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Changes Sweeping Global Manufacturing

Sourcing executives and government officials address key issues shaping the supply chain at the first WWD Sourcing Leadership Forum.

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NEW YORK — Sourcing executives and government officials gathered here last week to address some of the key issues that will shape the future of manufacturing and supply chain management at the first WWD Sourcing Leadership Forum.

The day-long conference drew more than 100 people and featured speakers from apparel giants such as Liz Claiborne Inc., Nike Inc. and VF Corp., as well as representatives from the U.S. Department of Commerce and U.S. Trade Representative’s Office. Themes that emerged included:

  • A consolidation of factory resources.

  • Focusing on top-performing suppliers.

  • Development of mutually beneficial relationships to

    spur growth and protect future business.

  • Improving operations and lowering costs.

  • China’s impact on the global economy.

  • Greater emphasis on corporate social responsibility.
Here’s what the speakers said:

Bob Zane, senior vice president, Liz Claiborne Inc.

Zane stressed during his presentation the importance of consolidating apparel production at fewer, larger factories that have a bigger stake in the success of Liz Claiborne’s brands.

“We have to abandon some of our old habits,” said Zane. “This is not the time for country-of-the-month sourcing. This is not the time for factory-of-the-season sourcing and this is not the time for bargain hunting.”

Retailers, pressured by increasing competition for a more discerning consumer, have demanded more from their suppliers like Claiborne, which has a portfolio of more than 30 brands, including Juicy Couture, Ellen Tracy and Enyce. Stores not only want well-produced, well-priced fashion, they want to be the only ones carrying individual styles. They want to bring hot looks onto their selling floors that will quickly drive full-price sales.

“Do you remember when we used to quote six- or even nine-month delivery windows?” Zane asked the sourcing executives attending the summit. “Who among you has the courage to do so today?”

In addition to pressures from consumers, policy shifts easing the flow of global commerce and the accompanying rise of China as the world’s workshop have forced the brands to evolve.

“Although things are relatively stable and predictable right now, our world is about to change,” said Zane.

Even as they are swept away in this shift, brands do have some control over how their businesses adapt to new market realities.

“Our success is dependent on the identification and selection of the vendors who will make up our ultimate sourcing configuration,” he said.

To Zane, the future of production for apparel brands looks like the present for footwear. He pointed to shoe factories in China that are geographically close to materials suppliers; employ tens of thousands of workers, including product development specialists, and have transparent pricing so brands know what each step of the process costs.

Apparel producers, let loose from a global system of quotas that expired last year, are concentrating their manufacturing in China and developing a similar supplier base, he said.

Over the next few years, Claiborne expects to narrow its manufacturing base to 120 factories in 15 or 20 countries, from the 300 factories in 40 countries it now uses. Crucial to operating in this new, leaner world will be developing more open, collaborative, profitable connections with those factories.

“Manage your vendors and your vendor relations, and good things will follow,” said Zane.

Developing closer relationships with factories will change life for many on Seventh Avenue.

“If fewer factories in fewer countries are to provide more products and more services, it stands to reason that those factories will undertake and execute functions that are now the responsibility of U.S.-based departments,” said Zane.

This means people at the factories will take larger roles in many of the basic design aspects, such as color approval or even final sample approval.

“We must arrange for the transfer of skills that will enable and facilitate the process,” he said.

Scott Quesenberry, special textile negotiator, Office of the U.S. Trade Representative

U.S. trade policy is sprinting down two roads at once and running out of time, Quesenberry told the forum.

In addition to working on widespread trade liberalization through the WTO, the Bush administration is negotiating and implementing several agreements with individual countries and regions to loosen restrictions on commerce.

However, Trade Promotion Authority, which has helped the Bush administration move its agenda ahead — it gives the President the power to negotiate trade deals that Congress is allowed only to approve, but not amend — expires in July 2007.

“Frankly, I don’t see TPA being renewed,” said Quesenberry.

That political reality has put a tight deadline on the WTO’s Doha Round trade talks, which seek to reduce duties and open up markets around the world for industrial goods such as apparel, as well as agricultural products and services.

