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Op-Ed: Unified Strategies: The New Strategic Sourcing Paradigm in Action

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The end of the FOB-only competitive era has opened the way to new, more rational strategies. However, the 40-year reign of the marauding garmentos has left its mark.

It will take time to overcome the endemic mistrust between customers and their suppliers, and the even greater mistrust between the industry as a whole and rest of the world.

The problem is parallax: Imagine you are an astronomer. You are looking through your telescope at a specific star.  You then take your telescope, travel 500 miles and look at the same star. You will see that the star has shifted position in the sky. In fact, the star has not moved, it is you that has moved. Astronomers define this apparent change as parallax.

What is true when we look at the stars in the universe is equally true when we look at our relatively small global garment industry.

  • To the suppliers, customers are bunch of extortionists who care only about FOB price
  • To the academics, suppliers are a bunch of exploiters, who unless policed 24 hours a day, will invariably employ 10-year-old children 70 hours per week in slave-labor like conditions, just to earn a few extra cents profit.
  • To the customers and their factory suppiers, the academics are a bunch of ignorant ideologues whose entire knowledge of the global garment industry is limited to walking down the aisles of Saks Fifth Avenue, and who know little and care less of the highly competitive nature of the garment industry, and less about the problems of working in countries with minimal logistics, less electricity and virtually no educated management.

To move forward, we must first realign our perception to a unified view of the global industry as a whole and the role of each player in that industry

Fortunately, a new generation of professionals from all disciplines is now moving from the parallax view to a unified view.

This is the first step to a new industry where players compete, while at the same time cooperate within the industry and collaborate with important players from outside the industry.

These are the two strategies required by the new industry: Cooperative Strategies – where customers work directly with their factory suppliers to increase more services such as higher productivity and faster speed-to-market, and Collaborative Strategies ­– where customers work together and with other global institutions for mutual benefit.

From Past to Future

Once again, back to the past. The customer dictates his requirements to the supplier in terms of delivery, price, quality, compliance and other areas of corporate social responsibility (CSR). In this regard, the customer offers few if any assists.

Competitive strategies are by nature fundamentally flawed:

  • Because each customer has its own requirements, the factory supplier is faced with the need to meet differing needs within a single structure and system. For example, since each customer has its own compliance standards, the factory is faced with the need to continuously modify his factory to meet conflicting requirements;
  • The factory often does not have access to the facilities to meet customer requirements. For example, without professional support, the factory cannot reduce required lead times to meet customers’ delivery dates or increase productivity to meet customers’ target prices;
  • The factory lacks professional management and technical skills needed to provide services to meet customers’ requirements;
  • In many cases the factory lacks access to the capital at reasonable rates of interest, needed to develop the operation their customers require.

The flaws inherent in competitive strategies invariably cause customers to migrate from the traditional factory supplier to the transnational giants, who because of their size, are able to develop in-house facilities to meet even the most exorbitant customer demands.

The transnational factory can effortlessly pass compliance simultaneously for any number of compliance structures.  If necessary, it can construct purpose-built factories to meet the specific needs of special customers.

The transnational factory employs teams of highly skilled professional engineers who constantly work to reduce lead-times and raise productivity.

The transnational factory with its educated and experienced managers is at the forefront of the strategic move from product-maker to service-provider.

The transnational factory with branches in South Asia need not worry about the 11%-15% charged by local banks in India, Bangladesh or Pakistan banks.  They can meet their full banking needs in Hong Kong, at Hong Kong rates.

The result is until and unless new strategies are implemented the transnationals have two unbeatable advantages over the locals:

  1. With higher productivity, they can produce at lower cost per unit.
  2. With greater service, they can charge a premium.

Lower costs and higher prices make competition very hard.

Into the present

Cooperative Strategies

The customer dictates its requirements, but at the same time assists the factory to meet those requirements. For example, the single most important pro-active move is to increase factory productivity. This is where the cooperative strategy brings strategic change.

