Notes from the MAGIC Sourcing Panel, Monday, August 25, 2008

HOW US RETAILERS AND BRANDS CAN PREPARE TO WORK DIRECTLY WITH FACTORIES HERE

US retailers are moving production back from Asia to factories here in the Western Hemisphere. European retailers continue to prove the high margin benefits of sourcing directly from factories that are close by. How do they make money doing this? By mastering the hard things in design, supply chain and production through true strategic partnerships. Its not easy. We’ll show you how US retailers can change measurements and organize internally to work directly with factories in the US, Mexico, the Caribbean and Central America.

Featuring:

Mike Todaro, AAPN, Moderator

Alfonso Hernandez, Argus Group, El Salvador and Nicaragua

Brian Meck, FesslerUSA, USA

Carlos Arias, KORAMSA, Guatemala

Fernando Capellan, Grupo M, Dominican Republic and Haiti

Walter Wilhelm, Walter Wilhelm Associates, USA

Carlos Arias (CA): There are three types of customers bringing production back to the Western Hemisphere. First, those who thought Asia would solve all of their problems but want better proximity to the market which they get in the West. Then, those who always know to balance their sourcing and are seeing new kinds of production evolve in the West. And finally, smaller firms who are just opening their operations.  Our worry now is how do we a match up right, by product, and as partners.

Brian Meck (BM): This return is driven by what products we can make in this hemisphere, and for us that means here in the US. We are seeing an increase in interest. Customers who would not take our calls two year ago are now calling us. For them, working in the West is almost a new way to source apparel.

Walter Wilhelm (WW): Looking back even recently, we all watched the DR-CAFTA region struggle to grow from CMT to full package. So the question is, when someone does come back from Asia, what services do they expect and for the most part what they’ll find today is the full range of services because the good factories are addressing them.

Fernando Capellan (FC): Factories like ours at Grupo M are becoming more sophisticated plus we are now seeing favorable legislation like cumulation and Haiti’s HERO II Act. It is working. Now, Haiti trumps Jordan as a viable source of high value production.

Alfonso Hernandez (AH): This hemisphere is not your low cost Walmart source of production, China is. But if you do your homework, you’ll find we are good at many things. We can do speed to market, yet we do have some bottlenecks in textiles because we are young in terms of fabric production. Still, with TPL’s, cumulation, short supply and other options, we’re addressing this opportunity. Also, our alliances with other suppliers have grown so strong and sophisticated, we are exploring joint ventures. So, you have to understand, when you evaluate this hemisphere, what you are against and the AAPN can help. We have found that selling is easy but delivering is hard. So I recommend you draw out your communications, as customers, so you develop a strategy with your factory that matches yours.

BM: We see that at FesslerUSA here in the US as well. We seek partnership with our suppliers which is a process of being responsive on both sides – joint calls, joint risks, joint plans.

FC: Like the others in the region we just did sewing when we started. But like FesslerUSA, we saw the need to go vertical so we invested in knitting. Today we buy yarn and then do all of the other steps including laundry, embroidery, screen printing and other services.

CA:  At Koramsa we have invested heavily in the front end, in product development done collaboratively with our customers. Like FesslerUSA, customers come to us to develop new products. So now we are responsive and flexible, changing washes and finishes constantly until we get it right, then our proximity comes into play because we are so close to the US market. We also study trends and we now have offices close to where we can spot them, in New York and Los Angeles. When we first started working with designers, we found they were very different, very radical in how they worked. They might as well have been Martians. So, we decided to hire our own Martians which accelerated our innovation in-house.

WW: What you’re hearing here is that these men each changed their business models. They have evolved their businesses and changed their processes to now accept small, high margin orders. In the past, a typical order may have been for 100,000 units, but now they have small, responsive, short cycle lines of production.

AH: Walter is right. This means we are now finding more ways to add value while at the same time adding higher fashion components all through modular lean manufacturing.  Let me give you an example from our company, Argus. We got lucky. We decided to create our own idea for a synthetic yarn in a new high performance shirt. We went to the US and found someone to develop yarn with the characteristics we wanted. We then found a high performance knitter to create our fabric. We developed, produced and embellished the final product, which we offered on a full package basis to a retailer. Well, it exploded. In 2009, we project sales of over 1,000,000 shirts and we are the only ones who can make this garment. For us, while this may be a common process in Asia, it was a first of many for us in the region.

