reducing risk of fashion merchandise using … risk of fashion merchandise using flexible supply...
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© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 11
Reducing Risk ofReducing Risk ofFashion Merchandise UsingFashion Merchandise Using
Flexible Supply OptionsFlexible Supply Options
Harvard Center for Textile andHarvard Center for Textile andApparel ResearchApparel ResearchPresentation to the Apparel IndustryPresentation to the Apparel IndustryNYC, October 3, 2008NYC, October 3, 2008
www.www.hctarhctar.org.org
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 22
AgendaAgenda
Tracing the rationale for U.S. ApparelTracing the rationale for U.S. ApparelProductionProduction
Opportunities in todayOpportunities in today’’s volatile markets volatile market
Flexible Supply OptionsFlexible Supply Options
Summary and Next StepsSummary and Next Steps
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 33
The Dominant 20The Dominant 20thth Century CenturySourcing StrategySourcing Strategy
Domestic Production OnlyDomestic Production Only~1900-1950~1900-1950’’ss
Basic items were made in the U.S. SouthBasic items were made in the U.S. South
WomenWomen’’s Fashion was made in N.Y. Citys Fashion was made in N.Y. City
Only unique fabrics and native designs cameOnly unique fabrics and native designs camefrom abroad for the very wealthyfrom abroad for the very wealthy
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 44
What Changed?What Changed?
The Relative Strength of the U.S. EconomyThe Relative Strength of the U.S. Economy
Demand for More Products and MoreDemand for More Products and MoreDifferentiationDifferentiation
Lower TariffsLower Tariffs
Efficiency of Transportation & ShippingEfficiency of Transportation & Shipping
TechnologyTechnology
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 55
The The ““OldOld”” Global Sourcing Model Global Sourcing Model
Shop the World for the Lowest PriceShop the World for the Lowest Price~1970~1970’’s-Todays-Today
Production CostProduction Cost Transportation CostTransportation Cost
SE AsiaSE Asia
The decisionThe decisionhas changed!has changed!
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 66
Things are Still ChangingThings are Still Changing
Preferential Bi-lateral Trade AgreementsPreferential Bi-lateral Trade Agreements
Information TechnologyInformation Technology
Lean Manufacturing, Quick Response, andLean Manufacturing, Quick Response, andShareholder ValueShareholder Value
Risk-shifting from Retailers to theirRisk-shifting from Retailers to theirManufacturersManufacturers
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 77
““Lowest PriceLowest Price”” has Other Costs has Other Costs
Lowest-price suppliers are often far awayLowest-price suppliers are often far away
Flexibility and ability to respond is sacrificed toFlexibility and ability to respond is sacrificed toprocure lowest price.procure lowest price.
This generates real economic consequencesThis generates real economic consequences Liquidation LossesLiquidation Losses Missed Sales opportunitiesMissed Sales opportunities Unacceptable RISK.Unacceptable RISK.
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 88
The New Global Sourcing ModelThe New Global Sourcing Model
Shop the World while considering TotalShop the World while considering TotalCost, Margins, and RiskCost, Margins, and Risk
Production and Transportation CostProduction and Transportation Cost Policy Costs (Tariffs)Policy Costs (Tariffs) Modern Inventory Carrying CostsModern Inventory Carrying Costs Risk ExposureRisk Exposure
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 99
AgendaAgenda
Tracing the rationale for U.S. ApparelTracing the rationale for U.S. ApparelProductionProduction
Opportunities in todayOpportunities in today’’s volatile markets volatile market
Flexible Supply OptionsFlexible Supply Options
Summary and Next StepsSummary and Next Steps
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1010
Modern Supply Chain RiskModern Supply Chain Risk
Labor InstabilityLabor Instability Fuel CostsFuel Costs Currency FluctuationsCurrency Fluctuations Credit MarketsCredit Markets
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1111
Managing ICC and RiskManaging ICC and Risk
To Lower ICC and Reduce RiskTo Lower ICC and Reduce Risk Shorten the Supply ChainShorten the Supply Chain Frequent, Dynamic ReplenishmentFrequent, Dynamic Replenishment Commit later and purchase reactive capacityCommit later and purchase reactive capacity Pre-validate regional suppliersPre-validate regional suppliers
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1212
Conclusion: Geography MattersConclusion: Geography Matters
Geography Matters when Choosing aGeography Matters when Choosing aSupplierSupplier Regional Trade BenefitsRegional Trade Benefits Length of the supply chain determinesLength of the supply chain determines
inventory costsinventory costs Length of the Supply Chain determines theLength of the Supply Chain determines the
opportunity to lower riskopportunity to lower risk
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1313
Conclusion: Proximate SuppliersConclusion: Proximate SuppliersEnable Flexible SupplyEnable Flexible Supply
Information Technology provides anInformation Technology provides anopportunity to KNOW real-time fashionopportunity to KNOW real-time fashiondemand!demand!