There are two points to consider here:

  1. In the West we cheer when productivity rises by 5 percent.  In India where productivity is 50 percent compared to China and increase of 25 percent is a reasonable short-term goal.
  2. We can divide manufacturing costs into two areas.

a.         Labor:  Wages paid to those who physically change the garment

b.         Overhead:  Everything else including, all other salaries, electricity, rent, the Directors car, etc.

In the West, where wages average about 12-15 times those India, but where everything else is relatively cheap, overhead equals about 70 percent of wages. However, in India, where wages are relatively low but the cost of turning on the lights is much higher than in the U.S., overhead averages 450-600 percent of labor.

  • Imagine an industry where the customer has designated the material and trim suppliers and the costs of each item.
  • Imagine an industry where the customer knows the precise consumption of all materials
  • Imagine an industry where the customer knows the number of standard minutes per piece
  • Imagine an industry where customer/factory negotiations revolve solely around the price per standard minute.

Actually this takes no imagination whatsoever.  This is how the global garment industry operates — at least at the top.

Case Study IndiaWe are looking at two situations:I:  The current:  30 minutes per piece

  1. You operate a factory in India.  Your wages averages $130 to $155 per month.:  $142.50
  2. The customer places an order at FOB $6.00
  3. You hope to earn 5% net on FOB = 30¢
  4. The customer is paying you CM 6¢ per standard minute
  5. The garment is calculated at 30 minutes = $1.80

II:  The future:  Productivity increase 25%:  24 minutes per piece and where you give the worker the same 25% wage increase

 

India Cost – 30 Min

India Cost – Productivity + 25%

FOB

$6.00

FOB

$6.00

Customer CM per STM

$0.06

Customer CM per St Min

$0.06

Net Profit

5%

Net Profit

5%

Wage Month

$142.50

Wage Month

$178.13

Wage Day

$5.48

26

Wage Day

$6.85

26

Wage Hour

$0.55

10

Wage Hour

$0.69

10

Minute pay

$0.0091

60

Minute pay

$0.0114

60

Minutes per unit

30

Minutes per unit

24

Customer pays

$1.80

Customer pays

$1.80

Labor Cost

$0.27

Labor Cost

$0.27

Profit

$0.30

5%

Profit

$0.55

9%

Overhead per unit

$1.23

Overhead per unit

$0.98

 

This may appear to go against all common sense, but consider the following:

You have increase wages 25% $142.50 to $178.13

Labor cost per unit has remained 27¢

Net Profit has risen from 5% to 9%

You have reduced cost by 25¢

To put it another way it is as if you are now paying your workers 2¢ per unit

 

 

Actually, the reality offers much greater advantages. I have seen engineers who have doubled productivity within 6-12 months, at well-managed factories making complex garments.

Cooperative strategies are quickly becoming the norm among U.S.-based major brand importers as well as some garment retailers. The consequential advantages of cooperative strategies to both customers and their factory suppliers are enormous. However, it is important recognize that cooperative strategies would have been impossible (and indeed are still impossible) to customers living in the FOB-only competitive world, for one obvious reason: The benefits of the new skills introduced by the customer to the factory will invariably be passed on to all of the factory’s customers, almost all of which are the customer’s competitors.

Herein lies the axiom on which all cooperative strategies are based: Benefits for all are more profitable than benefits for none.

However, cooperative strategies face serious limitations. A customer cooperating with its factory brings beneficial change to both. However that change is limited to what the single customer can achieve working alone with its suppliers.

The problem is that most of the problems facing the factory cannot be solved internally. The industry must recognize that most change must come from the outside. To affect real change, both the customer and its supplier must move from the factory to the industry as a whole, and beyond.

If the customer and/or his factory supplier wants to play a role in that change, it must have a seat at the table where the decisions are made.

