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VF Brands is a leading apparel company that is home to many popular brands. The company is considering a shift from its current supply chain because it has certain drawbacks. Chris Fraser, President of the Supply Chain International for VF Brands, is also worried that it will not be able to meet the future demands of customers in the Asia-Pacific market. The company is looking into a "third-way" approach which would foster closer cooperation and partnerships with suppliers.
Gary P. Pisano; Pamela Adams
Harvard Business Review (610022-PDF-ENG)
November 05, 2009
Case questions answered:
- How has the supply chain strategy of VF Brands evolved over the two decades? How well aligned was the supply chain and business strategy prior to 2008?
- What is your evaluation of the Third Way sourcing strategy proposed in the case? Is it the “best of both worlds” or the “worst of both worlds”?
- The supply chain options VF Brands seems to have on the table are continue the accelerated shift from integrated manufacturing to full outsourcing under the industry practices specified above, refrain from further shifting from IM to outsourcing, and either keep the situation “as is” or even rebuild internal manufacturing capability, or engage the “Third Way” as suggested in the case. Please decide which is the best course of action for VF.
- Provide a concise case background.
- How has VF Brands operations strategy evolved over the two decades? How well aligned was the operations and the business strategy?
- How would you characterize VF’s various products/brands in terms of critical competitive priorities? What are the implications for the operations strategy?
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Case answers for VF Brands: Global Supply Chain Strategy
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How has the supply chain strategy of VF Brands evolved over the two decades? How well aligned was the supply chain and business strategy prior to 2008?
The organization started as “The Reading Glove & Mitten Company” with headquarter in Pennsylvania in 1899. In 1917, VF Brands expanded into the lingerie business, and the name got changed to Vanity Fair (VF Brands). In 1969, the company entered the jeans business by acquiring Lee Company.
The flagship product “jeans” accounted for more than 75% ($1 billion) of the company’s sale. Before 1983, Vanity Fair was primarily an apparel company with a focus on basic apparel, i.e., jeans and lingerie catering to the US markets.
From 1984 to 2004, the focus was on the expansion of the jeans product line; with the acquisition of various jeans brands like Blue Bell. It also entered diversified segments like sportswear, backpacks, occupational apparel by acquiring companies, i.e., Jantzen and RedKap.
In the 2000s, heritage brands accounted for 90% of the total sales. Traditionally, the company adopted a vertically integrated manufacturing strategy with most of the factories in the US itself.
The company’s internal manufacturing was known for the state of art practices in terms of quality standards and efficiency in the industry. This resulted in shorter production lead times and lower defects rates when benchmarked against the industry’s average.
In-house manufacturing allowed them to better cater to the majority markets located domestically in the USA. Hence, the concentration of in-house manufacturing operation in the US made sense.
Post 2004s, VF Brands’ business strategy was to expand its offerings as well as enhance its global footprint as a part of its “Growth Plan.” It wanted to transform itself from a basic apparel company to a global lifestyle company with strong brands. The idea was to move beyond the denim jeans products and include other lifestyle products in international markets (like Russia, India, China). This was achieved in an inorganic way by acquiring a series of “lifestyle brands” (like North Face, Nautica, Vans, Reef, etc.) while continuing investment in the “heritage brands.”
The company aimed to grow the revenue from lifestyle brands from 44% to 60%. The company’s growth imperative focused on enhancing global revenue (19% in 2001) and expand the direct to customer business.
The focus was more towards marketing and brand building, and hence opened various single-branded stores (these stores served the purpose of showcasing the brand). VF Brands had 700 single-brand stores by 2009 and was targeting 1300 stores by the end of 2012 (opening 75-100 stores per year). VF also started the web-based retailing of its products.
The company also kept the design centers of acquired brands intact and preserved their heritage. Many of the acquired companies lacked manufacturing capabilities. However, VF’s corporate capital deployment strategy didn’t allow them to invest in them additionally. Hence, for the lifestyle brands, the firm started outsourcing manufacturing on a global scale while keeping the heritage brand in-house.
The company followed “cut and make” contracts for some heritage line and “package sourcing” for mostly lifestyle brands, by this time the company was manufacturing 30% of products in-house and outsourced the rest.
The outsourcing of the manufacturing process is in line with the conservative capital deployment strategy of the company. VF Brands had expertise in jeans manufacturing, and so it was technically infeasible to enter into the manufacturing of lifestyle Brands. Also, even if VF decided to manufacture in its existing plant, the shipping costs to Asian markets wouldn’t make economic sense in the apparel industry with narrow margins.
The company divided its business through five different coalitions ranging from Jeanswear to Contemporary brands giving them autonomy of their product line, sales, and marketing. The coalition was responsible for the designs, volume decisions, pricing, and margin goals for their respective product lines, whereas the supply chain organization planned capacity (internally and externally), managed inventory, coordinated all processes required to go from fabric to a finished product on the store shelf.
The whole process from designing to the product reaching the store shelves takes around 12-13 months. The process starts with designing and making the product prototypes. The prototype making takes about four weeks. Design decisions were reviewed both at the brand & coalition levels. After this step, the operations team starts with the sourcing strategy for each product.
For the past few decades, the supply chain strategy in apparel was primarily focused on chasing low-cost labor from one country to the next. Suppliers are evaluated based on the cost of production, transportation, technical expertise, etc. After the finalization of suppliers, samples are shown to retailers and wholesalers, and contracts are signed.
By this time, 6-7 months are already gone from the start of the process. After this, the suppliers procure the raw materials, which takes another 4 to 12 weeks, depending upon the fabric. The manufacturing of products takes another 2-3 months, and then products are shipped. The lead time of transportation from Asia to the US is another two weeks, and then the retailers finally get the products. Retailers and Wholesalers had to place orders 8-10 months before the start of the season, and so they have to suffer the cost of both excess inventory and stock-outs.