“If we don’t get something done by [the expiration of TPA], there’s a real chance we won’t be able to sign on to Doha,” he said.

The WTO is scheduled to determine the general layout of how Doha would reduce duties in the various areas by April 30, a goal that has been set several times and missed. Though apparel and textiles make up a small portion of worldwide trade, the debate over how to treat the sensitive sector could ripple throughout the larger talks.

“Textiles could make or break it,” Quesenberry said of the Doha talks.

Domestic textile firms want to address apparel and textiles in separate sector talks that would keep tariffs higher in the area and, they say, protect U.S. manufacturing jobs.

“If we have enough countries that are interested in doing a sectoral, we’ll be happy to participate,” said Quesenberry. “We can’t say we have a government position on something we don’t have yet.”

A proposal for the talks has yet to be put on the table, but he said that would probably happen by the end of next month.

As the global talks unfold, the USTR’s office is working on a number of free trade agreements, including recently announced negotiations with South Korea and Malaysia.

Quesenberry is also working on the implementation of the Central American Free Trade Agreement, which has had a rocky start. The deal is intended to eliminate tariffs on trade among the U.S., El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and Costa Rica.

So far, the U.S. and El Salvador are the only countries to go live with CAFTA. That has pulled El Salvador out of the Caribbean Basin Initiative, which let companies use materials from the region to make apparel and send it to the U.S. duty free. Accordingly, many goods now coming into the U.S. from El Salvador are subject to duties they hadn’t faced under CBI, and those duties, as of now, will stand until CAFTA is fully implemented by all of the countries.

“We have a solution that we think will work,” said Quesenberry. “Unfortunately, it doesn’t appear that we have that power under the legislation, which means we have to go back and fix legislation.”

He said making minor changes in the CAFTA legislation would clear up the problem that has affected millions of dollars worth of goods.

“Getting five words past Congress is sometimes tougher than it ought to be, but it is something that the administration supports,” he said. “I cannot promise you a timeline.”

Michael McBreen, director, global apparel operations and strategic planning, Nike Inc.

In its evolution from a global brand to a global company, Nike has made many changes, but McBreen is trying not to lose touch with the personal element.

“Take away the phones, take away the e-mails, get people sitting face to face and get them working in a face-to-face, collaborative environment,” he said. “The ideal environment for me is a round table with about 10 chairs around it so I can bring the whole team together, and when you do that, what you find is that you take months out of the process.”

Taking time, as well as cost, out of product development and delivery is always on McBreen’s mind, in part because he has no choice but to focus on it.

“The consumer today is more diverse, more informed and more sophisticated than at any point in history, so we’ve got to be able to adapt,” he said. “The consumer today wants it all. They want a consistent brand story, they want a consistent materials story, but they also want to be unique. Our sourcing strategy has to align around that.”

That strategy is focused on larger factories with which the brand has closer relationships than in the past.

“The days of being able to chase sourcing from factory to factory are over and they’re over for a number of reasons,” he said. “It diminishes our ability to build that strategic partnership and build the infrastructure that enables our success, both in terms of speed and cost.”

He called this newly found teamwork between factory and brand “positive leverage.”

“It’s possible to create greater leverage and greater results by building a strategic partnership as opposed to the traditional buyer-seller relationship where, ‘I’m the buyer. You’re the seller. I’m right, you’re wrong, I get a discount,'” McBreen said.

John V. Windham, executive vice president, Calvin Klein women’s better sportswear, Kellwood Co.

Kellwood took full control of the license for Calvin Klein better sportswear in September. Since then, Windham has helped establish Kellwood’s newest and most up-to-date supply chain.

“We have the ability to not have any bad habits,” said Windham.

His first task was identifying factories that had a background in producing better and bridge lines, a departure from Kellwood’s heavily moderate portfolio. Building a supply chain from the ground has allowed the Kellwood team to focus its cost-control efforts on issues outside the factory.

“We’ve really focused our suppliers in the areas where we were able to take advantage of raw material availability,” said Windham, adding that the relaunch of the brand brought average price points down by about 20 percent. “We develop the fabric with the supplier and the mills co-jointly, and in so doing, we’re able to bring down the cost of our components.”

