VF Case Study Update (October 2019)

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(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. 

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VF Sourcing Strategy

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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

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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.

Japan’s Apparel Sourcing Patterns

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(The full article is available HERE)

Key findings:

First, the total value of Japan’s apparel imports has been growing steadily in line with consumption patterns. Between 2010 and 2018, the value of Japan’s apparel imports enjoyed a 2.7% compound annual growth rate, which was lower than the US (3.4%), but higher than the EU (1.9%) and the world average (1.3%) over the same period.

Second, while China remains the top supplier, Japanese fashion brands and retailers are also diversifying their sourcing bases. Similar to their counterparts in the US and EU, Japanese fashion brands and retailers are actively seeking alternatives. Imports from Vietnam, Bangladesh, and Indonesia have been growing particularly fast, even though their production capacity and market shares are still far behind China.

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Third, Japanese fashion companies are increasingly sourcing from Asia. As of 2018, only 7.5% of Japan’s apparel imports came from non-Asian countries (mostly western EU countries), a notable drop from 11.4% back in 2000. A good proportion of Japan’s apparel imports from Asia actually contain fibers and yarns originally made in Japan. For example, it is not difficult to find clothing labeled ‘Made in China’ or ‘Made in Vietnam’ that also includes phrases such as ‘Using soft, slow-spun Japanese fabric’ and ‘With Japanese yarns’ in the detailed product description.

Fourth, overall, Japan sets a lower tariff barrier for apparel than other leading import countries. As of September 2019, there were around 15 FTAs and TPAs in force in Japan, whose members include several 1st tier apparel supplying countries in Asia, such as Vietnam, Bangladesh, India, Indonesia, and Cambodia. Most of these trade programs adopt the so-called “fabric-forward” rules of origin (also known as “double-transformation” rules of origin). Additionally, Japan is actively engaged in negotiations on a trilateral free trade agreement with China and South Korea, and the Regional Comprehensive Economic Partnership (RCEP), which involves Japan, South Korea, China and members of the Association of Southeast Asian (ASEAN) countries. Once reached and implemented, these trade agreements will provide new exciting duty-saving sourcing opportunities, including from China, the top apparel exporter in the world.

The Changing Face of Textile and Apparel “Made in Asia”

Video 1: How one Chinese shirt-maker uses automation to safeguard its future

Video 2: Chinese investors move clothing factory to Bangladesh

Video 3: Can Vietnam become the next China?

Discussion questions (for FASH455: Please finish watching ALL the three short videos above before sharing your viewpoints)

  1. How are textile and apparel “Made in Asia” changing its face? What are the driving forces of these changes?
  2. What are the examples of the “flying geese model” from the videos? Overall, why or why not do you think this model is still valid today?
  3. Why or why not do you think the U.S.-China tariff war has fundamentally changed the patterns of textile and apparel production and trade in Asia?

Related readings

New Report: Fashion’s New Must-have—Sustainable Sourcing at Scale

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The study was based on a survey of 64 sourcing executives from vertical apparel retailers, hybrid wholesalers, and sportswear companies, with a total sourcing volume of $100 billion. Below are the key findings of the report:

  • More sourcing executives now focus on process improvements in their companies, such as sustainability and transparency (56% of respondents), digitalization of sourcing process and related areas (45% of respondents), consolidation of supplier base (42% of respondents), end-to-end process efficiency (41% of respondents) than shifting sourcing countries (20% of respondents). Related, as cost gaps between sourcing destinations are narrowing, apparel companies are shifting from minimizing the price of supply to a focus on customer-centric, agile product development to meet customer demand. Digitalization, such as intelligent sourcing, is one of the most promising areas.
  • Affected by the on-going U.S.-China tariff war, two-thirds of surveyed companies expect their overall sourcing cost to increase in the years ahead, including 37.5% expecting a 2-4% increase and 25% expecting 1-2% increase. However, only 3.1% of respondents expect a significant cost increase (>4%).
  • Echoing the findings of other recent studies, respondents plan to source relatively less from China through 2025. Bangladesh, Vietnam, Myanmar, and Ethiopia are among the top alternative sourcing destinations. Meanwhile, more companies are considering near-sourcing. The biggest challenge, however, is limited fabric production capacity, NOT higher wages.
  • Sustainable apparel sourcing is regarded as a must—70% of EU companies and 35% of North American companies surveyed say “responsible and sustainable sourcing was on the CEO agenda.” Top challenges to achieve sustainable apparel sourcing include “no common, objective industry standard on sustainable sourcing”, “consumers lack a clear picture of what sustainable fashion is all about”, “mixed influence of the sourcing function in company-wide sustainability strategy.” Further, more companies prioritize environmental-sustainability initiatives (issues such as sustainable material, recycled material, traceability, and packing) than social sustainability initiatives (issues such as) fair on living wage and decent work). Additionally, respondents hold competing views on whether sustainability will increase sourcing costs overall. Around 58% of respondents see additional costs for sustainable sourcing between 1% and 5%.
  • Sustainability will play an increasingly important role in how apparel companies select their suppliers. Some surveyed apparel brands and retailers say they have upgraded their supplier ratings over the last couple of years, moving away from viewing sustainability simply as a compliance-based hygiene factor and instead embracing criteria that are more sophisticated.
  • There is also a need to shift from the transactional-based, season-by-season and the low-commitment relationship between apparel companies and their vendors to strategic partnerships between the two. Around 73% of respondents plan to consolidate their supplier base by at least 5% over the next few years. Related, apparel companies increasingly empower suppliers for self-auditing with tools like the Higg Index.

