Session 10. Sourcing and Supplier Management Practices
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1 Session 10 Sourcing and Supplier Management Practices 1
2 Outline Introduction: HK Apparel Industry Environment of HK s Apparel Industry Merchandising Management Sourcing Fashion Merchandising organisations Some other issues 2
3 I. Introduction: HK Apparel Industry HK as a fashion center Fashion center of the world; their influences on fashion trend Hong Kong: convergence of world fashion and brands Hong Kong s own fashion brands Hong Kong s influence on the world fashion business: apparel supply 3
4 I. Introduction: HK Apparel Industry From manufacturing base to service center Emergence of HK as the world s largest apparel exporter from the 1950s to the 1980s Decline of HK as an apparel manufacturing base since 1980s Emergence of HK as an apparel sourcing center Thousands of firms engaged Billions of dollars of exports of apparel (2007: domestic exports $39b, re-exports $185b) Merchandising as one of the most important functions 4
5 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 1. labour intensive 2. Small scale of operation 3. Low rate of concentration 5
6 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 1. labour intensive What does it mean labour intensive? Why is apparel industry labour intensive? Why can t apparel production be automated? 6
7 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 1. labour intensive What does it mean labour intensive? labour cost relatively high in total costs Total capital requirements and capital per worker relatively low 7
8 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 1. labour intensive Why is apparel industry labour intensive? Sewing not automated; much labour needed in manual operation Sewing cost about 75% of total labour cost Sewing operator 75% of time positioning materials 8
9 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 1. labour intensive Why can t apparel production be automated? Limp materials (no rigidity) difficult for devices to handle Low efficiency of automation due to fast fashion changes 9
10 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 2. Small scale of operation Small average size of plants/factories Production process relatively simple No mass-production except for some commodity products Small run and short run Frequent change of production system Small plants more flexible 10
11 II. Environment of HK s Apparel Industry Economic characteristics of apparel industry 3. Low rate of concentration Even the largest companies in the industry account for relatively small market share Impact on the market structure and the way of competition 11
12 II. Environment of HK s Apparel Industry Fast growth of international trade: globalisation Benefits of international trade to nations Increased welfare: Lower price and more variety Gainers and losers from international trade 12
13 II. Environment of HK s Apparel Industry Fast growth of international trade: globalisation Reasons for growth of international trade International economic growth Advances in transportation and communication Advances in international institutional arrangements Basic rules/guidelines (GATT and WTO), banking 13
14 II. Environment of HK s Apparel Industry Fast growth of international trade: globalisation globalisation of apparel High level of globalisation Global sourcing of materials and production Flow of semi-products (for quota or for costs) Multinational firms 14
15 II. Environment of HK s Apparel Industry General patterns of apparel trade Rapid growth of apparel trade in value and volume Major flow: Exports from developing countries to the developed countries Waves of exporting countries shift Emergence of China as dominating exporter in the world 15
16 II. Environment of HK s Apparel Industry General patterns of apparel trade Major flow: Exports from developing countries to the developed countries Comparative advantages of developing countries Developed countries: High productivity, but very high labour costs Developing countries: Lower productivity, but very low labour costs Primarily seasonal products and commodity products 16
17 II. Environment of HK s Apparel Industry General patterns of apparel trade Waves of exporting countries shift Japan Big Four: Hong Kong, Taiwan, Singapore, Korea China Other developing countries: Turkey, India, Pakistan, ASEAN countries Emergence of China as dominating exporter in the world 17
18 II. Environment of HK s Apparel Industry General patterns of apparel trade Emergence of China as dominating exporter in the world Rapid growth of production and exports since the late 1970s Now the largest exporter of textiles and apparel in the world The competitiveness of China as apparel exporter Tremendous importance to HK apparel business 18
19 II. Environment of HK s Apparel Industry Apparel Export (US$100m) W C %
20 II. Environment of HK s Apparel Industry Price of US Import Apparel (US$/SME) W C
21 II. Environment of HK s Apparel Industry General patterns of apparel trade The competitiveness of China as apparel exporter Society: stable and safe labour: cheap, ample, disciplined, hard-working Materials: sufficient in variety and quantity Infrastructure: relatively well-developed and improving Complete industrial system, variety of products, advantages of industrial clustering 21
22 II. Environment of HK s Apparel Industry International trade regimes From GATT to WTO Principles of GATT and WTO Textile/apparel trade as violation of the principle MFA (multi-fiber arrangement) and quota system MFA phase-out Post-MFA restrictions on China s exports Other challenges faced by China CEPA: Objectives and impacts on HK apparel industry 22
