(Slide above: VF Corporation European Headquarter; Photo Credits: Hannah Wilson)
VF Business Operation General
V.F. Corporation (VF) designs, manufactures, distributes and markets branded lifestyle apparel, footwear and accessories. The company offers Jeanswear, outdoor and action sports, image wear, sportswear, and contemporary brands. The company markets its products under brands namely, the North Face, Wrangler, Timberland, Vans, Lee, and Nautica, among others. It sells its products to specialty stores, department stores, national chains, and mass merchants, as well as through direct-to-consumer channel consisting of VF operated stores and internet sites.
VF forecasts to achieve $13.7 billion revenue in the fiscal year 2019, up 11% 4.6 from 2018. Gross margin% of the company improved from 48.3% in 2016 to 50.5% in 2018 as benefits from pricing, lower product costs, and a mix shift toward higher-margin businesses. However, gross margin% was partially offset by changes in foreign currency and the impact of restructuring charges.
VF Sourcing Strategy
VF’s centralized global supply chain organization is responsible for producing, procuring and delivering products to its customers. On an annual basis, VF sources or produces approximately 473 million units spread across more than 30 brands. In 2019, VF’s products are obtained from 19 VF-operated manufacturing facilities and approximately 700 independent contractor manufacturing facilities in over approximately 60 countries. [Note, in 2017, VF’s products were obtained from its 21 self-operated manufacturing facilities and approximately 1,000 contractor manufacturing facilities in over 50 countries.] No single supplier represents more than 10% of VF’s total cost of goods sold. Further, in 2019, 13% of VF’s units were manufactured in VF-owned facilities (down from 23% in 2017) and 87% were obtained from independent contractors.
VF operates manufacturing facilities in the U.S., Mexico, Central, and South America, the Caribbean and Europe. A significant percentage of denim bottoms and occupational apparel is manufactured in these plants, as well as a smaller percentage of footwear and other products.
For VF’s self-owned production facilities, VF purchases raw materials from numerous U.S. and international suppliers to meet their production needs. Raw materials include products made from cotton, leather, rubber, wool, synthetics, and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers, snaps, eyelets, and laces). Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors.
Independent contractors generally own the raw materials and ship finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and Panama. These hubs are responsible for managing the manufacturing and procurement of products, supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing and transportation and shipping functions. In addition, VF’s hubs leverage proprietary knowledge and technology to enable certain contractors to more effectively control costs and improve labor efficiency. Substantially all products in the Outdoor & Action Sports and Sportswear coalitions, as well as a portion of products for VF Jeanswear and Imagewear coalitions, are obtained through these sourcing hubs.
Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives VF greater flexibility, shorter lead times and allows for lower inventory levels.
This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing. VF intends to continue to manage its supply chain from a global perspective and adjust as needed to changes in the global production environment (VF Annual Report, 2015, 2016, 2017, 2019).
“Third-Way” Sourcing Update
VF has the goal of 40/40/20 for factory ownership. They want to own 40% of the factories they use, utilize the third-way approach in 40% of the factories, and use transactional sourcing for the other 20% (Glaser, 2014).
VF has expanded its Third-Way manufacturing program to sub-Sahara Africa, in addition to the third way factories VF works within Bangladesh, Cambodia, the Dominic Republic, and Nicaragua. VF is looking into Africa because, while Africa may not be as efficient as Asia currently, there is potential to get it to 80% efficiency in the coming years. It could also be cheaper to source from Africa given the African Growth and Opportunity Act (AGOA) with the United States
Since its creation, VF has split its “Third-Way” factories into three different categories: light, medium, and heavy. Light Third-Way is having engineers consult with the factories and visit each week. The medium Third-Way involves having an engineer on site and a long-term commitment to the supplier from VF. Lastly, the heavy Third-Way involves profit-share and open book costing as well as sharing of research and development (R&D) (Barrie, 2015).
Trust continues to be a central theme in Third-Way sourcing, as does having the right people on board with the initiative. VF also believes that any positive changes made to the factories because of the Third-Way program will ultimately help the whole industry and drive positive change, even if the changes are used for other companies that source from the same vendor (Barrie, 2015).
On May 22, 2019, VF finished spin off the group’s denim and outlet businesses into an independent, publicly-traded company. The new company, called “Kontoor Brands Inc“, comprises VF’s jeans brands, including Wrangler Lee, and the VF Outlet business. VF says that the move will sharpen its focus as a global clothing and footwear powerhouse focused on lifestyle brands such as The North Face, Timberland and Vans. However, VF also admits that the Kontoor Brands spin-off could result in substantial tax liability to the company and its stockholders.