Last month I dealt with the question, Where is mysupplier located. I showed that there is an ongoing evolutionary changefrom the past MY SUPPLIER IS LOCATED SOMEWHERE, to the present MYSUPPLIER IS LOCATED EVERYWHERE, into the future, MY SUPPLIER ISLOCATED NOWHERE.
WHO IS MY SUPPLIER?
The 'who' question follows a similar evolutionary track,particularly with regard to the U.S. market. We tend to think of the manufactureras the guy who makes the garments. At a minimum we expect themanufacturer to cut, sew and supply trim (CMT) and more frequently also tosupply the fabric or at least pay for it (FOB).
Actually, in the U.S. industry, the MANUFACTURERperforms very few of these operations. Traditionally the U.S. domestic industry was divided into two parts: the MANUFACTURER and his CONTRACTOR.The MANUFACTURER designed the garment, undertook pre-production taskssuch as pattern and sample-making, bought the fabric and trim, and even cut thefabric, and then of course marketed the goods. Other than cutting, the MANUFACTURERplayed no role in the actual production process. On the other hand, the CONTRACTOR'Srole was limited only to sewing and finishing the garment. He played norole in preproduction or postproduction and only a truncated role in production.The contractor did not even do CMT. He did only M, which is why the CONTRACTORwas called the MAKER.
In the 1950s when the U.S. MANUFACTURER- the guy whodid pre-production, bought the fabric and trim, and cut the fabric, etc.-wentoffshore to Mexico and Latin America, he took his contracting system with him. Thatresulted in the maquilas system where there are no real factories only makersand which is one of the main reasons why the apparel industries of both Mexico and DR-CAFTA are failing. This crippled factory model continues even now when few maquilasin the region have yet to feel the need to include in-house cutting. Evenfewer factories who have finally achieved CMT status are willing to move up towhat they define as FULL PACKAGE and the rest of us call FOB.
These atavisms notwithstanding, for the past 25 years, wehave defined the MANUFACTURER as the guy who delivers an FOB product. Atthe very least, the MANUFACTURER bought the fabric and trim and carriedout the CMT process.
About 15 years ago, the definition of MANUFACTURERchanged as customers reexamined their supply chains and began to realize theimportance of logistics-that schlepping materials from one place to a factorylocated someplace else created unnecessary cost, delays and opportunities forerror. The result was the customer then redefined the role of the MANUFACTURERto include all the steps involved in the manufacturing process. This was theera when we defined the MANUFACTURER in terms of BACKWARD LINKAGESand VERTICAL INTEGRATION became the flavor of the month.
Unfortunately, as many of the larger companies havediscovered, the in-house vertical model has four serious impediments.
- THE COST OF EACH UPSTREAM MOVE INCREASES GEOMETRICALLY. You can build a large garment factory for $3 to $5mn. A weaving mill would cost $12 to $25mn. Go another step backwards and spinning mills start at $50 to $70mn, an investment that few garment operations can afford.
- THE ECONOMIES OF SCALE FOR EACH UPSTREAM STEP INCREASES GEOMETRICALLY. The production of a spinning or weaving mill dedicated to a single garment factory is too small to allow its output to be competitively manufactured. The cost of each material is often at a 20%-30% premium above market price. In-house vertical integration makes sense only for truly niche products or where the factory is located in the middle of nowhere, without access to fabric and yarn markets.
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- IN-HOUSE OPERATIONS DO NOT BY THEMSELVES LEAD TO
SHORTER LEAD TIMES. More often than not, the service from in-house suppliers is
considerably less efficient than from external suppliers. Remember you can
replace your external yarn or fabric supplier. You cannot replace your
supplier when you are your own supplier.
- IN-HOUSE OPERATION MAY REDUCE YOUR FLEXIBILITY IN AN
EVER-CHANGING WORLD. If you own the spinning and weaving mills, you are pushed to
work within the limitations of those mills. Let's face it, why spend large
sums of money today, if tomorrow you do not want the product.
These impediments have lead to the CLUSTER-a new and revolutionary definition of the manufacturer, one where he is defined as being directly involved solely in the FOB garment, but located in close proximity to his core material suppliers. This CLUSTER was the first attempt to define the supplier as a FACTORY+. Here the manufacturer is the one who owns the garment factory, plus has direct access to nearby independent material suppliers. In theory the cluster has all the advantages of in-house vertical integration with none of the four serious problems listed above.
Clearly, the CLUSTER is a much better supplier than the in-house vertically integrated factory, just as the vertically integrated factory is a much better supplier than the FOB factory. However, the CLUSTER does have its own problem-location. Garment making and yarn spinning are entirely different operations. The ideal place for garment factory may be totally unsuitable for a weaving or spinning mill.
- DIFFERENT COST FACTORS: A factory is located close to
a dependable source of labor, because garment making is usually labor
intensive. A spinning mill is located where the cost electricity is
lowest, because spinning is always energy intensive.
- DIFFERENT RISK FACTORS: Garment factories can be
located in developing countries with unstable governments where a change
of government or even government policy can result in the loss of the
factory or mill with the complete loss of investment. Losing a garment
factory can cost $3 to $5mn. The loss of a spinning mill would be a far
more crippling $50 to $70mn.
This leads us to the latest manufacturing model. Here the definition of the manufacturer becomes the virtual vertical factory (VVF)-a vertically integrated collective of independent producers who have come together for the sole purpose of supplying a customer with the full range of services that the customer requires. The members of a VVF are bound neither by common ownership nor proximity.
The advantage of the VVF is two-fold. First of all, it does away with the impediments inherent in previous models:
- Because the members are all independent from one
another, the impediments of the vertically integrated manufacturer
disappear. Each member is free to sell their products to anyone. The only
time they come together is when they service the VVF customer.
- Because the VIRTUAL VERTICAL FACTORY
relationship is virtual, the impediments of the cluster disappear. The
members may be located in a cluster or they may be thousands of miles
apart. Location is simply a matter of relative cost-logistics costs vs
country and risk costs. It might well be that a successful VVF may begin
with its members located in different countries, but as sales increase the
members may decide to build branch operations in close proximity to each
other.
Removing the impediments is important. However the real value of the VVF concept is that it finally does away with the traditional customer/supplier relationship where each side competes with the other and neither customer nor supplier receive the full benefit of working with the other. The VVF finally recognizes the obvious:
- The supplier cannot survive without the customer.
- The customer cannot survive without the supplier.
- Both must join together into a single entity dedicated to providing the product at the lowest full value cost
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Going forward, who will be the supplier?
The answer is no one. In the VVF the customer and supplier merge into a single entity. All the members remain independent from each other. Neither side gives up profit and both benefit from the increased savings.
About the Author:
David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates.
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