23 II. Environment of HK s Apparel Industry Hong Kong s apparel industry today Fashion business, rather than apparel industry Coverage of the entire value chain of apparel products Product development, manufacturing, distribution Merchandising as major functions of many apparel companies Headquarters in HK doing design and marketing Manufacturing in China and other places 23
24 III. Merchandising Management What is merchandising? If you are an one person company, receiving an order from a buyer in the US If yours is a buying office for a retailer in Europe, preparing for a new season If you are an apparel manufacturer, exporting products to Japan 24
25 III. Merchandising Management What is merchandising? Activities that bridge the suppliers and the buyers, and that bring the right products to the right people at the right time and right price In HK merchandising is manufacturing oriented, while in the importing countries it is often retailing oriented 25
26 III. Merchandising Management The function of fashion merchandising To plan and procure consistent fashion products To ascertain continuity of supply by effective working with suppliers To maintain sound relationships both internally with other departments and externally with vendors and clients To maintain updated information and knowledge for proper and responsive decision making 26
27 III. Merchandising Management The three areas of merchandising Technical areas Specification of products and production requirements Determination of quality, quantity, and design feature Commercial areas Negotiation, formation of contract, documentation, visits shipping services, finance, and legal supporting activities Logistics Scheduling and transporting materials and finished goods All movement and storage activities 27
28 III. Merchandising Management Major phases of fashion merchandising cycle 1. Anticipating fashion business and fashion trend 2. Developing product program and specification 3. Sourcing and allocating fashion merchandise procurement 4. organising production 5. Arranging merchandise shipment 28
29 III. Merchandising Management Major areas of activities 1. Anticipating fashion business and fashion trend Market information search and analysis Fashion forecast based on characteristics of existing merchandises Business forecast based on economic environment and fashion trend 29
30 III. Merchandising Management Major areas of activities 1. Anticipating fashion business and fashion trend Importance of market research Fashion: most fickle products Fashion change and seasonal change Information sources Internal records, investigation and analysis Collection of information from external sources The importance of trade fair and fashion weeks 30
31 III. Merchandising Management Major areas of activities 2. Developing product program and specification Portfolio development by three functions Design: Creative ideas Marketing: Market opportunities, target customers, positioning Manufacturing: Technical feasibility and cost consideration Major factors: colour, silhouette, texture, and details (trimming, cutting, ) 31
32 III. Merchandising Management Major areas of activities 2. Developing product program and specification Specifications of products The importance and use of samples Various samples and their uses 32
33 III. Merchandising Management Various samples and their uses Enquiry sample/initial sample (to see style and design effects) Size set sample/fit sample (for fitting test; size has to be accurate) Approval sample (for approval by clients, then used for specification) Salesman sample (for show, exhibit, salesman use) Promotion sample/advertisement sample (for photo; colour important) Pre-production sample (submitted before mass production) Production sample (sampled during production) Shipment sample (sampled after production) Testing sample (fabric/auxiliary sampled to make sample for test) 33
34 III. Merchandising Management Major areas of activities 3. Sourcing and allocating fashion merchandise procurement Searching information on supply market (such as trade restrictions) Checking requisition Analyzing quotation (materials and manufacturing) Evaluating and selecting suppliers Scheduling delivery and order placement Negotiating and writing of orders Following up for delivery Verifying invoices Corresponding with suppliers and buyers 34
35 III. Merchandising Management Major areas of activities 4. organising production Arranging production Defining and monitoring quality level Scheduling material requirement and delivery Ordering, receiving, inspection Solving technical problems Arranging for packing and dispatching of finished products 35
36 III. Merchandising Management Major areas of activities 5. Arranging merchandise shipment Deciding transportation modes and routes Determining packaging and handling methods Advising the best arrangement for delivery Documentation Merchandising activities for one season 36
37 What is sourcing? IV. Sourcing Process of determining how and where goods will be procured Materials and finished products Identifying which production units to be used and combined to serve particular market to supply components for production to exploit competitive advantages in the best costefficiency Sourcing includes: materials, finished products, and services 37
38 IV. Sourcing The possibility and necessity of global sourcing Factors which make global sourcing possible Global sourcing is now necessary for competitiveness Global sourcing is now reality 38