The new line also allowed Kellwood to get factories involved at the earliest stages of development.

“We engaged [the factories] from the initial prototype stage,” said Windham. “Our design teams have been to Asia twice. They actually sit and sketch there with the vendors, with the agents and suppliers, and it’s very beneficial.”

Like other major brand manufacturers, Kellwood is looking to reduce the number of factories with which it works. For the new line, the company has focused on four suppliers. Windham said he’s moving toward an all-technology platform.

“We look to be paperless,” he said. “That’s a huge savings in terms of time.”

Windham believes that how responsibility for the supply chain is structured can have the greatest impact on performance.

“Our supply chain calendar has 115 components,” he said. “I look at nine of those.”

Robert McKee, fashion industry solutions director, Intentia Americas Inc.

Sourcing executives can look to cut costs and assure future stability by gaining a thorough understanding of every aspect of a supply chain and focusing on the customer.

McKee, a 25-year textile veteran, said sourcing executives needed to focus on the benefits of what he dubbed “the intimate supply chain.”

“The idea behind the concept is to move our organizations to become more customer-centered and do that through intimate knowledge of the organizations that make up the supply chain,” said McKee.

It’s a concept that McKee said is driven by providing solutions rather than increasing the amount of processes involved in the chain.

“That’s a big difference,” said McKee. “If it adds time but doesn’t add value, then it needs to be eliminated.”

McKee also warned that establishing open relationships would be key for the future, as increased competition will put pressure on resources such as labor and raw materials.

“We’re going to have a real tough time finding the great resources that we enjoy today,” said McKee. “So, becoming intimately involved with everybody in our supply chain is the key to making sure we have appropriate relationships inside our supply chain to insure deliveries in the future.”

Roger Mayerson, vice president, product development and global sourcing, Casual Male Retail Group Inc.

It wasn’t until Mayerson was well into his career that he learned the benefits of collaborative relationships.

“I spent the first half of my career being dictated to by retailers. I spent the second half of my career dictating to vendors how to do their job,” said Mayerson, who has spent 30 years working in sourcing and product development for Kohl’s, Target, Marshall Field’s and Mervyns. “Eventually, I figured out there was a better place, and the place was called collaboration.”

Mayerson doesn’t mind divulging his source for developing successful collaborations — a book on training dogs, which was given to him as a gift from a previous manager.

“I opened up the book and the first chapter said, ‘Get a good dog,'” said Mayerson. “What ‘Get a good dog’ translates to in our world is, you have to have a vendor who responds to your needs and expectations. You don’t get a poodle to hunt birds.”

Mayerson said companies should establish partnerships with their best-performing vendors. The goal is collaborative development, which prevents the same problems occurring year after year.

“You have to be clear about your expectations,” said Mayerson. “If you want a product delivered in 12 weeks, you need to make sure that up front in your negotiations you say 12 weeks.”

Mayerson also recommended providing vendors with a plan that conveys growth expectations. “If we can give them a three- to five-year road map, first, they know they’re going to be here, and second, they can build their own plans around where you’re going,” said Mayerson.

One of the greatest hurdles facing sourcing executives is understanding the problems their vendors face and conveying expectations to workers who are separated by thousands of miles.

“It comes from true partnerships. This is what I think the industry, more than anything, has lost over these last years,” said Mayerson. “Without having the person doing the work understanding those expectations, how can you expect them to meet those expectations?”

Rewarding vendors is also key, he said, adding, “There are a lot of ways of recognizing great development, but I always thought the best way…is [to] give them more orders.”

Thomas A. Glaser, vice president, global sourcing, and managing director, VF Asia Ltd.

Glaser believes there’s been more than a little overhype when it comes to the rise of China and its impact on the global economy.

Glaser, who joined VF in 2001 and has more than 25 years of experience in the apparel industry, sought to alter what he views as the misconceptions regarding China’s manufacturing dominance and economic prosperity.

Like many sourcing executives, Glaser questioned the need for quotas or safeguards on Chinese goods, comparing them to damming a river. That metaphorical dam broke with the removal of quotas at the beginning last year and soon was patched with safeguards, said Glaser. During that free-flow period, there was little doubt China’s export levels surged.

“We know that China really did roar,” said Glaser, “and if you look at the market share increases, they are pretty amazing.”

However, Glaser noted that, contrary to popular belief, those gains did not take the wind out of the sails of American manufacturing.

“They stole share from a lot of different people around the world,” said Glaser. “Actually, last year was a very good year for manufacturing in the U.S. It went up 4.5 percent. Overall economic growth in the U.S. was 3.5 percent.”

Glaser did concede that manufacturing employment has declined.

China’s dominance as a global manufacturer is another concept Glaser believes has been overblown. “China must be the world’s workshop, right?” asked Glaser. “I took a look at that and, actually, it’s not. The European Union is the largest exporter. Germany is actually the largest [exporting] country.”

China’s rapidly increasing share of global manufacturing has yet to translate into sizable gains for the Chinese economy. Glaser noted that China is faced with high unemployment rates, especially in rural areas far from the country’s coastal provinces, where most factories are located. Glaser said China is starting to encourage factories to build further west in an effort to use the untapped labor pool.

“China is actually quite poor,” said Glaser, pointing to China’s $1,400 per capita income. “I think there’s only one country in this hemisphere, Haiti, that has a per capita income lower than that.”

The U.S. holds the upper hand when it comes to trade, and China relies heavily on the U.S.

“We’re probably going to win in a trade war,” said Glaser, noting that 11 percent of China’s economy is interdependent with U.S. trade.

The concentration of sourcing activities in China isn’t a result of pricing advantages, either, said Glaser. Instead, China has the advantage of being able to provide a vertical supply chain and the benefit of economies of scale.

“They have responsive and well-managed factories,” he said. “They have political and economic stability.”

But this idea, too, has been overblown. “From a compliance perspective, China is complex,” said Glaser. “There’s a tremendous amount of overtime. As we all know, we have to work very carefully with our factories there.”

Martin Trust, president, Brandot International

The best opportunities for success come when buyers and sellers have equal amounts of skin in the game, Trust said.

Trust has been establishing joint-venture production facilities in India, Sri Lanka and the U.S. since 1970, when he founded Mast Industries Inc. The company eventually became one of the world’s largest apparel producers, with sales of $1.5 billion, before it merged with the Limited Stores Inc. in 1978. After retiring from the Limited in 2003, Trust founded Brandot International, which holds an equity interest in 18 textile and apparel companies.

Trust sees too many pitfalls in the traditional relationship between buyer and seller that stand in the way of product development.

“It’s typically a relationship that is based on narrow and opportunistic considerations,” said Trust. “It’s primarily evaluated on strict financial terms. Price is generally the paramount issue and it neglects, for the most part, the organizational, cultural, political and human aspects of any relationship.”

The result, said Trust, is a relationship that is confrontational rather than collaborative and devoid of an entrepreneurial spirt that Trust believes spurs brand building.

Finding the right partner is a matter that Trust equates to marriage, complete with introduction, courtship and engagement periods. Typically, Trust said his company works with a vendor for two to three years before entering into a joint venture. It’s time spent discovering compatibility and searching for shared values.

“If you’re expecting quick returns, you’re going to be disappointed,” warned Trust. “Typically, we lose money the first, second and sometimes even he third year in building up a joint venture.”

One of the greatest benefits of joint ventures, Trust has found, is that participants have been more willing to take risks. “People were willing to take risks for opportunity,” he said.

Trust admits that opting not to take a majority stake in a venture meets with skepticism and resistance from those coming from a corporate financial background.

“My feeling was, I’m never going to control a factory in Sri Lanka or Indonesia or China anyway,” said Trust. “I’m in Andover, Mass., and in what way am I really going to control these guys from doing bad things?”

Having equal stakes in a venture does not assure that all things will work out equally, however.

“I would accept the fact that every event in the life of a partner won’t be fair to everyone,” Trust said. “It’s impossible to run a partnership for any length of time and feel that every year everybody’s going to get equally treated.”

Ken Mizera, vice president, TradeCard Inc.

Providing all points of a supply chain with access to real-time information is key to eliminating excess costs, Mizera said.

