Reducing Risk of Fashion Merchandise Using … Risk of Fashion Merchandise Using Flexible Supply...

© 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


AgendaAgenda

Tracing the rationale for U.S. ApparelTracing the rationale for U.S. ApparelProductionProduction

Opportunities in todayOpportunities in today’’s volatile markets volatile market


Summary and Next StepsSummary and Next Steps


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


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


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!


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


““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.


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


AgendaAgenda






Modern Supply Chain RiskModern Supply Chain Risk

Labor InstabilityLabor Instability Fuel CostsFuel Costs Currency FluctuationsCurrency Fluctuations Credit MarketsCredit Markets


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


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


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!


How do We Meet thisHow do We Meet thisOpportunity?Opportunity?


AgendaAgenda






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



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


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


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



FrequencyFrequency

AverageAverage

Std. Dev.Std. Dev.


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.


$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


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


Low DemandLow Demand High DemandHigh Demand

2,7452,745


ExercisedExercisedOptionsOptions

Total SupplyTotal Supply


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)


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


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


AgendaAgenda






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.


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


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


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

Reducing Risk of Fashion Merchandise Using … Risk of Fashion Merchandise Using Flexible Supply...

Documents

Transcript of Reducing Risk of Fashion Merchandise Using … Risk of Fashion Merchandise Using Flexible Supply...