39 IV. Sourcing Criteria of supplier selection Quality, Price, Delivery Service/information, logistic support, capacity and know-how, and others Partnership/commitment 39
40 IV. Sourcing Multiple sourcing versus single sourcing Meaning of single sourcing Single source for each item Consolidated several items from each supplier Advantage of SS Consistent quality Economies of scale in buying (lower prices, saving on resources) Better commitment from supplier, better coordination and cooperation Drawbacks of SS Losing access to information on products, price, market trend Exposure to supplier s problems 40
41 IV. Sourcing Multiple sourcing versus single sourcing Advantage of MS Reduce over-dependency on one supplier; more reliable supply Flexibility and market knowledge; lower price due to competition Drawbacks of MS Administration and traveling costs Low commitment Balanced sourcing 41
42 IV. Sourcing Trends in production and material management Short lead time Reduced order Vendor managed inventory systems Eliminating storage, JIT New technology in various stages; Virtual merchandising 42
43 IV. Sourcing Challenges in global sourcing Large number of interrelated activities Complex arrangement of production and distribution Requirement for effective communication and coordination Growing rate of fashion and seasonal changes Frequent changes in customer requirement Uncertainty and last minute decision making Re-design and re-work, lower efficiency 43
44 V. Fashion Merchandising organisations Types of fashion merchandising organisations 1. Store buying offices 2. Independent trading companies 3. Offices of manufacturers 44
45 V. Fashion Merchandising organisations Types of fashion merchandising organisations 1. Store buying offices: buying representatives of stores/brands to access production and follow-up Buying agents: independent companies, charging stores a fee Store-owned buying offices Cooperative buying offices: owned by a group of non-competing stores/brands 45
46 V. Fashion Merchandising organisations Types of fashion merchandising organisations 2. Independent trading companies 3. Offices of manufacturers Exporting to clients Overseas sourcing for own businesses 46
47 V. Fashion Merchandising organisations organisational structures Functional division e.g., design/development, production, sales, merchandising, shipping/transportation, accounting, human resources Division by product or market e.g., casual wear, knitwear, handbag e.g., US market, European market, Japan 47
48 V. Fashion Merchandising organisations organisational structures Functional division Suitable for companies with limited lines Specialized skills, easier management Response maybe slow, difficult in performance accountability Division by product or market Greater authority and accountability Better knowledge about product or market Administration and man-power may duplicate Matrix organisation 48
49 V. Fashion Merchandising organisations Staffing in fashion merchandising Major responsibilities of a merchandiser Liaising with buyer for appropriate merchandises Selecting, developing and liaising with suppliers Sourcing material (price, specification, delivery) Forming contract Monitoring production process Gathering and disseminating info on changes in regulation, trade restriction and requirements Liaising with other departments 49
50 V. Fashion Merchandising organisations Staffing in fashion merchandising Knowledge and skill needed of a merchandiser Good language skill, adequate knowledge of technical terms: for accurate and efficient communication Good knowledge of product and production: yarn, fabric, dyeing, garment Awareness of the common potential quality problems in garment production Knowledge of trade restrictions in each of the producing and importing countries, duty rates, customs regulations, shipping and banking documentation 50
51 V. Fashion Merchandising organisations Relationship with other departments Cooperation and conflicts Merchandising performance measurement Areas to be measured Costs and prices Operations: timing, quantity, man-power Quality organisation Methods used for measurement 51
52 VI. Other Issues Many other issues related to fashion merchandising but not covered in this class Documentation, Logistics, Payments Other trade practice Branding 52
53 Summarisation Introduction: HK Apparel Industry Environment of HK s Apparel Industry Merchandising Management Sourcing Fashion Merchandising organisations Some other issues 53
54 Review Questions 1. What are some of the economic characteristics of the apparel industry? 2. What are the general patterns of the international trade in apparel? 3. What are the functions of fashion merchandising? 4. What are the phases of a fashion merchandising cycle and the major activities in each phase? 54
55 Review Questions 5. What are the major criteria for supplier selection in apparel sourcing? 6. What are major advantages and drawbacks of multiple sourcing and single sourcing? 7. What are the major responsibilities of a merchandiser? 8. What are the knowledge and skill requirements for a merchandiser? 55
56 Reading Reference Texts: 1. Fashion: From Concept to Consumer (9th Edition) (Hardcover) by Gini S. Frings 9th ed. (2007) 2. The Business of Fashion: Designing, Manufacturing, and Marketing (Hardcover) by Leslie Davis Burns, Nancy O. Bryant (2002) Cases: 1. Li and Fung (2006), Harvard Business School, School case Giordano International: Sustained Success Beyond 2005, Asian Case Research Centre, HKU, HKU
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