U.S. Textile and Apparel Industry and Companies’ Sourcing Strategy—Discussion Questions from FASH455

 

#1 How do you think it would be possible for the United States to successfully re-shore apparel manufacturing when so many other countries have the advantage in speed, efficiency, and cost?

#2 The Berry Amendment is highly favored by NCTO and is seen as being good for the U.S textile industry and American pride. Why or why not do you think Berry Amendment should be applied to other segments of the fashion industry? Will such an initiative gain broad support?

#3 Why do you think NCTO suggests the trump administration impose tariffs on finished apparel items from China, whereas U.S. fashion brands and retailers oppose the tariff action strongly?

#4 Assume you are a sourcing manager for a major US fashion brand, how would you rank the following regarding importance when determining a sourcing destination: Speed to Market, Sourcing Cost, Flexibility and Agility, and Risk of Compliance?  Why would you rank them as such?

#6 Why do you think U.S. fashion brands and apparel retailers are sticking with sourcing from China, when there are less expensive products in other countries, such as Bangladesh and Vietnam?

#7 According to the 2019 US fashion industry benchmarking study, some apparel retailers source from more than 10 or even 20 different countries or regions. What are the benefits of adopting such a diversified sourcing base? Is it necessary?

(Welcome to our online discussion. For students in FASH455, please address at least two questions and mention the question # in your reply)

Related: Global Apparel Sourcing Practices and Trends

American Giant: $108 Hoodie Made in the USA

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Discussion questions:

  1. Is it still meaningful to promote apparel 100% “Made in the USA” in today’s global economy? Why or why not?
  2. From the video, what is your evaluation of the strength, weakness, opportunity, and threat of American Giant’s business?
  3. From the video and our class discussions, why or why not do you think the U.S.-China tariff war has benefited textiles and apparel “Made in the USA”?
  4. Will you be interested in working in a textile mill/garment factory as featured in the video after graduation? Why or why not?
  5. Any other thoughts/reflections from the video?

[For FASH455: 1) Please mention the question number in your comments; 2) Please address at least TWO questions in your comments]

Additional readings:

U.S.-China Tariff War Escalates–Impact on Apparel and Footwear

Background: In response to China’s decision to impose 5%–10% retaliatory tariffs on $75 billion U.S. products, on August 23, 2019, the Trump administration announced to raise the Section 301 tariffs from 25% to 30% for around $250 billion Chinese products (tranche 1, 2 and 3), effective October 1, 2019. The scheduled Section 301 tariffs on $300 billion Chinese products (tranche 4) to take into effect on September 1, 2019 and December 15, 2019 will also be increased from 10% to 15%.

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Trump lashes out at China, sending markets reeling

U.S. fashion brands and retailers are deeply concerned about the negative impacts of the tariff war on their businesses. According to the 2019 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association, even without considering the upcoming 10-15% tariffs to be imposed on around $35.7 billion Chinese textiles and apparel covered by tranche 4:

  • The trade diversion effect of Section 301 has accelerated U.S. fashion companies’ pace of reducing sourcing from China. About 83 percent of respondents expect to decrease sourcing from China over the next two years, up further from 67 percent in 2018.
  • The Section 301 action is pushing up the price of U.S. apparel imports across the board, making “increasing production and sourcing cost” the top business challenge for respondents in 2019. As much as 63 percent of respondents explicitly say the U.S. Section 301 tariff action against China “increased my companies’ sourcing cost” in 2019. As companies are moving sourcing orders to Bangladesh, Vietnam, and India, the average price of U.S. apparel imports from these countries – the main alternatives to China — have all gone up very quickly.
  • No evidence shows that Section 301 has benefited near-sourcing from the Western Hemisphere and reshoring from the United States significantly. Instead, respondents say Section 301 has increased the production costs of textiles and apparel “Made in the USA.”
  • Respondents say they are reluctant but may have to increase their retail prices, should the U.S.-China tariff war escalate further.

Related reading: