VF Sourcing Strategy Case Study Updates (May 2018)

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(Slide above: VF Corporation European Headquarter; Photo Credits: Hannah Wilson)

VF Business Operation General

V.F. Corporation (VF) designs, manufactures, distribute and market 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 reported revenue of $11.8 billion in 2017, down 4.6% over the fiscal year 2016. Gross margin% of the company improved from 48.3% in 2016 to 50.5% in 2017 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’s net income (net profit) substantially decreased by 42.8 percent to $615 million in 2017 from 2016 and net profit% also went down to 5.2% over the period. 

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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 2017, VF’s products are 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. In 2017, 23% of VF’s units were manufactured in VF-owned facilities (up from 22% in 2016) and 77% 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 product, 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).

“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).

Resources for Learning about Cotton: FASH455 Exclusive Interview with Shannon Brady, CottonWorks™ Student Ambassador

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The picture above: Shannon Brady, Junior, UD Fashion Merchandising Major (Fourth one from the left in the front row) visited Cotton Inc together with other Cotton Student Ambassadors.

Question: What is the CottonWorks™ Ambassador program about and what is your role as an ambassador?

The CottonWorks™ ambassador program is a program where students in fashion and apparel related majors get to promote CottonWorks™ on their college campuses. Ambassadors are charged with helping faculty and students understand the resources available through CottonWorks™ as well as promote this resource through social media. This semester there are twelve ambassadors (including myself) from 12 different schools across the country.

My role as an ambassador is to raise awareness about CottonWorks™ on campus as it is a new program here at the University of Delaware. In January of this year, I had the opportunity to visit the Cotton Incorporated Headquarters in Cary, North Carolina. I, along with other CottonWorks™ ambassadors participated in an all-day CottonWorks™ training as well as a tour of the production facilities at Cotton Incorporated. I got to see everything from raw cotton to state-of-the-art laser finished denim. It was a unique experience and such a cool way to see the material I learned about in class come to life. 

Question: Cotton Incorporated recently launched a new CottonWorksTMprogram to help industry professionals and emerging professionals (like our FASH students) know more about cotton. Can you give us an overview of the program, particularly the learning resources related to the sourcing of cotton products?

CottonWorks™ is a free website where students and professionals can access a multitude of resources about cotton and the fashion and apparel industry.  The site offers many learning resources. Detailed guides are offered on topics such as sourcing and manufacturing, retail and marketing, fabric and technology, fashion and trend, and sustainability. These topics really apply to the fashion curriculum at UD. Additionally, the site offers a mobile-friendly textile encyclopedia where students can look up any textile related word anytime, anywhere.

However, the site offers more than just learning resources. CottonWorks™ is a great supplemental learning tool, but the site also offers emerging professionals ways to get engaged with their industry. Free webinars and workshops are offered through the website and are a great way to engage with industry professionals and learn about the issues pressing the industry right now. Their next webinar is on Tuesday 24 April 2018 registration is open on the CottonWorks™ website, and the topic of discussion is Cotton’s Biodegradability in Aquatic Environments.

Particularly regarding learning resources on sourcing cotton products, the sources and manufacturing topic on the website offers dozens of guides all kinds of cotton products, ranging from denim to cotton nonwovens.

Last but not the least, the Executive Cotton Update and Monthly Economic Letter, both posted every month at cottonworks.com/news are great resources for students and industry professionals interested in knowing what is happening in the U.S. and world cotton industry.

Question: Developing a sustainable supply chain is critical for the textile and apparel industry. So how is cotton related to sustainability? What are the facts important to know?

Cotton Incorporated is committed to being at the forefront of cotton sustainability, and the CottonWorks™ site offers many resources on how cotton is related to sustainability, including guides on responsible cotton production and manufacturing because sustainability happens throughout the lifecycle of cotton.

Cotton is a natural fiber, unlike some manmade fibers such as polyester it can biodegrade. If you log on to CottonWorks™ website you can view a recap of their webinar last month that went in depth about cotton’s biodegradability in soil and septic environments.

Additionally, CottonWorks™ has information on campaigns such as Cotton LEADS™ and Blue Jeans Go Green™ to promote the sustainability of cotton. Cotton LEADS™ is a joint program with Australia and the United States that supports a reliable and responsible cotton supply chain through five core principles of sustainability, use of best practices and traceability in the supply chain. Blue Jeans Go Green™ initiative collects denim sent to landfills and recycles it in partnership with Bonded Logic Inc. You can learn more about both these initiatives on the CottonWorks™ site at cottonworks.com/topics/sustainability.

Question: What are the opportunities for our FASH and UD students to get involved with CottonWorks™ and learn more about cotton?

Students can get started today! By registering for a free account on cottonworks.com, they have access to all of the amazing resources I touched on and many more. Additionally, they can follow @cotton_works on Instagram and Twitter to learn more about cotton and get cotton inspiration for their projects. 

I will also be hosting a tabling event where students can learn more about these resources, talk to me, and win free food and prizes on Thursday 19 April 2018 in Perkins! There will be more tabling events in the future that I will be posting about in my social media as well.

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

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#1 How is international trade associated with the prosperity of the U.S. textile and apparel industry today?

