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VF Brands: Global Supply Chain Strategy Operations Strategy Academic Group: 02

VF Brands: Global Supply Chain Strategy Operations Strategy Academic Group: 02 Amit Mehta (PGP-17-010) Gayatri Jaisinghani(PGP-17-035) Gurbeer Singh (PGP-17-037) Jasdeep Singh (PGP-17-041) Vartika Upadhyay (PGP-17-080) Archan Thakker (PGP-17-100) Introduction • In 2008, VF Corporation had a total revenue of just over $7.6 billion • One of the world’s largest publicly owned apparel company • Portfolio of powerful brands Lee, Wrangler, The North Face etc. 1899 1914 1917 1969 1984 Reading Glove & Mitten Company Expanded into Lingerie Changed its name to Vanity Fair Entered Jean business through acquisition of Lee Company Series of acquisitions; Blue Bell, Jantzen, Redkap Blue Bell- Jeans company Jantzen- Sportswear & Backpacks Redkap- occupational apparel & uniforms Business Growth 01 Like Jeans Basic apparel 02 Continue investment in growing “heritage brands” like Wrangler & Lee 03 Acquired new brands with global appeal through series of acquisitions 04 Global lifestyle apparel company with strong brands Expand sales outside US; In rapidly developing countries like Russia, India and China In 2001, international sale – 19% of revenues In 2008, it grew to 30% Expand direct to consumer business; In 2009, 700+ single brand stores By 2012, target of 1300 stores globally (75-100 stores annually) 16% 16% 2% 7% 3% 15% 13% 28% Different types of Channels Specalty store Domestic/international retailers Department stores Chains Upscale department stores Mass retailers Royalty income International wholesale $2,751.00 $2,751.00 $994.00 $611.00 $383.00 $153.00 $- $500.00 $1,000.00 $1,500.00 $2,000.00 $2,500.00 $3,000.00JeanswearOutdoor & Action sportsImagewearSportswearContemporary BrandsOther Different Coalitions In keeping with its international expansion strategy, the company was emphasizing on the Asian markets for the location of new stores 2008 Sales Revenue by Coalition larger companies branched out from their traditional “base” i 01 02 03 04 Substantial, Continuous investments to maintain margins; 7-12% of sales in advertising Highly fragmented competition; largest players had single digit market shares; Companies like Nike and Adidas dominated sportswear Global sales of $1.3 trillion (2008) It encompasses the design, manufacture and marketing of clothing, accessories and personal luxury goods The Apparel Industry Large Mass retailing chains Wal-Mart High bargaining power Private Labels Wal-Mart (Faded Glory) Tariffs and Quotas • Complex and ever changing • Different for different countries • Companies chased quotas • Extremely large base of suppliers • Responsive to changes Production outsourced • Focused on design & marketing • Labor intensive process • Few scale advantages • Low barriers to entry • Large base of suppliers The Apparel Industry - Trends Tariffs and quotas were slowly reduced Left Supply chains highly fragmented and illogical All the vertical steps to be in a region or a country After 2005 WTO accord Birth of Supply chain service companies Challenges of finding and managing suppliers increased Asian Manufacturers shifted their business model Started their brands and retail chains e.g. Li & Fung Co. As a result, fabric producers in CAFTA region lost market share to imports from China Supply Chain globalized US companies; Asian Manufacturers Intermediary b/w brand companies & a network of sub- contractors Impact of 2008-09 recession Impact on VF Brands • VF was doing well than its competitors • Only 9% Sales & 30% earnings decline; Low debt, A- bond rating; untapped line of credit • Manufacturer supplying over 15 million pairs of jeans per year • Moved production from Nicaragua to Vietnam • Had to drop due to unfavorable tariffs & quotas • Total industry revenue fell by 10% • Many small garment contractors • razor thin margins & no financial cushions • forced to shut down when volumes dropped • In China, more than 60,000 small contractors closed VF had to scramble to find an alternative supplier Sudden closures of suppliers caused disruptions in apparel supply chain across the world Impact on apparel Industry VF Operations Strategy Internal Manufacturing Outsourcing In 1980’s many apparel companies started selling their internal manufacturing operations and began to outsource from specialised suppliers. But VF had Unique Operations Strategy: With acquisition of North Face in 1990’s, scenario began to change VF’s internal manufacturing not suited to new acquisitions Plants largely focussed on jeans & denims products, while many brands were not Plants located in Mexico & Caribbean to serve US market, but now international expansion, so outsourcing to Asia required Closed many plants. By 2009 it produced 30% products in-house and outsourced remaining Outsourced 100% for their lifestyle apparel, footwear and backpacks Sourcing in VF