Global Supply Chain Strategy in VF Brands - Essay Example

? VF Brands – Global Supply Chain strategy Table of contents Introduction 3 2. Global Supply Chain strategy in VF Brands – critical analysis and evaluation 3 2.1 Global supply chain strategy in the literature 3 2.2 Supply chain strategy in VF Brands – analysis 7 2.2.1 Operational challenges for VF Brands – the role of the supply chain management 7 2.2.2 Supply chain management characteristics in VF Brands 8 2.2.3 The Third Way sourcing strategy in VF 9 2.2.3.1 Organizational and market environment 9 2.2.3.2 Third Way supply chain management strategy – requirements, benefits and challenges 12 3. Conclusion – Third Way as the firm’s most efficient global supply chain strategy 13 References 15 1. Introduction The choice of strategies that can effectively respond to the needs of each organization can be a challenging task for the organization’s leaders. In practice, it has been proved that the actual benefits and drawbacks of each organizational strategy take a long time to appear; this is a problem when the change on a firm’s traditional policies is attempted since the value of the proposed strategies is difficult to be proved in advance or even in the short term. However, the elements of this strategy and its expected performance – as it can be measured using figures related to the firm’s performance within a particular period of time – can be important indicators regarding the potential value of a strategy in case that it is established in a particular organization. Current paper aims to explore the benefits and drawbacks of the global supply chain strategies of VF Brands, a firm well known in the global Apparel industry. Particular reference is made to the firm’s new global supply chain strategy, the Third Way, and its potential contribution in the improvement of the firm’s relationship with its global suppliers, thus its growth in the global market. 2. Global Supply Chain strategy in VF Brands – critical analysis and evaluation 2.1 Global supply chain strategy in the literature The literature developed in the specific field is based on a wide range of criteria; there are views, which promote a narrow perspective of supply chain management – in terms of the potentials of the specific organizational sector to be changed following the differentiations in the market trends. Moreover, different perceptions seem to exist regarding the elements of a successful supply chain management strategy: in accordance with Mangan et al. (2008) the criterion on which the value of a supply chain management strategy is decided is the level at which this strategy promotes the use of knowledge related to all organizational activities. However, Branch (2008) notes that key priority of supply chain management in modern market is the identification of practices that will minimize the cost of production. It is further noted that in the context of the global market, the challenges for supply chain are significantly increased; global supply chain management strategies need to address all issues related to a firm’s production needs in the global market – a fact that results necessarily to the increase of complexity of the particular strategies (Branch 2008). Under these terms, the criteria on which the choice of a supplier in the global market will be based cannot be standardized; usually, ‘the differentiation from other players in the marketplace and the existence of a separate identity’ (Branch 2008, p.13) are used as criteria for choosing a supplier in the international market. However, other criteria can be also set in accordance with the needs of each organization and its potentials to respond to the demands of each supplier – demand for specific price, location, time for producing a specific volume of products with ‘pre-arranged’ characteristics. Also, the level at which a firm accepts its potential dependency on another firm – in the context of the supply chain – can be differentiated. Supply chain, which has been defined as ‘a system of entities that supply the next one’ (Long 2000, p.43), can have various forms depending the resources available, the market needs and the organizational culture. The view that a firm has to be totally autonomous in terms of its products cannot be easily applied today, taking into consideration the continuous increase in costs involved – under the influence of the global crisis (Mentzer 2001). For this reason, outsourcing would be characterized as an unavoidable solution but the level of its use by each firm cannot be precisely estimated in advance, as explained above. In the context of the modern market, the development of global supply management is based on advanced technological systems; these systems are appropriately tuned ensuring the security of data exchanged. It is for this reason that most of these systems are preferred by firms in various industries – referring specifically to the e-logistics schemes used by firms of different sizes (Ross 2010, 306). In accordance with Waters (2003) ‘e-logistics focuses on the interfaces between process management, information and communication technology’ (Waters 2003, p.125). The increased security provided by these systems is their major advantage compared to the traditional forms of global supply chain management; the ability of these systems to handle complex organizational needs is another advantage. However, their requirements may be increased – compared to the traditional supply chain management systems. The training of the employees of each firm on the use of the above systems (e-logistics) is the most common method for facing the problems related to the daily use of the particular systems (Ross 2010, 306). The effectiveness of e-logistics in various industries has been used as the reason for the promotion of these systems in markets worldwide. The increased value of e-logistics (in terms of security and ability to respond in complex tasks) is mostly related to the structure of these systems; however, the perspectives of their effective use in each organization are differentiated. In the case under examination, the potential use of e-logistics will be evaluated at the level that the above systems can effectively respond to the needs of the organization – as served through the Third Way sourcing strategy. At this point, reference should be made to the study of Waters (2007) where the following issue is discussed: in order to choose the global supply chain management system that best suits to the organizational needs, the managers of each organization have to take into consideration the following fact: the chosen supply chain management system has to be based on the needs of both the customers and the supplier – or else to offer ‘an alignment between the processes of the customers and the processes of the suppliers’ (Waters 2007, p.25). From a same point of view, Wood (2002) notes that the challenges faced by firms that manage global supply chain management systems can be many mostly because of the differences among the trends of markets worldwide (Wood 2002, p.416). In the above study reference is also made to the potentials of firms to choose among two quite effective global supply chain management strategies, ‘the efficient supply chain and the responsive supply chain’ (Wood 2002, p.418); the former is characterized by long term contracts and explicit roles while the latter is more flexible, being characterized by short term contracts and roles that can be periodically alternated under the influence of the market trends and the firm’s performance/ resources (Wood 2002, p.418). Particular emphasis should be also given on the study of Taylor (1997); the above researcher notes that the global supply chain management systems may seem to be quite complex, however, this is not always the true. In fact, the establishment of a simple methodology for analyzing the global supply chain management problems of a firm, can lead to the development of an effective global supply chain management system. In such systems, three are the main issues that should be effectively addressed: a) ‘the physical flow of goods’ (Taylor 1997, p.5) b) the management of information related to the physical flow of goods (referring to the information systems involving in the particular activity) and c) the mechanism that will be used for the control of the specific supply chain (Taylor 1997, p.5). As for the criteria used for the evaluation of the global supply chain management systems, these are likely to refer to the following three activities: a) the balance achieved regarding the interests of all the parties – referring to the firm, the customers and the suppliers, b) the ability to foresee the market demands – referring to the customer preferences and c) the ability to keep their cost at an average level – referring to the ability of these systems to respond to the needs of the firms and the market within a marginal cost, in terms of balance between the cost of the system and the benefits expected (Blanchard 2007, p.14). 2.2 Supply chain strategy in VF Brands – analysis 2.2.1 Operational challenges for VF Brands – the role of the supply chain management VF Brands is one of the leading firms in the global apparel industry. However, its financial strength cannot secure the firm’s position in the global market. As noted in the case study, the firm has been affected by the global crisis; however, this fact would be normally expected – most businesses in all industrial sectors have not managed to escape the effects of the 2008-2009 recession. The effects of the crisis on the firm’s operations have two different forms: at a first level, the profitability of the firm has been reduced; also, the identification of ‘low cost places to source production’ (case study, p.1) has become extremely difficult. In the past, there were countries where production could be developed at low cost; today that all countries have been involved in such activities the actual level of ‘low-cost production’ has been increased. In VF Brands the need for resolving this problem is emergent; the most effective solution seems to be the reviewing and updating of the firm’s global supply chain strategies; at least such suggestions have been made by experts in order for this problem to be resolved (case study, p.1). The level at which such strategy could actually help the firm to reduce its costs of production need to be evaluated. The key need of the firm seems to be the reduction of both cost and time in producing garments; only in this way, the firm will manage to keep its competitiveness towards its rivals. Under these terms, the following questions need to be answered: is the firm capable of improving its relationship with its suppliers so that to reduce the costs/time of garment production through the suppliers at same levels with the production through its own plants? In case that the achievement of such target is not feasible, are there any alternative strategies for the firm in order to reduce costs/ time of its production? 2.2.2 Supply chain management characteristics in VF Brands Currently, the firm uses a common practice regarding its global supply chain: garments are produced both in plants of the firm and by global suppliers (outsourcing); this is common method of supply chain in the apparel industry. Up to now, the above method has allowed the firm to reach a high level of production and effectively compete its rivals. In fact, without the use of outsourcing the firm would not be able to respond to the market needs (as highlighted in the case study); from this point of view, the use of outsourcing as a firm’s production method seems to be completely justified. However, the terms of the relevant relationship should be further examined. The cooperation between the firm and its global suppliers is based on the agreement that specific garments are delivered to the firm at the volume and the time framework set in advance in the relevant contract (referring to the contract signed between the firm and each of its suppliers, case study, p.1). This practice has been proved quite effective up to now; however, it is clear that changes need to be made on the firm’s global supply chain management because of the following two reasons: the time involved needs to be further reduced; the trust between the firm