TRENDS POINT TO SUPPLIERS’ CAPITAL SPENDING ON COMMUNICATION TECH RISING WITH THE PUSH FOR GLOBAL BIZ
Byline: ISABELLE SENDER
NEW YORK — Thanks to technology, global competition is viewed as a new opportunity for manufacturers and U.S.-based brand marketers, executives and industry observers are saying.
Companies optimistic about crossing borders, and those who have already done so, say that it is the firms’ technology infrastructure that determines the level of international trade growth a company manages.
These are the conclusions drawn from industry research on technology trends at the supplier, manufacturer and retailer level. The surveys point out the strong relationship between investments in technology and the expansion into multinational sourcing and distribution. And studies strongly suggest that vendors and brand marketers supplying the industry are planning future growth based on the opening of new markets abroad and a strong technology foundation to manage them.
As Mark Manoff, partner, director of retail and apparel, Ernst & Young, New York, explained, “Even domestic companies are dealing with global sourcing and minimizing costs. It starts domestically and filters to global sourcing channels.
Ultimately, what companies are competing on is technology and their ability to deliver.”
For the few large firms (75 percent of respondents were companies with sales of more than $250 million), research also points to the end of the restructuring period and the beginning of business improvement. Steve Keener, partner, supply chain practice at Computer Sciences Corp. (CSC), Waltham, Mass., noted, “The whole reengineering phenomenon is losing steam because you can’t focus forever on cutting costs and cheap labor … It’s time for growth.”
And for the industry’s many small- to mid-sized firms, $10 million to $500 million in sales, cost cutting via PC-based networking infrastructures — such as local-area networks (LANs), wide-area networks (WANs), the Internet and Intranet — are the ways companies are getting up to technological speed for communication with domestic customers and, ultimately, with global ones they hope to pursue.
“The intent with PCs is that if we [conduct business in] Mongolia, we don’t want to maintain a mainframe. Mid-size companies we’ve talked to have not reengineered or put new systems in yet … They have enough problems selling to their consumer base here
the U.S.,” said Steve Kastell, senior manager of the management consulting department, Grant Thornton LLP, Chicago.
Gil Sullivan, a principal with CSC, agreed, stating in CSC’s first annual consumer goods technology study, that among fashion-related companies — 60 percent of respondents reported annual revenues of less that $100 million and 14 percent generated more than $500 million — many are still concerned with low-cost foreign competitors, which increases their need to focus on reducing supply-chain costs and timing. “It is interesting to note, too, that many … see a further impact coming from the shift toward a more global marketplace. This will put further pressure on cost and time-to-market cycle reduction.”
According to Walter Wilhelm, principal of Wilhelm-Leslie Associates Inc., Allen, Texas, “Today the state-of-the-art modern technology is found in every corner of the globe, including the developing countries.” It is especially true, he said, for those companies contracting for the U.S. retailers or manufacturers because the volume of units ordered by U.S. companies is much larger than European or Japanese firms’.
“Consequently, the contractor is under more pressure to be efficient,” he said, and identified communication, design and development technology as the tremendous growth areas.
Cindy Knoebel, director of investment relations at VF Corp., New York, said her organization has implemented base-level technology in order to track flow management with its European retail partners and exchange data.
“The transfer of data has been the biggest thing we focused on,” agreed apparel discounter supplier Roland Kimberlin, president of operations at Chic by H.I.S. in New York, underscoring the importance of communication technology to his company’s European operations. The company makes its markers in Germany and cuts in Turkey, he explained, and this is done in order to control piece goods.
Gordon Cohen, senior divisional vice-president, Hart Schaffner and Marx, Chicago, also specified communications as a critical technology for global companies because “the further away you get from the brain of the company, you have to be able to communicate very quickly.”
He noted how growth in computer-aided manufacturing equipment is booming because of the North American Free Trade Agreement (NAFTA). “In fact all of Latin America has become important to the U.S. because of its proximity.”
“With NAFTA, it will be Mexico and Canada,” Kimberlin said in discussing future areas for piece goods opportunities. “What will be done is marking here and cutting [in Mexico]. We are also doing business in Canada, but we will distribute there.”
It is no wonder technology vendors have jumped onto the opportunities that global enterprise presents.
The pulse of international development is quickening all over the world, they said, and their companies are working on supply-chain solutions that speak the language of international business partners and focus on the core competencies of the soft goods manufacturing countries.
