations planning by merging all supply planning. “Third Way” supply chain can develop true partnership between VF and suppliers. VF can gain several advantages to implement “Third Way” supply chain. VF can keep itself away from the adverse impacts of competition in case products are needed in big quantity. There is an opportunity to perform together with supplier on production development and process development which can develop strong long term connection between VF and the supplier. VF can gain potential cost benefit. As it is difficult to move into “Third Way” supply chain promptly, it is advisable that VF should find experienced engineer from its own facility to rearrange or hire employees and send them for training in various manufacturing facilities of VF. The company can select good supplier and manage both outsourcing and in-sourcing which can help to produce the product in an efficient manner. If the supplier produces the product in lesser cost than VF’s manufacturing unit, it will be beneficial for VF to outsource their product from supplier than to manufacture it. VF should make successful attempt to pursue the technology used by supplier. This can restrict VF to become heavily dependent on supplier all the time. Since the US is one of the major markets for VF, it should focus on rapid reaction and good time management to successfully meet the demands of the customers. VF should employ ‘Cut and Make’ approach of production which can help to gain better ownership and control over the supplier. This ‘Cut and Make’ approach helps to control the cost in every phase of inventory management through tight control because in each phase of production there will be independent contract which can allow VF to manage the flow of production from one supplier to another. In case of lifestyle brand, VF can apply packaged outsourcing. The advantage for using this technique is that it costs low in various countries such as Asia and it is cost effective way of outsourcing. With this technique VF can respond quickly in the international market. There is another advantage for using packaged sourcing because in this method, the supplier has the full responsibility for the entire course of actions from manufacturing the product to delivering it to the customer. In this way, VF can save money as well as time for shipment (The Pennsylvania State University, 2010). The “Third Way” supply chain strategy is a good step for VF to expand their business in future. Through this strategy, VF can trounce the traditional system and create a long-term relationship with supplier which can help the company in the long run. As VF possesses good presence in manufacturing business and have experience in on-time delivery of products, it must transfer their skill, experience and technology to the outsourcing suppliers for developing strong supply chain management system. Though there is large time needed in making good relation and partnership with suppliers, once the trust is established the business of VF can run smoothly and the company can experience the changes in international business. There are several limitations in third way supply system because to assemble the products from different suppliers, it needs long time and effort. VF should avoid the frequent shifting of supplier. It should rather make strong supply chain system and help the supplier to develop their knowledge. VF should not close down their manufacturing factories because of outsourcing, rather they should keep the manufacturing factories open because the employees possess the fundamental skills on technology and production and those skills and experience can be transferred to the new supply chain system to fulfill the need of innovation and creativity. VF must tailor their manufacturing strategy according to customers’ needs. It should make alteration in strategy based on importance of distribution channel of supplier. Proper distribution channel can reduce the delivery time of supplier. The trust is the most important in any relationship or partnership. Thus, VF must develop good trust and honesty with their suppliers. Good trustworthiness leads to long lasting relationship. VF must share information, skill, experience, knowledge and technology that can help suppliers to manage the production better and form mutually profitable relationship. A profitable relationship helps to tailor the order according to customers’ demands and incorporate differential features in production in the apparel business. To manage the huge suppliers and supply chain system across the world, VF should implement strong ERP system. ERP system will help VF to track and monitor the records of suppliers’ action as well as different sectors of the company. Though it will cost high to implement new ERP system, in future it will be proved profitable for the company to become more competent and effective. From idea generation to design and finally manufacturing, the product will take longer time in case of outsourcing. Therefore, VF should find out a few solutions on reducing the time which can create benefit for it (Pritchard, n.d.). In this new competitive market, JIT (Just in Time) supply system of “Third Way” supply chain system can help to dominate in the market. VF had variety in style of clothing along with different colours and sizes. Greater variety clothing and small product life cycle can result in larger stock size and thus greater implausibility of demand for any particular product. To control the inventory cost, VF can use ‘lean retailing’ approach which is based on JIT supplies. It can reduce the initial order which can help VF to balance the supply and demand of product more efficiently. As VF had large supply chain all over the world, the JIT method will be slow to respond in the new market because JIT is not compatible with mass production rather it is compatible for small suppliers. However, the small suppliers do not have the production capacity to fulfill the demand of JIT products. To face this challenge, VF can apply flexible manufacturing and new logistics systems. VF can use price enticement to reward the suppliers for making immediate and accurate fulfilment of order and furnish cost penalty to those supplier who will fail to acquire the supply targets. Developing rapid production and flexible manufacturing practices along with proximity to markets can provide VF with the competitive advantage (Doeringer & Crean, 2005). In order to provide apparel products to the customers according to their requirements, VF must understand which product is required in which location and immediately supply it to the retailers. As a part of enterprise wide re-engineering process, VF needs to create unified planning system which can add speed to the planning process in supply chain management. A good planner can match the product and capability with executable plan (i2 Technologies US, 2002). References Doeringer, P., & Crean, S., 2005. Can Fast Fashion Save the U.S. Apparel Industry?. Garment Industry Development Corporation. [Online] Available at: http://www.bostonfed.org/economic/nesg/papers/Doeringer.pdf [Accessed April 30, 2011]. i2 Technologies US, 2002. Reducing Inventory at VF Corporation. Case – Studies. [Online] Available at: http://www.wecreatesolutions.com/port/case-studies/i2-VF-Corp.pdf [Accessed April 30, 2011]. Pritchard, W., No Date. VF Brands: Global Supply Chain Strategy. Supply Chain Management. 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