CA: Europe has been a big surprise for us in the region. They want true American jeans. We like European brands and retailers because they tell is what they want, then give us what we need to get it done and they keep their hands off our operation. The US should learn from them.

FC: We are seeing the same thing from the Europeans in the DR. The Euro is strong which makes our pricing more competitive. For them, most of the fabric we use comes from China.

AH: Fabric is the key. When we see someone build a new mil in the region, it costs $100 million. And they are not moving used machinery here, it is all new technology.

BM: Having your own mill, which we do, really gives us speed. To ramp up for a new customer, it can take 8 to 12 weeks to develop product. If it is a reorder from an existing customer, we can turn it in 2 to 3 weeks, and if we are maintaining greige goods, we can garment dye and ship the same week as the order.

QUESTION – How can small companies work with you factories?

Answer – The region was developed by large brands, huge orders and long runs of the same thing. It didn’t matter then if it was slow, but now we must do speed to market. The common mistake customers make is they rush a sourcing order but because they are usually wrong with their specs and their planning is poor, so it takes weeks to actually get the garments. It should be exactly the opposite. You should take a long time to define the product and the relationship, then you’ll get your speed to market responsiveness.

QUESTION – Can the region scale up volumes if production does come back from Asia?

Answer – AH: 500 factories have closed in the region over the past 3 years. If a sourcing Tsunami were to hit now, we’re not ready. That’s why we have to start talking seriously now. For example, in our company, we decided to discuss our knits internally. We met and made a hit list of 5 new prospects for knits, hoping we would land one of them for 2009. We also spoke to our existing customers to tell them we were going shopping, so we touched base with them. Their response was to tell us that in 2009 they wanted to increase their volumes with us by 50%. That meant we didn’t need any new customers for our knit operations. 

AH: For too long, the factories in the region have been like prostitutes. We said no to no-one. Now we are learning to act like ladies, to be reserved, sophisticated, patient and discretionary, and it is the key to our growth.

WW: If there is one key take away from this seminar, it is that when you pick a factory from within the AAPN membership in the US, Mexico, the Caribbean and Central America, US customers drop their factories far too quickly. What we’re learning is that you will make money from the factory you pick and stick with as true strategic partners.

SUMMARY – MIKE TODARO:

What you saw here today was unrehearsed. There were no PowerPoint’s. There were no speeches or handouts. There was no preparation. The five panelists did not know what I was going to ask them or in what order I might call on them. So, why did this work so well? It did so for three reasons.

   First, the AAPN has focused on factories since we started in 1981 and we know what to ask them. Second, because our members span the entire supply chain from fiber to retail, we have learned the ‘one story’ about this industry from end to end. And finally, you do not have to memorize or bulletize the truth. What these men said was simply the truth.

   Everyone in this room who is in the supply chain falls into one of three ‘buckets’. The first is the supply chain. Every company competes as a supply chain. By having a network that includes fiber, yarn, textiles, trim, transportation and technology, we meet with those who have their fingers on the pulse of this industry and we learn first hand what keeps them awake at night.

   The second group is retail and brands and we all know how tough the apparel market is for them today. What do they want? New markets, fast fashion and either lower costs or, if they are sophisticated, a focus on higher margins by sourcing close to their stores.

   And finally, this panel, the factories. What you saw on this panel were 4 factories who have transitioned from just sewing to ‘full’ full package and one consultant who was the mid-wife counseling these factories on how to do that.   

   That brings us to today. What have these factories asked the AAPN to work on for them? There are their three priorities.

   First, they want our help meeting suppliers to form strategic partnerships with them, even including joint ventures, as you heard in the seminar. That’s why we host ‘town meeting’ format supply chain meetings. Second, each of our factory members is developing better services for the customers they already have – on the front end with new designs and ideas and the back end with faster replenishment. That’s why they are so selective about accepting additional customers. And finally, they do want to meet the CEO’s of retailer and brands who want the highest possible margins of working directly with factories, eliminating middlemen. CEO’s understand profit and ‘chasing the low cost needle’ no longer produces it.

   I hope you learned something today. I did. They did. And we do every day within the network. Thank you.