Companies that are gearing up to partner with the volume-heavy, quick response-driven U.S. organizations span the globe. Bordeaux, France-based Daniel Moreau, the general manager of Lectra Systemes SA, said that in general apparel and textile companies in industrialized countries where manufacturing is disappearing are hard pressed to develop creation-capable systems. “They are also adding to their current tools with new ones that allow them to manage their relationships with their subcontractors,” he said, suggesting the strong network and communications push by the industry in those countries.
Moreau also identified sourcing opportunities by noting, “In developing countries where the production has been going, they are buying pattern-design and marker-making systems. They are also starting in the area of automated cutting to give their customers the expected level of quality.”
China, Malaysia, Indonesia, Eastern Europe, North Africa and Latin America in particular, he said, are quickly acquiring computer-aided manufacturing equipment.
Similarly, Grant Thornton’s Kastell identified Korea, Singapore, Mongolia, China, the Philippines, Indonesia, Hong Kong and Turkey as developing resources. As he explained, “There’s an infrastructure of subcontractors supplying the industry that are just as advanced as we are here in the U.S.”
In a discussion with A&HT on his way to catch a plane that would take him to Turkey, James S. Arthurs, the executive director of the international division of Gerber Garment Technology Inc. (GGT), Tolland, Conn., said Turkey’s rate of technology buildup is “disproportionate” to any other nation’s, even those in Europe.
According to Arthurs, GGT sold approximately $10 million worth of systems there last year. He said investment has slowed somewhat, and is expected to top off by the end of this year at around $11 million or $12 million.
“And part of the reason is that Turkey had a very traditional apparel industry and the infrastructure for the industry was there. As the European landscape changed, Turkey became [a source for] textiles. Now, for geo-political reasons, people in the apparel industry are flocking there,” he explained, adding, “We did so many turn-key systems there it’s unbelievable.”
In addition, emerging soft goods resources are popping up in Syria, Jordan and Lebanon, Arthurs said, noting that there is computer-assisted manufacturing being installed there for export and domestic sales. “That whole area is really changing, and that’s the area we are concentrating on the most regarding hiring [Gerber] people,” he said.
The average financial resources devoted to technology varies wildly from company to company. Although there is no barometer for capital spending, U.S. companies have until recently monitored their spending by assigning a ceiling expenditure based on a percentage of total sales.
Donn Liles, a consultant to the sewn-products industries, Fort Lauderdale, Fla., said this method of expenditure control is still being used for information technology (IT). He indicated that most sewn-goods companies spend in the range of 1 to 1.25 percent, while other producers of consumer goods spend 2 to 3 percent, acknowledging, “This is not adequate to be competitive.”
“Progressive sewn-goods companies should spend 5 to 7 percent in onetime ramp-up investment and 2 to 2.5 percent ongoing [in order] to sustain a strong competitive position. These ranges should be tempered by the size of the company. Obviously a $10 million company would need to spend a higher percentage of sales than a company doing $10 billion,” he said.
Wilhelm, another consultant, qualified his opinion on investment caps by saying that the spending depends on whether the company has tried to stay modern or whether they are playing “catch-up.”
“A range of 5 or 10 percent of sales would seem to be a reasonable number to allocate for plant and system modernization. Information technology/information systems is definitely playing a larger role today, complicated by the fact that most companies have some old-legacy systems that need to be updated at the same time,” he said.
Yet, others suggested, a percentage of sales is no longer the way to allocate funds to the capital expenditure budget for technology. As entrance into the supply chain requires more agility and technology enhancements, the percentage rule has become less prevalent.
“I have a problem with the percentage-of-sales number,” said Ann Senn, a principal in the consultant group’s information technology practice at Deloitte & Touche LLP, New York.
“You have to look at that [investment] in a longer time frame, because if you underinvest, you will pay for it down the road,” she said.
Cohen at Hart Schaffner and Marx believes that a company must spend as much as it needs to in order to remain competitive.
Robert Untracht, partner and national director, consumer products industry services at Ernst & Young, said that companies can use the percentage of sales rule as a guideline, “but our research shows that companies are making technology a priority. It’s where they are putting their money. But to say that you should be spending ‘X’ is not the right way to look at it.”
Manoff at Ernst & Young told AH&T, “If you believe the premise that historically the typical apparel company has not invested in technology, then most are behind the eight ball and [their] spending will have to reach new levels … As a general rule, the industry has been a laggard in embracing technology.”