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DALLAS — “Change or die” is the sobering advice from Peter McGrath, president of the purchasing division at J.C. Penney Co., as stores, vendors and textile mills scramble to shift their sourcing paradigms and supply-chain management by 2005, when textile and apparel quotas are lifted.

“As harsh as this sounds, it is the reality of the world we are about to enter,” McGrath said. “This is not a message of threat: It’s a call to action. The year 2005 and life without quotas will greatly redefine how we do business forever. Staying focused on the customer and the creation of value must be a primary goal. Product innovation, performance, technology and providing enhanced products are important to a company’s health and growth.”

The consolidation of sourcing operations is expected to be among the biggest changes in a deregulated trade world.

“Retailers are forecasting an apparel world post-2005 shaped by joint ventures and supersized factories,” McGrath said. “End-to-end involvement in the total supply chains, active collaboration between the mill, the manufacturer and the retailer on fabric development, merchandise design, forecasting, logistics and distribution, are all part of it.”

It’s a sharp contrast to the highly fragmented scenario fostered by a strict quota system, in which nomadic buyers have moved orders from country to country in search of cheaper prices. Starting in 2005, most major apparel firms are expected to greatly reduce the number of countries from which they purchase.

“The consolidation in our industry that will occur over the next five years will be unprecedented,” McGrath predicted. “Quota goes away and business will flow to the suppliers who consistently execute. Growing business with just a few suppliers will become common place. The trick will be to insure you are on the ‘A’ team.

“The quota system has bred inefficiency and helped bring about a significant proliferation of suppliers. Now, sourcing will become more strategic and planned. You will intimately know your key suppliers and will be able to grow the business in a planned manner. The relationship that will exist between the supplier and the retail industry will become very transparent and fully integrated. Factories will need to specialize in order to meet customer needs,” McGrath said.

This story first appeared in the October 5, 2004 issue of WWD. Subscribe Today.

As a result, cost and speed will become competitive factors among suppliers as buyers seek out the fastest and most cost-effective ways to fulfill orders, he said.

“The supplier of the future must be prepared to manage in a faster environment,” McGrath said. “The pace everywhere is picking up. Megaships are coming online. They will carry 8,000 containers and will cross the ocean — Shanghai to Los Angeles — in 12 days.”

Transportation, including shipping and security challenges, are magnified in light of rising fuel prices and terrorist threats, and they are among the issues facing Michelle Livingstone, director of transportation at Penney’s.

“The primary transportation challenges we’re facing right now are rising fuel prices.” Livingstone said. “The prices are higher than anyone ever expected and our outlook for 2005 is what we’ve experienced in 2004 — we’re not expecting to see a lot of relief.”

Livingstone noted that Penney’s shares the burden of higher fuel prices with its carriers. As of Sept. 27, the average retail price for a gallon of gasoline in the U.S. was $1.92, up from $1.87 a week earlier and $1.59 a year ago, according to the Energy Department. The average retail price for a gallon of diesel fuel was $2.01, up from $1.91 a week ago and $1.43 last year.

“We’re always working to offset our costs,” she said. “We’re continually improving our container and trailer utilization.”

For example, Penney’s works with suppliers to optimize deliveries and ensure that trucks and containers are fully loaded when possible, a task made easier by technological advances in shipment monitoring. Penney’s goal is to have domestic catalogue and Internet orders delivered within three to five business days.

International shipping is another story, though, as global security concerns and backlogs at the West Coast ports can cause delays.

“We’ve not seen an improvement in foreign import transit time,” said Livingstone. “A lot of it is associated with West Coast port delays. It’s a problem that’s plaguing the entire industry.”

Penney’s works closely with the U.S. Customs Service to ensure that its international maritime shipping partners meet strict security standards. Penney’s has been rewarded for its efforts with a certificate from the Customs-Trade Partnership Against Terrorism program, which helps streamline the shipping process and certifies that standards are in place to ensure safe passage from foreign shipyards to U.S. docks.

For his part, McGrath said organizations must figure out how they can be faster in all aspects of their operations because “speed can be a competitive advantage.”

McGrath urged factories and importers to reassess their specialties and said importers will encounter more pressure as large stores continue to source directly with foreign companies.

“Factories will need to specialize in order to meet customer needs,” he said. “Competing in a quota-free environment will require specialization. Megafactories producing in a highly efficient manner will force those who don’t specialize on to the sidelines, as they will be unable to compete on price.”

Wholesale prices are expected to slide by 8 to 18 percent in the next year, he said, though the savings aren’t likely to be felt by consumers, who instead should benefit from higher-quality merchandise.

“We expect to see significant market pricing declines over the 24 months,” McGrath said.

The challenge, he said, is to be able to adjust the cost structure to meet the market demands. Competing in the hyper-competitive marketplace of the future means looking for ways to aggressively drive costs out of all levels of the supply chain.

McGrath outlined a game plan for companies doing business in a post-quota world:

  • Develop partnerships early in 2005 and be fast, flexible and focused.
  • Understand that the old business model is changing and have a forward plan that capitalizes on the 2005 change.
  • Speed will increasingly grow in importance: concept to selling floor will be a major focus of U.S. retailers, including fast inventory replenishment.
  • Information technology will continue to grow in importance. Within 18 months, most U.S. retailers will become paperless and firms will be required to have enterprise-wide systems that make their organization more visible to their customers.
  • Cost structure will remain challenged: Investment in efficient manufacturing systems will become a necessity. Backroom operations need to be streamlined, cost reduction and productivity improvement should be an ongoing process.