Real-time information relies on companies moving away from paper-based methods of doing business. Paper, said Mizera, slows things down and obscures any view of how a supply chain is truly operating.

“Companies don’t know the status of transactions,” said Mizera. “There’s a complete lack of visibility because paper is moving back and forth. When you don’t have visibility, financial and procurement executives can not make fully informed decisions.”

Mizera noted that the pace of business has only increased, making visibility and flexibility increasingly important.

“Many of you are brand owners,” said Mizera. “You have customer demands, your retailers are asking you for quick responses. They’re giving you smaller orders and asking for more shipments. They’re asking you for greater collaboration.”

Mizera recommends companies adopt a common technology platform that provides the visibility necessary to make adjustments and respond to consumer demands.

“If you can increase the visibility and access to real-time information, you make a greater proportion of your supply chain execution decisions opportunistic versus reactive,” he said.

Jim Leonard, deputy assistant secretary, textiles and apparel, U.S. Department of Commerce

Bringing apparel made in China into the U.S. this year has been a predictable affair, especially when compared with the chaos importers were dealing with a year ago.

Just as global trade in apparel and textiles began to open up last year with the phaseout of a worldwide system of quotas, importing from China became a dicey affair as the Bush administration began imposing temporary and unpredictable safeguard quotas on goods from the country.

The man at the center of the safeguard storm was Leonard, who is also chairman of the Committee for the Implementation of Textile Agreements.

“In 2003 and 2004, we had spent a lot of time with the Chinese, trying to get them to sit down and talk about some mechanism for them to do a better job of controlling their exports over the next several years,” said Leonard. “We ended up not getting anywhere.”

China agreed to safeguards as a condition of its 2001 entry into the WTO. The restrictions were intended to give U.S. producers time to prepare for competition from China.

“When we started taking the safeguard action, not only were the imports disruptive, the safeguard mechanisms themselves were disruptive because nobody knew — I had to be the guy who signed the paper — nobody knew when Jim Leonard was going to sign a piece of paper reimposing a quota on product X with China,” Leonard said.

Though disruptive, the safeguards brought China to the bargaining table and the two countries reached an import agreement that puts predictable quotas on 34 types of goods, including cotton trousers, sweaters and bras.

“The importing community, most of you folks, would prefer not to have these quotas; I understand that,” said Leonard, who maintained: “We created a certain amount of certainty with this agreement.”

However, the pact, which runs through the end of 2008, leaves the door open for additional safeguards on goods not covered under the deal. The U.S. agreed to use “restraint” in applying them, but hasn’t specified exactly what that means.

Importers have argued that restraints on China increase their prices and hurt their shoppers.

“The U.S. consumer is probably impacted by this,” said Leonard during the question-and-answer session. “We’re certainly not doing it for or against the U.S. consumer. We listen to inputs from all sides of the issue.”

Ted Sattler, executive vice president, foreign operations, Phillips-Van Heusen Corp.

In addition to keeping an eye on the shifting sourcing scene, the fashion industry is focusing on social issues, Sattler said.

Sattler, who opened and closed his presentation at the summit by playing Bob Dylan’s, “The Times They Are A-Changin’,” said the industry over the next four or five years would see a “significant increase in corporate social compliance reporting.”

He pointed to Nike as a leader in the area. “What they are doing today, relative to total transparency in multinational corporate supplier base, is what many of us will be doing in the next three to four years,” said Sattler.

The industry, he said, can also expect growth in investors interested in socially responsible companies, as well as antisweatshop legislation and environmentally friendly initiatives worldwide.

According to Sattler, this will help create “increasing pressures and increasing desires for companies like ours to proactively utilize sourcing practices that contribute positive results to the less-developed countries in the world.”

Social issues and good business are not mutually exclusive terms, he said.

“The obvious reason for compliance, the business reason for compliance, is to protect your brand,” said Sattler. “In many ways, it’s a marketing opportunity.”

Since labor often makes up a small portion of total costs, Sattler said companies can afford to treat their workers right and benefit from it.

“Workforce productivity and better quality yield will offset the higher labor costs,” he said. “Where you can improve your costs is on the efficiency of the factory.”

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