Supply Chain • Outsourcing required enormous investment and a reliable and high-quality supplier network • Suppliers need to be visited and manufacturing capabilities assessed. • Strict policy of doing business who followed internationally established standards for worker safety • By 2009, VF had more than 1600 contractors and 30 DC’s • Between 2000 and 2009 with acquisition of many lifestyle brands sourcing volume in Asia increased 15 folds reaching to $1.8 billion. Complexity of the product line- For eg. they had over 6,00,000 SKU’s, Jeanswear- 1,00,000 SKU’s Short product lifecycles, so required constant replenishment of new designs Challenges Widely differing & priorities of the brand coalitions • Some brands design was supreme like Tommy Hilfiger, cost was not a critical issue • other brands, game was low cost and rapid replenishment (responsive supply chain) • Also significant differences in product requirements across regions of very similar products The Apparel Supply Chain Designing Planning done for Fall 2009 collection Iterative process of creating designs and tweaking them, and physical prototypes sewn June 2008 Marketing Group June 2008 Forecasting prices, volumes and margins for each item Sourcing Sep-Dec 2008 • Raw materials, fabrics, accessories • Location – cost & trade quote/ tariff • Managerial & technical expertise • Production of samples • Obtaining price quotes Order Placing Jan 2009 Order placing by suppliers (or VF) of Raw materials, fabrics Procurement lead time can vary from 4 weeks to 12 weeks Production March-June 2009 Production in batches to optimize capacity utilization, to cater to multiple garment manufactures Demand Forecasts Regional DC’s (Asia) June 2009 Sorting, Packing, for bulk shipping to target markets US port 2 weeks lead time Distribution Centre’s After customs clearance Retail Stores Fall collection Early July 2009 CM Cut and Make Contracts OPTION 1 PS Package Sourcing OPTION 2 Third Way Long term Relationship OPTION 3 Third Way Supply Chain Strategy Highly Efficient, Globally diversified Supply Chain 2004 Sourcing Strategy Third Way Supply Chain Strategy Sourcing Strategy • Separate contracts for suppliers at each stage of production process • Short- term contracts (Typically for one season) • VF owned inventories • Payment to supplier was based on the value added to the product • Opted for heritage lines ( Central America & Caribbean) • Single supplier responsible for the entire process ( RM to FG) • This supplier took care of subcontractors as well as the logistics • VF did not own any inventories • Payment to supplier was done on piece basis • Used for lifestyle brands (Asia, Europe and North America) CM Cut and Make Contracts OPTION 1 PS Package Sourcing OPTION 2 Why the Third Way Sourcing Strategy ? Effort from suppliers was minimum as they operated on razor thin margins Some inefficiencies existed even though overall corporate margins of 10-15% were achieved Sourcing Strategy 01 02 03 04 05 06 07 08 Lack of Coordination Loyalty Issues Production Capacity Transparency Excess Inventory Competitors’ Products Tedious Process No Improvement Short-term contracts made the suppliers very insecure No Guarantee from supplier on the capacity allocation for a particular product Inventory levels at suppliers side were never disclosed. Suppliers feared bias while biding for business Suppliers leveraged inventory as a security against the company Risk Hedging technique for suppliers due to low switching costs Company had to negotiate for each product from scratch Suppliers were not interested in process improvement as their margins were very low The Third Way Sourcing Third Way sourcing Key Elements Designed to be a perfect mix of full integration and traditional outsourcing Strike long term agreement for a specific product line No competitors’ product of the same category 01 Supplier to set up dedicated production line for VF’s product Invest in building, equipment, labor, logistics services, admin etc. 02 Collective effort to develop the production plan Information exchange between S & C on forecast and capacity 03 VF and Supplier to work on continuous process improvement VF to provide engineering expertise, % of savings passed to VF 04 Suppler Owns the factory, manages labor VF will invest in special equipment and/or on capital need basis 05 Objective: Leverage internal technical expertise to have a greater control over the supply chain without owning the suppliers VF to leverage its buying power to source fabric & RM Buyback clause for unused fabric and raw materials 06 Payment to the supplier Cost plus basis + margin, ensure a good ROA 07 Challenges Marketing Dpt. Worried about loss of flexibility in sourcing 01 Failed Projects Moroccan Jeans plant, debt burden in 2009 02 Staffing Problem  Deploy experienced staff from VF’s internal factories  Hire locals, Train them with experts from VF  uploads/Industriel/ 02-vf-brands.pdf