Short Local Supply Chains create anShort Local Supply Chains create anopportunity to MEET current fashionopportunity to MEET current fashiondemand!demand!
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1414
How do We Meet thisHow do We Meet thisOpportunity?Opportunity?
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1515
AgendaAgenda
Tracing the rationale for U.S. ApparelTracing the rationale for U.S. ApparelProductionProduction
Opportunities in todayOpportunities in today’’s volatile markets volatile market
Flexible Supply OptionsFlexible Supply Options
Summary and Next StepsSummary and Next Steps
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1616
The Value of Flexible SupplyThe Value of Flexible SupplyOptionsOptions
Flexible Supply Options allow retailers toFlexible Supply Options allow retailers toOptimize their Open-to-buy:Optimize their Open-to-buy:
Only buy products with high margins thatOnly buy products with high margins thatwill sell at full retailwill sell at full retail
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1717
Flexible Supply OptionsFlexible Supply Options
A Flexible Supply Option (FSO) is a A Flexible Supply Option (FSO) is a ContractContractbetween a manufacturer (Buyer) and a jobber orbetween a manufacturer (Buyer) and a jobber ora sub-contractor (Seller).a sub-contractor (Seller).
FSOFSO’’s s are are purchasedpurchased prior to the season prior to the season
FSOFSO’’s s can be exercised during the season for ancan be exercised during the season for anadditional costadditional cost
FSOFSO’’s s expire beyond a specified timeexpire beyond a specified time
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1818
Utilizing FSOUtilizing FSO’’s s –– Basic Example Basic Example 100% cotton,100% cotton,
cheetah-print mesh.cheetah-print mesh.
Made in SE AsiaMade in SE Asia
Retail Price: $119Retail Price: $119
Uncertain marketUncertain marketacceptanceacceptance
Buyer ChoosesBuyer ChoosesOrder QuantityOrder Quantity
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 1919
Step 1: Determine a Two-CaseStep 1: Determine a Two-CaseSales Forecast (Boom or Bust)Sales Forecast (Boom or Bust)
Consider 51 like-styles from past years:Consider 51 like-styles from past years:(Average Sales = 2,100 units)(Average Sales = 2,100 units)
36 of 5136 of 51
1,200 units1,200 units
240 units240 units
Low DemandLow Demand High DemandHigh Demand
15 of 5115 of 51
4,200 units4,200 units
1,050 units1,050 units
FrequencyFrequency
AverageAverage
Std. Dev.Std. Dev.
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2020
Step 2: Place Orders to Create aStep 2: Place Orders to Create aFlexible Supply QuantityFlexible Supply Quantity
Place a conservative order from the standard supplier.Place a conservative order from the standard supplier. Purchase options from Purchase options from a pre-qualified suppliera pre-qualified supplier to to
replenish in case of high demand.replenish in case of high demand.
