VF Brands: Global Supply Chain Strategy

Operations Strategy
Academic Group: 02
Amit Mehta (PGP-17-010)
Gayatri Jaisinghani(PGP-17-035)
Gurbeer Singh (PGP-17-037)
Jasdeep Singh (PGP-17-041)
Vartika Upadhyay (PGP-17-080)
Archan Thakker (PGP-17-100)
 Introduction

• In 2008, VF Corporation had a total revenue of just over $7.6 billion

• One of the world’s largest publicly owned apparel company
• Portfolio of powerful brands Lee, Wrangler, The North Face etc.

Entered Jean business

Expanded into through acquisition of Lee
Lingerie Company

1899 1917 1984

1914 1969

Reading Glove & Changed its name Series of acquisitions; Blue

Mitten Company to Vanity Fair Bell, Jantzen, Redkap
Blue Bell- Jeans company
Jantzen- Sportswear & Backpacks
Redkap- occupational apparel & uniforms

Expand sales outside US;
In rapidly developing
countries like Russia, India
and China
In 2001, international sale –
19% of revenues
In 2008, it grew to 30%
Basic apparel
01 Like Jeans
Business Growth
Expand direct to consumer
business;
In 2009, 700+ single brand
stores Global lifestyle apparel
By 2012, target of 1300 04 company with strong
stores globally brands
(75-100 stores annually)
Acquired new brands
03 with global appeal
through series of
acquisitions
Continue investment
02 in growing “heritage
brands” like Wrangler &
Lee
In keeping with its international expansion strategy, the company was emphasizing on the Asian
markets for the location of new stores

Different types of Channels Different Coalitions

$3,000.00
$2,751.00 $2,751.00

Specalty store
$2,500.00
Domestic/international
16% retailers
Department stores $2,000.00
28%
Chains
$1,500.00
16%
Upscale department stores
$994.00
Mass retailers
$1,000.00
13%
7% 2% $611.00
Royalty income
15% $500.00 $383.00
3% International wholesale $153.00

$-

2008 Sales Revenue by Coalition

 The Apparel Industry
Global sales of $1.3 trillion (2008)
It encompasses the design, manufacture and marketing of clothing, accessories and personal luxury goods

Highly fragmented
Companies like Nike competition;
and Adidas dominated largest players had single
sportswear digit market shares;

02 04

01 03

larger companies Substantial, Continuous

branched out from investments to maintain
their traditional “base” i margins;
7-12% of sales in
advertising
 The Apparel Industry - Trends

Large Mass Tariffs and Production

retailing chains Quotas outsourced

• Focused on design &

Wal-Mart • Complex and ever changing
marketing

• Different for different

• Labor intensive process
High bargaining power countries
• Few scale advantages
• Companies chased quotas
• Extremely large base of
Private Labels • Low barriers to entry
suppliers
Wal-Mart (Faded Glory) • Large base of suppliers
• Responsive to changes

After 2005 WTO accord

Tariffs and quotas were slowly Left Supply chains highly All the vertical steps to be in a
reduced fragmented and illogical region or a country
 Birth of Supply chain service companies

Supply Chain globalized Challenges of finding and managing

US companies; Asian Manufacturers suppliers increased

As a result, fabric producers in

CAFTA region lost market share to
imports from China
Started their brands and retail chains Asian Manufacturers shifted their
e.g. Li & Fung Co. business model

Intermediary b/w brand

companies & a network of sub-
contractors
 Impact of 2008-09 recession
Impact on apparel Industry
• Total industry revenue fell by 10%
• Many small garment contractors
• razor thin margins & no financial cushions
• forced to shut down when volumes dropped
• In China, more than 60,000 small contractors closed
Sudden closures of suppliers caused disruptions in apparel
supply chain across the world
Impact on VF Brands
• VF was doing well than its competitors
• Only 9% Sales & 30% earnings decline; Low debt, A-
bond rating; untapped line of credit
• Manufacturer supplying over 15 million pairs of jeans
per year
• Moved production from Nicaragua to Vietnam
• Had to drop due to unfavorable tariffs & quotas
VF had to scramble to find an alternative supplier
 VF Operations Strategy

In 1980’s many apparel companies started selling their internal manufacturing operations and began to outsource
from specialised suppliers. But VF had Unique Operations Strategy:

Internal Manufacturing Outsourcing

With acquisition of VF’s internal Closed many plants. By Outsourced 100% for
North Face in 1990’s, manufacturing not suited 2009 it produced 30% their lifestyle apparel,
scenario began to to new acquisitions products in-house and footwear and backpacks
change outsourced remaining

Plants located in Mexico &

Plants largely focussed on jeans
Caribbean to serve US market,
& denims products, while many
but now international expansion,
brands were not
so outsourcing to Asia required
 Sourcing in VF Supply Chain

• Outsourcing required enormous investment and a reliable and high-quality supplier network

• Suppliers need to be visited and manufacturing capabilities assessed.