#2 Can trade policy bring textile and apparel manufacturing back to the United States? If so, how?

#3 The Trump Administration has decided to impose additional import tariffs to protect U.S. steel and aluminum production in the name of “national security.” Should U.S. textile mills and apparel manufacturers ask for similar trade protection too? Why or why not?

#4 The U.S. textile industry seems to be doing quite well— since 2009 its total value of output has risen 11%. However, why do you think the apparel factories in Los Angeles are struggling?

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Is it still meaningful to give so much attention to apparel manufacturing in the U.S.?

#6 According to the readings, the increasing minimum wage is a critical factor behind the closure of many garment factories in LA. Does it imply that we have to choose between paying garment workers poorly and keeping the factory open?

#7 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, Risk of Compliance?  Why would you rank them as such?

#8 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?

#9 According to the 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. Please mention the question # in your reply)

Pattern of U.S. Textile and Apparel Imports (Updated: February 2018)

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The value of U.S. textile imports reached $25,706 million in 2017, up 7.2 percent from 2016 and 77.8 percent from 2000. The value of U.S. apparel imports reached $80,287 million in 2017, slightly down 0.5 percent from a year earlier and up 40.3 percent from 2000.  It is estimated that the value of U.S. textile and apparel imports could change between -2.2% and 7.6% and between -1.2% and 5.3% respectively in 2018.

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Because the United States is no longer a major apparel manufacturer but one of the largest apparel consumption markets in the world, apparel products accounted for 75.7 percent of total U.S. textile and apparel imports in 2017, followed by made-up textiles (17.4 percent), fabrics (5.7 percent) and yarns (1.2percent). This structure has remained stable over the past decade.

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The U.S. imported apparel from as many as 150 countries in 2017. Meanwhile, the Herfindahl index declined from 0.17 in 2010 to 0.15 in 2017, suggesting that overall the U.S. apparel import market is becoming less concentrated. This result is consistent with some recent studies, which show that U.S. fashion brands and retailers continue to diversify their sourcing bases gradually. Specifically, all top apparel suppliers to the United States in 2017 (by value) were developing countries and most of them are located in Asia, including China (33.7 percent), Vietnam (14.4 percent), Bangladesh (6.3 percent), Indonesia (5.7 percent), India (4.6 percent) and Mexico (4.5 percent).

On the other hand, despite the uncertain prospect of the renegotiation of the North American Free Trade Agreement (NAFTA), the U.S. apparel imports from Mexico and Canada enjoyed a robust growth of 5.3 percent and 7.7 percent respectively in 2017 from a year earlier. The result confirms the increasing importance of “speed to market” in U.S. fashion apparel companies’ sourcing decisions and the growing popularity of “near-sourcing.”

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U.S. textile and apparel imports are also becoming even cheaper. For example, U.S. apparel imports in 2017 on average was only 81.1 percent of the price in 1990 and the price of imported fabrics cut nearly by half over the same period.

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Additionally, U.S. apparel imports overall mirror the pattern of apparel retail sales in the U.S. market. This pattern reflects the fact that the performance of the U.S. economy is the leading factor shaping the size of demand for imported apparel. Notably, between 2010 and 2017, the value of U.S. apparel imports grew relatively faster than the value of U.S. apparel retail sales (3.2 percent vs 3.1 percent annually on average). The result suggests that a growing share of apparel products consumed in the United States now come from overseas.

Data source: Office of Textiles and Apparel (OTEXA), U.S. Department of Commerce

By Sheng Lu

Additional reading: Lu, S. (2018). Four key patterns in U.S. apparel imports. Just-Style

Apparel Sourcing in 2018: Results from the Just-Style State of Sourcing Survey

The latest Just-Style State of Sourcing Survey suggests a few trends of apparel sourcing in 2018:

First, apparel companies are attaching greater importance to speed-to-market in their sourcing decisions. According to the result, the need for a faster, more responsive supply chain is being driven by consumers’ increasing demands for immediacy and constant newness, as well as the speed with which social media can spread new trends.

Second, respondents say the rising sourcing and production cost remains one of their top business challenges in the New Year. Key drivers of cost increase include wage of production workers, raw material price and the social and environmental compliance cost. Notably, almost half expect their sourcing budget to go up, with 15.3% seeing an increase of more than 5%, and 32.8% anticipating a rise of between 1% and 5%. A further 32.1% see their budgets staying the same in the year ahead.

Third, the survey result confirms that China’s dominance of global apparel manufacturing is unlikely to change anytime soon. Asked about their China sourcing plans in 2018, 21.1% of respondents said they would buy more here over the next 12 months, some 30.5% expect their China sourcing to remain roughly the same year-on-year, and 28.9% expect to source less. Respondents say that “no other country can match China regarding the size of its supply base, its range of skills, its quality levels, its product variety and the completeness of its supply chain. The country also continues to lead the way when it comes to efficiency and infrastructure.” Meanwhile, Bangladesh and Vietnam continue to be seen as the two sourcing markets most likely to grow in importance in the next five years.

Fourth, respondents also expressed concerns about uncertainty over trade agreements (64.5%), particularly how the Trump Administration may do with the North American Free Trade Agreement (NAFTA). However, the impact of uncertainty created by Brexit seems to be limited.