and its suppliers need to be increased in order to avoid ‘high inventory and long lead times’ (case study, p.1). Another important disadvantage of the firm’s existing global supply chain management systems has been the lack of loyalty and coordination between the firms and its suppliers (case study, p.9). At the same time, there was no mechanism promoting the improvement of existing process, which, as a whole, was time consuming (case study, p.9). Most important, the firm needs to respond to the following challenge regarding its supply chain management: the market needs are often emergent; the firm can respond to these emergent needs only at the level that its own production plants are able to reach the required level of production. When the volume of garments required is quite high, then the need for support by suppliers is clear. However, the following problem needs to be resolved: the time required by the suppliers to complete each order has to be similar with the time required by the firm’s plants to produce the garments of the same quality and the same volume. The use of the ‘Third Way’ sourcing strategy could help the firm to overcome the above barriers and reduce the time/ costs related to its production. However, the above strategy would be effective only under the terms that the firm would be able ‘to create supplier relationships that work as closely with the firm as its internal plans do’ (case study, p.1), a perspective which is analyzed below. 2.2.3 The Third Way sourcing strategy in VF 2.2.3.1 Organizational and market environment In order to understand the potential performance of the Third Way sourcing strategy in VF it would be necessary to refer to the key characteristics of the organizational culture, which has been traditionally the basis for the development of the firm’s strategic decisions. Since its establishment the firm has followed various strategies in order to enter the global market. Initially, the firm was based only on the products it could produced in its plants; however, through the years, the strategy of outsourcing was adopted in order to respond to the increased market needs and to support the firm’s growth (case study, p.2). The acquisition of a series of well known brands has been another strategy that helped the firm to increase its market share; at this point, the firm’s culture has been critical for keeping its brands strength: the firm showed respect to the culture of each brand – avoiding in most cases changing the design teams and the locations of production (case study, p.3). The above strategy is expected to influence also the firm’s new sourcing scheme: the ‘Third Way’ sourcing strategy, which has characteristics of both the traditional methods of production (in – house manufacturing) and the outsourcing (case study, p.2). The estimation of the potential effectiveness of the Third Way sourcing strategy requires the presentation of the market environment, in which VF operates. In order for a new organizational strategy to be successful it is necessary to be aligned with the conditions in the internal and the external organizational environment. Moreover, it is necessary to respond to the actual needs of the market – as identified through the level of sales of the firm but also of its competitors. The global Apparel industry is a promising industry, in terms of the potential profits of its firms; as noted in the case study in 2008, the industry’s sales worldwide reached the $1.3 trillion. However, the competition in the particular industry is extremely strong. Competitors in the industry continuously update their manufacturing practices – improving the quality of their products. At the same time, the acquisition of well-known brands has become a common strategy for the industry’s firms in order to improve their position in the global market. Moreover, the sectors of the apparel industry in which each firm operates tend to be changed, continuously. Expanding in new industry’s areas is another key strategy used by firms in the particular industry for increasing their competitiveness. However, in this way, the uniqueness of firms, in terms of their heritage, is limited. For instance, VF, a firm traditionally related to jeans, has lost its dominance in the particular market; in fact, its sales in jeans in 2008 were about the 5% of the sales in jeans globally, a fact which indicates the level of competition in the global apparel industry. The above fact has to be taken into consideration when evaluating the Third Way as a sourcing strategy for VF. The above strategy could help towards the limitation of costs/ time of production in VF only if it could compete the similar strategies of the competitors and if it could result to benefits in the short term – not just in the long term. The internal and the external organizational environment, as indicatively described above, could influence the performance of the Third Way strategy, but just to a level; instead, emphasis should be given on the requirements and the potential benefits of this strategy – especially as compared with other strategies of similar scope. At this point, reference should be made to the performance of the firm after the recession of 2008-2009; in accordance with the case study, despite the significant expansion of the crisis, the firm managed to keep its losses at relatively low levels – in the above period the decline in the firm’s sales was estimated to 9% (case study, p.5) - which is rather low level taking into consideration the level at which the crisis of 2008-2009 affected markets worldwide. The firm’s financial strength, in terms of cash, and the low level of its financial obligations – compared to other firms in the same industry – have been the main factors that protected the firm from severe losses in the above period. The update of the firm’s global supply chain management – through the Third Way supply chain strategy – as described below – could support the firm’s full recovery but also its further growth in the global Apparel industry, under the terms that certain requirements are met, as explained analytically in the section that follows. 