• Strict policy of doing business who followed internationally established standards for worker safety

• By 2009, VF had more than 1600 contractors and 30 DC’s

• Between 2000 and 2009 with acquisition of many lifestyle brands sourcing volume in Asia increased 15 folds
reaching to $1.8 billion.

Complexity of the product line- For eg. they had over 6,00,000 SKU’s, Jeanswear- 1,00,000 SKU’s
Short product lifecycles, so required constant replenishment of new designs

Challenges
Widely differing & priorities of the brand coalitions
• Some brands design was supreme like Tommy Hilfiger, cost was not a critical issue
• other brands, game was low cost and rapid replenishment (responsive supply chain)
• Also significant differences in product requirements across regions of very similar products
 The Apparel Supply Chain
Planning done for Fall 2009 collection Demand Forecasts

June 2008 Sep-Dec 2008 Jan 2009 March-June 2009

Designing Sourcing Order Placing Production
Iterative process of creating • Raw materials, fabrics, Order placing by suppliers Production in batches to
designs and tweaking them, accessories (or VF) of Raw materials, optimize capacity utilization,
and physical prototypes • Location – cost & trade fabrics to cater to multiple garment
sewn quote/ tariff Procurement lead time can manufactures
• Managerial & technical vary from 4 weeks to 12
expertise weeks
June 2008
• Production of samples
Marketing Group • Obtaining price quotes
Forecasting prices, volumes
and margins for each item June 2009
Regional DC’s
(Asia)
Sorting, Packing, for bulk
shipping to target markets
Early July 2009
Retail Stores Distribution US port
Fall collection Centre’s 2 weeks lead time
After customs clearance
 Third Way Supply Chain Strategy

Sourcing Strategy

OPTION 2

Cut and Long term

Make Relationship
Contracts

CM Third Way

PS
Package
Sourcing

OPTION 1 OPTION 3
2004 Highly Efficient, Globally diversified Supply Chain
 Third Way Supply Chain Strategy

Sourcing Strategy

• Separate contracts for suppliers at each stage of production process

Cut and
OPTION 1

• Short- term contracts (Typically for one season)

Make
Contracts • VF owned inventories

CM • Payment to supplier was based on the value added to the product

• Opted for heritage lines ( Central America & Caribbean)

• Single supplier responsible for the entire process ( RM to FG)

PS
OPTION 2

• This supplier took care of subcontractors as well as the logistics

• VF did not own any inventories
Package
• Payment to supplier was done on piece basis
Sourcing
• Used for lifestyle brands (Asia, Europe and North America)
 Why the Third Way Sourcing Strategy ?
Sourcing Strategy
Some inefficiencies
existed even though
overall corporate
margins of 10-15%
were achieved
Effort from suppliers was minimum as
01 Lack of Coordination
they operated on razor thin margins
Short-term contracts made the suppliers
02 Loyalty Issues
very insecure
No Guarantee from supplier on the capacity
03 Production Capacity
allocation for a particular product
04 Transparency Inventory levels at suppliers side were never disclosed.
Suppliers feared bias while biding for business
Suppliers leveraged inventory as a security against
05 Excess Inventory
the company
Risk Hedging technique for suppliers
06 Competitors’ Products
due to low switching costs
Company had to negotiate for each product
07 Tedious Process
from scratch
Suppliers were not interested in process
08 No Improvement
improvement as their margins were very low
 The Third Way Sourcing
Objective: Leverage internal technical expertise to have a greater control over the supply chain without owning the suppliers

Strike long term agreement for a specific product line

01
No competitors’ product of the same category

Key Elements Supplier to set up dedicated production line for VF’s product
02
Third Way sourcing Invest in building, equipment, labor, logistics services, admin etc.

Collective effort to develop the production plan

03
Information exchange between S & C on forecast and capacity

VF and Supplier to work on continuous process improvement

04
VF to provide engineering expertise, % of savings passed to VF

Suppler Owns the factory, manages labor

Designed to be a 05
VF will invest in special equipment and/or on capital need basis
perfect mix of full
integration and
VF to leverage its buying power to source fabric & RM
traditional 06
Buyback clause for unused fabric and raw materials
outsourcing

Payment to the supplier

07
Cost plus basis + margin, ensure a good ROA
 Challenges

Failed Projects Manufacturing Dpt.

02  Moroccan Jeans
plant, debt burden in 04  Closing of internal facilities despite
exceptional performance
 Handing hard earned Technical
2009
Expertise to third party

01 Marketing Dpt.
 Worried about loss of 03 Staffing Problem
 Deploy experienced staff from VF’s internal
flexibility in sourcing factories
 Hire locals, Train them with experts from
VF
 Complete Training Program: WIP
 Successful Third Way Sourcing Implementation

5 2009
China Thailand
 Jeans Production  Backpacks
 Outwear Production

Bangladesh Morocco
 Jeans Production  Jeans Production
Thanks