1,270 units1,270 units
$40$40
$40$40
StandardStandardSupplierSupplier
OptionOptionSupplierSupplier2,745 Options2,745 Options
$17$17
$51$51
PurchasePurchase
Up-front CostUp-front Cost
Total Landed CostTotal Landed Cost
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2121
Step 3: Use POS Data to ManageStep 3: Use POS Data to ManageInventory PositionInventory Position
Determine whether the style is Determine whether the style is ““coldcold”” or or ““hothot””
Exercise the appropriate number of options, ifExercise the appropriate number of options, ifnecessary, to receive additional units by week 5necessary, to receive additional units by week 5or 6.or 6.
00
1,270 units1,270 units
Low DemandLow Demand High DemandHigh Demand
2,7452,745
4,015 units4,015 units
ExercisedExercisedOptionsOptions
Total SupplyTotal Supply
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2222
The TraditionalThe TraditionalNo-Option BenchmarkNo-Option Benchmark
Forecast Distribution is created byForecast Distribution is created bycombining combining ALLALL 51 past like-styles. 51 past like-styles. Mean = 2,100Mean = 2,100 Std. Deviation = 1,550Std. Deviation = 1,550
Optimal Single Order Quantity = Optimal Single Order Quantity = 3,5403,540(According to Forecasting System)(According to Forecasting System)
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2323
Performance ResultsPerformance Results
Starting Inventory
Units Purchased 3,540 1,270
Options Purchased - 2,745
Low Demand Outcome
Exercised Options 0 0
Total Units On Hand 3,540 1,270
Unsold Units to be Cleared 2,340 70
High Demand Outcome Exercised Options None Available 2,745
Total Units On Hand 3,540 4,015
Customer Service Level 83% 95%
Current Plan
Proposed
Options Plan
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2424
Financial ResultsFinancial Results
Starting Inventory
Units Purchased 3,540 1,270
Options Purchased - 2,745
Value at Risk $141,600 $97,465
Low Demand Outcome
Cost of Good Sold ($48,000) ($48,000)
Cost of Unused Options 0 (46,665)
Liquidation Costs* (62,010) (1,855)
Sales 142,800 142,800
Profit $32,790 $46,280
High Demand OutcomeCost of Good Sold ($141,600) ($190,795)
Cost of Unused Options 0 0
Liquidation Costs* 0 0
Sales 421,260 477,785
Profit $279,660 $286,990
Current Plan
Proposed
Options Plan
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2525
AgendaAgenda
Tracing the rationale for U.S. ApparelTracing the rationale for U.S. ApparelProductionProduction
Opportunities in todayOpportunities in today’’s volatile markets volatile market
Flexible Supply OptionsFlexible Supply Options
Summary and Next StepsSummary and Next Steps
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2626
Offering Flexible Supply OptionsOffering Flexible Supply Options
Flexible Supply Options sold by localFlexible Supply Options sold by localpre-qualifiedpre-qualified suppliers become part of a suppliers become part of ablended sourcing strategy.blended sourcing strategy.
FSOFSO’’s Depend on Quick Response ands Depend on Quick Response andShort Lead-times.Short Lead-times.
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2727
Next StepsNext Steps
Pilot the Model with a forward-lookingPilot the Model with a forward-lookingRetailer/ManufacturerRetailer/Manufacturer
Identify Several Local Suppliers WillingIdentify Several Local Suppliers Willingand Capable to offer FSOand Capable to offer FSO’’ss
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2828
For More InformationFor More Information
Please visit The Harvard Center for Textile andPlease visit The Harvard Center for Textile andApparel Research (HCTAR)Apparel Research (HCTAR)
www.hctar.orgwww.hctar.org
Thank YouThank You
© Harvard Center for Textile and Apparel Research, 2008© Harvard Center for Textile and Apparel Research, 2008 2929
Opportunities Vary by StyleOpportunities Vary by Style
Specific Product Characteristics Matter inSpecific Product Characteristics Matter inChoosing a SupplierChoosing a Supplier Labor Content (as a percentage of cost)Labor Content (as a percentage of cost) Material Requirements (cost and availability)Material Requirements (cost and availability) Length of the Selling SeasonLength of the Selling Season Demand Forecast: What we Think we knowDemand Forecast: What we Think we know