2.2.3.2 Third Way supply chain management strategy – requirements, benefits and challenges As explained above, in section 2.2.2, the firm has to face a series of challenges related to its existing global supply chain management system. Through the Third Way supply chain management strategy the above challenges will be effectively addressed. This target will be achieved mostly because of the system’s structure, which is characterized by the following terms: a) the contract between the firm and each one of its suppliers will be based on a long – term agreement (instead of the short term contracts signed up to now between the firm and its global suppliers), b) the relevant contract will refer to a specific product line; the term that the supplier cannot provide to other firm the particular product line – at least for the period mentioned in the contract – needs to be included in the relevant contract; this term is particularly important supporting the increase of loyalty and coordination between the firm and its global suppliers, c) the supplier takes the responsibility for the funds necessary for the effective delivery of the specific production line – referring to the funds required for the development of the various phases of the production; in fact the supplier would be the owner of the factory and the machinery used in the production process – the company could invest only in case that specialized equipment is required in any phase of the process, d) the improvement of the process is initiated – jointly - by the supplier and the firm, another element of the specific strategy that helps to face the lack of coordination and loyalty between the firms and its global suppliers, e) the firm could support the suppliers regarding ‘the identification of raw materials at discount prices’ (case study, p.11); f) as for the payment of the supplier, this should be such that the cost of the production is covered and a profit for the supplier is guaranteed (case study, p.11). It is made clear from the above that the Third Way supply chain management strategy is based on a unique form of partnership between the firm and its suppliers; in fact, through the specific strategy, a real partnership is developed between the firm and its global suppliers, a fact that could significantly enhance the firm’s productivity and competitiveness. The initial introduction of the above strategy, in 2005, was followed by reactions within the organization, mostly because the new strategy was considered as limiting flexibility regarding the firm’s global supply chain options. Moreover, the development of long-term contracts between the firm and the suppliers has not been an idea welcomed by the latter; also staffing for supporting the specific strategy has been proved to be problematic. The delay in the appearance of the strategy’s benefits, even if a few Third Way contracts have been developed by 2009, has been another of the disadvantages of the above strategy – this disadvantage is related though with the barriers that the strategy had to face, as explained above. 3. Conclusion – Third Way as the firm’s most efficient global supply chain strategy In accordance with the issues discussed above, the following question should be answered: should the firm continue its efforts in order to expand the Third Way strategy in its global supply chain contracts? Or it should rather choose another strategy for covering its global supply chain needs? The above question would be difficult to be answered taken into consideration the different requirements and benefits of each of these strategies. In fact, in accordance with the issues discussed above, each of the firm’s global supply chain strategies has been found to have different benefits and drawbacks. It seems that the identification of the global supply chain strategy that best suits to the organization’s needs requires the use of relevant data, i.e. figures revealing the performance of these strategies in practice. The potential value of the Third Way can be made clear by referring to the relevant figures released by the firm – referring to the figures related to the performance of the Third Way compared to other global supply chain strategies – Exhibit 4, p. 16 of the case study. Through the above figures it is made clear that the Third Way is the most effective global supply chain strategy – requiring less days for forwarding the products (116 days in Bangladesh and 137 in Morocco) compared to the other strategies, within the same cost of other strategies but at extremely low charge for capital per unit (only $0.12 where the firm’s second- most effective global supply chain strategy (Owned and forward) had a charge for capital per unit of $0.93 and an increased total cost, of $7.48 – while the Third Way has a total cost of $6.96 – the lowest cost of all the firm’s global supply chain strategies (as used by the firm periodically, as alternatives). For this reason, and taking into consideration the strategy’s other benefits, as explained above, it is suggested that the particular strategy is chosen as the firm’s main global supply chain strategy, even if its benefits will take a bit more time to be fully revealed. References Blanchard, D. (2007) Supply chain management: best practices. Hoboken: John Wiley and Sons Branch, A. (2008) Global Supply Chain Management and International Logistics. Oxon: Taylor & Francis Long, D. (2003) International logistics: global supply chain management. London: Springer Mangan, J., Lalwani, C., Butcher, T. (2008) Global logistics and supply chain management. Hoboken: John Wiley and Sons Mentzer, J. (2001) Supply chain management. London: Sage Ross, D. (2010) Introduction to Supply Chain Management Technologies. Boca Raton, FL: CRC Press Taylor, D. (1997) Global cases in logistics and supply chain management. Belmont: Cengage Learning Waters, D. (2007) Global logistics: new directions in supply chain management. London: Kogan Page Publishers Waters, D. (2003) Global logistics and distribution planning: strategies for management. London: Kogan Page Publishers Wood, D. (2002) International logistics. New York: AMACOM Division of American Management Association Read More