Vf Brands

Q1. How was VF’s operation strategy evolved over two decades? How well aligned was the operations and business strategy.

A1. The present operation strategy of VF comprises of both internal manufacturing and outsourcing which is unique strategy with respect to the apparel industry.

Till early 2000s, the entire manufacturing of VF was manufactured in their own factories. VF pursued a vertically integrated manufacturing strategy in jeans with majority of factories located in USA.

• Acquisition of Lifestyle Brands: In 2004, they initiated their new “Growth Plan” shifting focus from being basic apparel manufacturer to creating a global lifestyle apparel company. With acquisitions of new companies like The North Face, Napapijri etc., they decided to start sourcing products from outside. But, design groups and original locations of these companies remained unchanged, thus design at VF become highly decentralized.

• Reason for Acquisition: The two business strategic reasons behind the new growth plan were:

1. Expansion of sale outside USA, particularly in developing countries like Russia, India and China
2. Expansion of its direct to customer business I.e. shifting focus from selling via traditional independent stores to single branded stores and web based retailing.

• Requirement of outsourcing:

The significant reason for outsourcing was that outsourcing to low cost countries around the world raised companies’ margins, as garment production was generally labor intensive and had low barrier to enter. It also saved companies costs like transportation and taxes by direct productions in sale target countries, especially with restriction of quota and tariffs. As a result of outsourcing, garments companies could focus more on its core business including garment designing and brand building.

This decision was also triggered by major changing trends in apparel industry

1. Highly fragmented competition and single digit market share led to increase expense in brand building and marketing
2. Growing power of large mass retailing chains in distribution of clothing which highlighted the need for brand specific stores

Thus, VF need to reduce it production cost to invest in above mentioned activities.

Further, VF’s internal manufacturing is unsuitable for newly acquired lifestyle brands because

1. Existing plants largely focused on jeans while lifestyle brands are not
2. Located on Mexico & Caribbean to optimize logistic cost & tariffs and not fit for Asian market

• Types of Contracts: 

In 2004, there are few basic types of sourcing relationships VF established with supplier

1. Cut & Make Contracts – VF would have separate contracts for suppliers at each stage of production process. This contract was mostly for heritage products based out of central America and Caribbean and managed in conjunction with internal manufacturing.
2. Package Sourcing – A single supplier was responsible for entire activity from raw material procurement to delivering finished goods to the market. This model is mostly followed in Asia, Europe & Northern Africa.

• Result of the outsourcing strategy:

By 2008, the sales revenue from heritage brand shifted to 56% from 90% in 2000. The company’s goal was to have 40% sales from heritage brands and 60% from Lifestyle brands.

From 2000 to 2009, sourcing volume from Asia alone increased 15 fold to $1.8 billion.

By 2009, 30% production was in-house from their 40 plants and rest from independent sources. VF used outsourcing 100% for its lifestyle apparels, footwear and backpacks. VF had relationship with more than 1600 contractors and 30 distribution centers. This process of building up efficient and reliable supplier network also costed VF huge investment in time.

• Development in in-house manufacturing capabilities

VF was successful in developing technical and engineering capabilities in its in-house manufacturing which was among the very best in industry in terms of quality, efficiency and reliability.

In a globalized supply chain challenges include finding suppliers, managing source relationships and coordinating product flow.

• Drawbacks of mentioned outsourcing model

Lack of coordination and lack of reliability had developed among suppliers due to greater switching of apparel companies and short term contracts. This resulted in issues like excess inventory, greater lead time and lack of process improvement in supplier factories.

Thus, the apparel supply chains were very inflexible, as they usually needed to place the order 8 to 10 months prior to a particular season, and wouldn’t have enough time to add on more or cut down order by the time they received feedback from customers when the products actually hit the market. Retailers suffered the costs of both excess inventory and stock-outs.

• Emergence of Third way

Thus in 2009, VF started implementing “Third Way” partnership in experimental basis in 5 cases. he Third Way Sourcing was designed to be a halfway point between full integration and traditional outsourcing to make supply chain more efficient by building a true partnership with VF’s suppliers and integrating VF’s internal technical and supply chain expertise into external suppliers.

• Conclusion

Thus, the changes in Operational strategy of VF was primarily based on changes in business strategy as well as based on variation on market trends. All changes are implemented focusing on the cost benefit analysis.

Q2. What is your evaluation of 3rd Way sourcing strategy proposed in the case? Is it the “best of both worlds” or the “worst of both worlds”?

A.2 To evaluate the impact of the new Third-way outsourcing partnership suggested, the approach of looking at its impact in all the stages involved in a product’s journey from Design to Store shelf in a typical outsourcing model is used.

• Product Design Stage: This was the longest stage in the entire supply chain and involved a highly iterative procedure. Adopting a Third Way partnership approach would allow precious time to be saved in design modifications at later stages, as since the supplier would be already locked in, the designers could be made aware of any possible challenges at this juncture itself, and they could incorporate the recommendations proposed into the final design before the prototype development begins.

• Prototype Development: Since at this stage, prices, volumes and margins for each item were forecast, negotiations with the supplier regarding his margins could be initiated simultaneously, reducing time to shelf. The supplier would also get to know about the volumes so that he can accordingly modify his labor force strength

• Development of Sourcing Strategy: Since the suppliers for a particular product line would be already locked in, time that was earlier spent in deciding the location, outsourcing/insourcing decision would be saved. However, this would increase the business risk from a change in quotas/tariffs, apart from leading to a decrease of flexibility that VF has regarding selection of the most optimal supplier-location combination.

• Selection of Supplier and Supplier Testing: Time spent on selecting suppliers on the basis of their managerial-technical skills, price quotes, capabilities, and samples would be saved as suppliers would be already locked in for specific product lines and time will only be utilized on the production testing stage.

• Purchase of Raw Materials: Third Way partnerships would prove to be useful in three ways

• Since the volumes for each item would have been already forecasted in the prototype development stage, VF could begin the process of selection of manufacturers for each raw material item and fabric early
• VF would also be able to procure materials at lower rates by leveraging its purchasing capacity leading to lower costs for supplier

• Since, VF retail would be bearing the risk of any unused fabric or raw material item. The supplier would be willing to carry a larger safety stock and reduce the chances of stock out.

• Production Stage: By leveraging its capabilities in process engineering, VF retail would be able to drive down the costs of production leading to more margins that it could then share with itself while keeping some of it with itself leading to both the players being better off. Greater coordination would also result in lower inventory holding costs due to a more integrated value chain.

• Shipment and Retail-  Having dedicated lines to their products at the supplier site would also ensure higher flexibility to ‘hot’ items in the market that will result in lower lost sales and higher profits.

By the above analysis, we can conclude that this arrangement would be the best of both worlds from VF brands’ perspective as not only would it be able to drive down its costs more compared to Packaged sourcing, it would also be able to improve the flexibility of its supply chain. This can be seen from Exhibit 4 also.