The aftermath of the 2008 crisis resulted in multiple suppliers shutting down, leading to sourcing problems. In this industry scenario, lower lead times, reduced inventory level, superior product quality at lower costs started gaining significance, while the much sought after the concept of cheap labor was losing ground amongst the garment industry across the world.
‘Outsourcing’ traditionally helped in achieving lower cost; however, the short-term contracts in the apparel industry created trust and loyalty issues between the companies and the suppliers.
To address this, VF Brands adopted a “Third-way” strategy, for some supplier contracts, to make the supply chain more efficient and responsive. It was a midpoint between traditional outsourcing and complete integration. The idea was based on the partnership alliance between the VF and the suppliers, with both parties working as a team to improve the process.
VF would leverage its capabilities and resources to improve the overall production process. The approach was more towards knowledge sharing and facilitating the suppliers in improving their performances.
If “Third-way” promises were to be believed, it looks like a good strategy for the company as it enables long term partnerships with suppliers. It also helps suppliers by leveraging the VF Brands’ expertise to improve efficiency and reduce the company’s cost via outsourcing. Therefore, this strategy also looks in-sync with the business strategy of minimal investment and maximum responsiveness.
The manufacturing strategy is also entirely in sync with ‘Coalition strategies’ for all five coalitions (whereby, VF manufactures Jeanswear and Imagewear in-house, while outsources Outdoor and Action Sports, Sportswear, and Contemporary brands).
VF Brands’ business strategy had two critical elements. The first one was a strategic growth plan, which includes expansion of sales outside the US, especially rapidly developing countries, and expanding direct to consumer business like their own single-brand store and web-based retailing. The second element was the corporate capital deployment strategy. They believed that money is better invested in brands and retail than in building manufacturing capabilities.
Overall the VF Brands’ business strategy of expansion was in line with the change in the supply chain strategy. In the supply chain, two significant changes happened. The first one was the transformation of inhouse manufacturing to a combination of in-house and outsource manufacturing & the second significant change was selling through self-owned single-brand stores from initial strategy to sell through third-party retailers and wholesalers. They both helped VF to focus on marketing and branding aspects more.
What is your evaluation of the 3rd Way sourcing strategy proposed in the case? Is it the “best of both worlds” or the “worst of both worlds”?
VF Brands employed mainly two methods to source the apparels.
I. Insourcing: VF Brands had strong internal manufacturing capabilities, counted among the best in the world in terms of quality, efficiency, and reliability, aided by over a century of experience and extensive proprietary knowledge. It provided a low lead time (2-3 weeks, for cut, sew and finish) and provided extensive control to VF for quality, ensuring low defect rates. However, establishing plants required high capital investment and was not supportive of its expansion plans to serve the international markets
II. Outsourcing: VF used two types of outsourcing contracts.
- “Cut and Make”(CM): In this, VF Brands used to sign separate contracts for suppliers at each step of the production process. VF owned the inventory, coordinated product flow between suppliers, and paid the suppliers for value additions.
Advantage: It allowed tight control over costs at each stage.
- “Package Sourcing”: In this, a single supplier took the contract for the entire production process for the given product, from raw material to the final product shipping into the market. The contractor was paid on a per-piece basis.
Advantage: It would have freed VF’s management time to focus on more productive works. Incidentally, it appeared relatively easy to manage and so well suited for far-off overseas markets.
Benefits of outsourcing to VF:
- It helped VF Brands in its Capital deployment strategy as it didn’t need investment in fixed assets.
- It was the cheaper alternative, thus helping VF to achieve the corporate margin targets. Per unit cost in outsourcing was ~$7.15 as against ~$7.50 in insourcing (Exhibit 4 of the case).
- It helped in VF’s expansion plans and manufacturing near the market.
- VF’s coalitions appreciated quality and reliability.
Issues with outsourcing:
- The lead time was typically high (2-3 weeks in insourcing vs ~10 weeks in outsourcing).
- The contracts were short-term, which led to a lack of coordination and trust among suppliers. It prevented suppliers from sharing their capacity, cost, work-in-process inventories, etc. causing inefficiencies for VF Brands.
- The above two factors led to a high inventory of finished goods with VF forcing substantial discounts.
- The overall process of placing orders was time-consuming as it required negotiations and bidding every time.
- The suppliers didn’t have enough incentive to invest in improving processes due to small margins and short-term contracts.
- VF was holding rich experience in manufacturing processes. However, the outsourcing models prevented VF from taking advantage of the same.
In this background, Fraser’s “Third-way” sourcing sought to integrate the benefits insourcing and outsourcing, as followed earlier. It was typically a mid-way between the two. It called for longer-term partnerships with knowledge and technology sharing.
Benefits of Third Way:
- Capital Deployment: The suppliers will make most of the investment in most of the machinery, as in the case of outsourcing, but VF would make investments in certain specialized equipment. It paves the way for process improvement at lower costs incurred by VF Brands.
- Production schedules: The decision on production schedules will be made jointly by both parties, considering the need for both the partners and the forecast data will be shared amongst each other. This will improve coordination and also improve the trust factor.
- Low-cost Raw Materials: VF would use its bargaining power to buy raw materials for the suppliers at low cost, which would, in turn, reduce the final cost of the product.
- Process improvements: VF would work along with suppliers in order to bring process improvements; this would reduce inefficiencies and reduce lead time.
- Dedicated capacity: VF Brands could have a better hold on suppliers through this method and have dedicated product lines which increases the production capacity of that particular production line.
- Proprietary: The agreement also asked suppliers not to sign contracts for similar product lines for competitors.
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