Just as cooperative strategies are based on the belief that for those operating within the industry, benefits for all is better than benefits for none; so too must we in the industry recognize that to the degree that our industry operates in the real world benefits for all includes everybody within and without the industry

Collaborative Strategies

If we are to affect real change, these are some of the people who must sit at the table where change is decided:

COLLABORTIVE STRATEGY

PLAYERS

CUSTOMER

FACTORY

GOVERNMENT

INSTITUTIONS

Local Transnational Development Banks

Labor

Education & Training
WB ADB ILO Solidarity TAFF (Sing.) ITC  (HK)

There is however one proviso. We cannot bring everybody to the table. Not everyone is interested–let alone committed to change. Those still living in the old pre-professional era with the old FOB-only strategy when the industry was dominated by the garmento-marauders, have no place at the table.

Cooperative strategies begin with a single country.

The coalition of the willing

  1. Customers: We start with a small group each with an annual sales volume o approximately $8-$10 billion and with a good record of ethical performance;
  2. Factories:

i.         Local: Large well run operations located in a single target country

ii.         Transnational: Interested in investing in target country

3.  Government

4.  Institutions:  Development Banks

i.         World Bank (WB)

ii.         Asian Development Bank (ADB)

5.  Institutions: Labor

i.         International Labor Organization (ILO) part of the United Nations

ii.         Solidarity part of the U.S. based AFL/CIO.  (There other suitable responsible national labor unions. I list Solidarity only because I am currently working with them in a collaborative strategy)

6.  Institutions Education

i.         Textile and Fashion Industry Training Centre, Singapore (Taf.tc) One of the most qualified, if not the most qualified training facilities in the world, with fine record of overseas projects

ii.         Institute of Textiles and Clothing, Hong Kong (ITC).  Perhaps the world’s leading professional garment institution specializing in the global garment export industry

We have the players.

Now for the tasks:

UNIFIED STRATEGY

COLLABORATING PARTNERS

COMPLIANCE Customer Factory ILO In-House
LABOR LAW Customer Factory ILO Government
UNIONS Customer Factory ILO Solidarity
SUSTAINABILITY Customer Factory SAC Other
PRODUCTIVITY Customer Factory
TRAINING Customer Factory TAFF Sing.  ILO
EDUCATION Customer Factory ITC HK ADB
TAXATION Customer Factory World Bank Government
GOVERNMENT POLICY Customer Factory World Bank Government
TRADE RELATIONS Customer Factory World Bank Government
FOREIGN DIRECT INVESTMENT Customer Factory World Bank Government

The unified strategy begins in a single country with 5 customers and 5 factories.

The goal for the first 12 months:

  1. Increase productivity by 25 to 50 percent
  2. Ensure 100 percent compliance to a single standard
  3. Introduce quantitative measures for sustainability
  4. Begin work to create viable professional labor movement, where unions exist to negotiate higher wages and better working conditions for their member

i.         Professional non-politicized union leadership

ii.         Transparent union operations

iii.         Collective bargaining

iv.         Mediation

v.         Compulsory arbitration

5.  Work with government through the ILO to create practical and enforceable labor laws

6.  One year training for merchandisers, mechanics, line engineers, QC, QA and other areas required for a successful garment industry

7.  Begin work with government to improve taxation, trade relations, FDI and other policies related to the garment industry

8.  Begin planning a tertiary degree-granting institute.

 

The success of a unified strategy is based on its ability to prove tangible benefits to all the players.

Customers:  More reliable product at lower cost

Factories:  Higher profit with more reliable capacity

Workers:  Higher wage and better working conditions

Garment exporting countries:  Higher employment, greater exports, higher tax receipts, and a growing industrial sector

 

This is not some academic dream and I am not a college professor. The industry is moving toward unified strategies as a practical solution to long existing problems, which have plagued us from the very beginning just as they plague us today.

Provided these strategies are implemented correctly, the industry will benefit, and so too will the people in the countries where we produce our goods, and the consumers in the countries where we sell them.

 

DavidBirnbaum

David Birnbaum began his career as a patternmaker in the United States and later managing and building factories in Asia and Latin America. He started Third Horizon (THL), a strategic development organization specializing in garment production and sourcing. His clients included major factories as well as brand importers and retailers.

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