TOD 522- Supply Chain & Logistics

Management

Assignment 2: - Case Analysis

VF Brands: Global Supply Chain Strategy

Submitted to: Prof. Aravind Panicker

Date: 06th February, 2020

Submitted by: - Group 1

Name Enrolment No.
Karan Trivedi AU1814018
Shruti Vyas AU/HLIC/BCOM/15-18/593
Arnav Godha AU1713005
Masumi Manish Shah AU1713056
Dishita Sheth AU1613011

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Industry Overview: -
The apparel industry which constituted of design, manufacture, and marketing of clothes,
accessories and personal luxury goods has seen several changes over time. Initially, most
garment companies were associated with a specific product segment, but over time and with
increasing competition they have moved into several product lines. And additionally, Shoes
and footwear brands like Nike and Adidas have started entering this segment with their
sportswear. Large retailers like Wal-Mart had also started their private labels, intensifying the
competition further. The competition in the industry was highly fragmented and even the
largest players don't have a market share more than a single digit.

It has been the industry trend that most companies focused largely on design and marketing,
while production was being outsourced to reduce costs. As the skills required for the production
and others barriers to entry for production in this industry was very low, there were thousands
of small and big garment manufacturers around the world. This gave an upper hand to the
companies to choose their manufacturer on their own terms and conditions.
Bilateral trade deals, tariffs, quotas and duties also played a significant role in the economics
of production. But all these things had complicated the supply chain of the industry furthermore
and significantly slowing down the process and increasing the lead time.

The dynamics of the industry has been changing drastically in the last decade with the removal
of garment quotas. Another threat impacting the overall industry was a great depression.
Several small suppliers across the globe have been either shutting down or shifting their
factories creating a prominent disturbance in the industry. And the total industry revenues fell
by 10%.

Problem Statement: - The lack of coordination and trust between suppliers and apparel
companies led to higher inventory and long lead times. Barrier to entry in production is low
leading to strong competition resulting into lower profits

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Q1) Evaluate the merits & Demerits of the 3rd Way Sourcing Model being proposed
at VF Brands.

Merits of Third Way Sourcing Model:

• There would be an agreement with the supplier which would provide dedicated
production lines for producing VF’s products and the contract would be for a number
of years (instead of one season) which would ensure trust between the two parties.

• The supplier would invest in building, machinery, labor, etc. to manage the operations
while VF would invest more into its products rather than fixed assets. VF would still
make certain investments in specialized equipment as and when it’s necessary so that it
could help the supplier and maintain their confidence and trust on themselves.

• This system would enable VF and its suppliers to share their individual needs by way
of preparation of production schedules jointly along with the information regarding
order forecasts (of VF) and production capacity (of suppliers) openly available between
the partners (which was not the case earlier).

• The engineering resources of VF would be shared with its suppliers so that more
efficiency can be achieved. More efficiency would benefit VF while an improved
efficiency would benefit the supplier in terms of lower operating costs.

• It was very easy to convince new suppliers, broadening the supplier base of VF which
enabled them to get lower costs.

De-Merits of Third Way Sourcing Model:

• VF would have to share their information and engineering resources with the suppliers
which could result in leakage of VF’s hard-earned process expertise which could
eventually be used by suppliers to produce products for competitors as well.

• It was very difficult for VF to find experienced engineers from VF’s own factories who
are willing to move across the world so often. To overcome this, VF either hired locals
and sent them to rigorous training program within its own manufacturing division or
top graduates from universities and put them into mentoring program. All this resulted
into more expenses for the company and finding such people who are willing to do this
job was not so easy.

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 • The best existing suppliers did not want to be a part of this system/ partnership. They
did not want to change their process and were set with their existing process. Also
getting them to share information regarding production and cost was a tedious task.

• Despite all the benefits which this process gave, it was still not able to get the Moroccan
Plant debt free due to the drastic declines in the business which earlier came from other
companies.

Q2) Evaluate the various options available for sourcing to a global firm on the
continuum from arm’s length sourcing to vertical integration.

There are various options available for sourcing to multinational companies’ life VF
brands with first total internal manufacturing, vertical combination by the third way
approach, collaborations, cut and make approach, package sourcing. VF brands had their
total manufacturing capacity of jeans but they also wanted to expand into a
replacement market which is from basic jeans apparel to global lifestyle apparel hence
they began to acquire the varied companies just like the NORTH FACE, WRANGLER,
VANS, NAUTICA, REEF, KIPLING and lots of more. because the main reason for them
was to possess the main expansion to the buyer business. within the early stage VF sold
their products through the independent stores except for the opposite apparel business, VF
started its own single brand stores and began its sales through web-based retailing (vertical
integration). VF had a target of getting 1300 stores globally with the target of opening 100
brand stores annually. With the extent to the present VF began to five major “coalitions”
alliances. As all was responsible of its own marketing and sales strategy globally. The
result was the Jeanswear coalition sold more pairs of jeans than the other company within
the world. With reference to this the opposite four coalitions were also successful because
the image wear coalition was making uniform for private companies also as for sports
franchises too. the opposite coalition was associated to other lifestyle brands. These
coalitions were just like the collaboration of VF with the main companies like for
Jeanswear VF collaborated with wrangler, lee, rustler, the action sports were collaborated
with Jan sport, THE NORTH FACE, vans, reef etc. the image wear was collaborated with
redcap, bulwark, the force, CSA. The sportswear was collaborated with Nautica, john
varvatos, Kipling. In 1992, 49% of apparel sold in USA was made domestically, which
reduced to only 12% by 1997. which clearly means the method of outsourcing the product was
done by the majorly in the market. as a result, the production process was not seen as the skill-

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oriented work but the labor-oriented work. if the stores are opened in china there can be a lot
of overall benefit from it. With the other reason was because of recession due to which many
large companies had to sell of their manufacturing plants and do the outsource of their product
like Ralph Lauren. The company started adopting the traditional approach, the cut and make
process. In this process every department/stage is been separately given to each supplier and
the company act as a coordinator and a mediator between them. The company act as a mediator
because of maintaining the coordination and to make sure process is completed on time.

The other is third way sourcing for this method the businesses make strong relationship
with the supplier and vice – versa and gain their trust. Which finally makes the
availability chain effective. during this approach there are some key elements which the
corporate and therefore the supplier follows

1) There'll be agreement shared with company and supplier for manufacturing specific
product for specific time and in specific volume. thereupon the supplies need to agree to
not manufacture same product to the competitors in present or in just future.

2) the suppliers would produce just for the VF and must invest in machinery, logistics and
various investment to manage the assembly.

3) if there's any major improvement needed within the production process to

improvise the merchandise VF would make some special investment within the factory.

4) VF would utilize the purchasing capacity to assist the supplier to use the fabric
and staple and would comply with repurchase the unused staple and plus with-it supplier
would be paid on cost plus basis.

Q)3. Analyse the fit between VF’s business strategy and the various sourcing models that
VF is currently using while also explain how the 3rd way sourcing model will impact the
implementation of the overall business strategy.

Strategy: VF was a traditional vertically integrated apparel company when it made jeans in its
own plants, it was for which it had been known for. The company then went to an outsourcing
strategy when it pursued a global marketing strategy featuring branded life style products. The
change of strategy towards massive outsourcing was initiated for several reasons. The number
one reason was that outsourcing to low cost countries around the world raised companies’ gross
margin, as the production of garments was generally labor intensive and had low barrier to
enter. It also saved companies extra costs (transportation and tax costs) by direct productions

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in sale target countries, especially with restriction of quota and tax tariffs. As a result of
outsourcing, garments companies could focus more on its core business including garment
designing and brand building. The company is focused on attaining sustainable, long-term
growth driven by continued geographic expansion. The company’s goal was to have 40% sales
from heritage brands and 60% from lifestyle brands. There were two critical components for
this growth, one was to expand sales outside the US, particularly in developing countries like
Russia, India, China and second was to expand its direct to consumer business. VF believed in
preserving the organizational culture and unique brand identities of companies acquired. For
this, as critical part of strategy, it allowed companies to keep their design groups intact and in
their original locations.

Sourcing

VF Corp. has developed and relied on its owned manufacturing infrastructure from the begning,
focusing on jeans and denim product as their major market was restricted to U.S only. However
from the begnning of 1980s major apparels companies and competitors of VF started to
focusing on outsourcing the manufacturing to specialized suppliers. VF Corp. mainly started
its outsourcing operation after the acquisition of lifestyle apparel companies and also after their
business startegy started to focus outside U.S market, in different countries like China, India
and other Asian countries. Lifestyle apparel requires contious change in design based on the
market and also manufacturing in other geography require lot of invest which is not possible.
Traditional outsoursing based on the suitable tariff and qouta combination was used by VF.
However, VF did not compromise with brand image and hence build up a network of reliable
and high-quality supplier with international started of operation and worker safety. Result of
this strategy was that by 2009, VF produced only 30% of product in-house and rest where
outsourced, majority of which where lifestyle apparel.

VF have build the relationship with supplier in two different ways. First one was ‘cut and make’
or CM contact and second one was known as ‘package sourcing’. Fraser and Green identified
in 2004 that supplier where facing immense trouble fron the technical side of order fulfillment.
They identified an opportunity and introduced “Third Way” supply chain strategy in 2005
where VF would share their expertise in engineering and technical side to the supplier to build
their capability to resolve the issue of full intergation and building a strong network of reliable
and consistant supplier to serve demand in other countries.

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Under cut and make contracts, VF made contracts with providers for every level of the
manufacturing procedure for example, material, additives, slicing, sewing, washing,
completing, etc. The inventory was owned by VF and providers had been paid for his or her
value addition of each step. Flow of product from one provider to the alternative changed into
also responsibility of VF. The benefit of this contract became that, at every degree VF became
allowed to have a very tight control over cost. Mostly those contracts had been used for
historical past lines out of Central American and Caribbean suppliers and were controlled with
conjunction with internal production operations.

Outsourcing production to third parties as described as "packaged sourcing" had the benefit of
low cost, as companies could choose between a number of suppliers in different locations based
on economic factors, such as labor cost and transportation costs, and trade quota or tariff
considerations to get cheapest price for finished goods. Also it allowed apparel companies to
put more energy and investment of human capital and money in more critical fields like brand
building and retailing. However, “Packaged Sourcing” also came with several risks that
dragged VF away from higher efficiency of supply chain. Inflexibility of change was the first
one. The apparel supply chains were very inflexible, as they usually needed to place the order
8 to 10 months prior to a particular season, and wouldn’t have enough time to add on more or
cut down order by the time they received feedback from customers when the products actually
hit the market. Retailers suffered the costs of both excess inventory and stock-outs.

VF business strategy of entering into lifestyle apparel market and expansion into other markets
required outsourcing operation strategy. The current operation strategy is in line with the
business goal of organisation and even though “Third Way” strategy may not show immediate
result but in long term it would establish VF strongly in these markets.

“Third Way” sourcing

It changed into designed to be half of-way point between full integration and traditional
outsourcing. The concept changed into creating a real partnership among VF and the suppliers.
In this, there has been an agreement between VF and the provider for a particular product line
and that they had been alleged to commit to a extent forecast over some of years. Suppliers
would set up production lines. VF and the suppliers would jointly develop a production
schedule and work together on process improvement. Suppliers would own the factory and the
equipment’s and be responsible for managing work force. VF would utilize its production

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capacity to help the suppliers. Suppliers would be paid on cost plus basis with a margin to meet
its ROA requirements. The challenge of implementing “Third Way” sourcing was staffing.

By analysing exhibit 4, we've seen that there is a huge difference between the lead time taken
by VF owned & operated factories and lead time by third way sourcing. VF owned & operated
factory’s lead time was 17 and in finished goods inventory was 24 days while on the other hand
by third way, where fabric, etc. was by Bangladesh in one case and morocco in other, lead time
was of 48 days and 52 days respectively and in finished goods inventory it was 68 and85 days
respectively. Which says that total days forwarded are much more by third way sourcing. As
compared to price incurred by means of VF-owned & operated sourcing i.e. 7.48 (including
0.93 charge for capital per unit) price incurred via third way sourcing in Bangladesh’s case was
7.06 (including 0.12 charge for capital per unit) and in Morocco’s case was 6.96 (including
0.12 charge for capital per unit) is much less, this serves the strategy by means of improvement
in techniques, expanding commercial enterprise globally and reaching sustainability.

(Highlighted Figures: - They are the lowest of the given costs of all the alternatives)

Whereas we compare the rest of the alternatives, we can see a constant minimum cost for the
alternative of the India- Bangladesh alternative of the “Third Way” strategy. The India
Bangladesh alternative will also help in reducing the lead time as the time to transport the

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sewed fabric for finishing will also be less. Thus, if we analyse it through the comparison of
keeping the parameter of costs, it would be the best possible alternative for long term structural
and cost saving change which can be implemented as a part of the strategy of the “Third Way”

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