Creating and Preserving Value in the Textile and Apparel Supply Chain: From Fibre to Retail by Arvind Singhal, Suhasini Sood, and Vishesh Singh 1

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1 Creating and Preserving Value in the Textile and Apparel Supply Chain: From Fibre to Retail by Arvind Singhal, Suhasini Sood, and Vishesh Singh 1 SUMMARY QUERY02.DOC 10/05/04 13:01 The textile and apparel supply chain -- from fibre to retail -- is experiencing deflationary price trends, making cost reduction the key to survival. This has forced players to rethink the role they play within the supply chain. With operating efficiencies already quite high, members of the supply chain need to look at strategies other than reducing labour costs to improve margins. Two key areas on which to focus are collaboration with supply chain partners and innovation. Collaboration offers an opportunity to reduce costs in the supply chain in the areas of product development, inventory holding, and manufacturing through better capacity utilisation, lower reject rates and fewer charge-backs. Investment in the innovation of products, services and business processes can result in quantum jumps in profitability for a company. Significant growth in revenue will only come by bringing jaw-dropping new products and services to customers. Customers will always make room for something new, useful and value-packed, and will be willing to pay higher prices for it. INTRODUCTION World trade in 2002 was US$360 bn and growing International trade in textiles and clothing was worth more than US$360 bn in 2002, 4% more than in the previous year. So it should be easy for shrewd firms to remain profitable 1 Arvind Singhal is chairman of KSA Technopak in India, Suhasini Sood is a senior consultant with the firm and Vishesh Singh a consultant. 8 Textiles Intelligence Limited 1

2 Given the size of this market and its growth rate, it should be relatively easy for shrewd textile and clothing companies to remain profitable. But the major apparel markets are fickle, and characterised by short life cycles and economic stagnation But the major apparel markets of the USA, Western Europe and Japan are highly fickle, and are characterised by short life cycles, unpredictable demand, whimsical consumers, multiple trading partners, difficulties in doing cross-border trade and stagnating economic conditions. The industry is under serious price pressures -- Although international trade is growing, the industry is under serious price pressures. -- and these are set to get worse in 2005 when quotas have been eliminated Moreover, those price pressures are set to get worse when quotas restricting exports from developing countries are eliminated on January 1, 2005, in accordance with the Agreement on Textiles and Clothing (ATC). The Agreement on Textiles and Clothing has provided for the elimination of quotas at three stages Under the ATC, quotas equivalent to a certain percentage of a country or region's imports have been eliminated at each of three stages: 16% on January 1, 1995; 17% on January 1, 1998; and 18% on January 1, But this still leaves 49% of trade to be liberalised at the beginning of But this leaves as much as 49% of imports still restricted by quotas. Thus almost half of trade will not be liberalised until January 1, 2005, when the ATC expires. -- which could have a dramatic impact on supplies, prices and margins The effect of liberalising almost half of imports on one day could be dramatic. In 2005 the supply of textiles and clothing to the world market is expected to rise significantly, leading to lower prices and, hence, major reductions in margins for all players in the supply chain. The reality could be worse, given that the percentages are based on 1990 import levels In fact the reality could be even worse. In formulating the ATC, it was agreed by the negotiating parties that the above percentages would be based on import levels in Since then, imports into developed countries have increased dramatically. In previous phases of quota elimination, there has been a 10-20% fall in sourcing prices within a year -- The view that prices are likely to fall significantly is supported by experience with previous phases of quota elimination under the ATC. In almost all cases, there has been a 10-20% fall in sourcing prices within a year for each product category. -- as in the case of bathrobes, and infants' and kids' wear, whose quotas were eliminated in 2002 Two examples are bathrobes, and infants' and kids' wear. In both cases, quotas were eliminated on January 1, In the case of bathrobes (both cotton and man-made fibre) the average fob price fell by around 18% between January-May 2001 and January-May In the case of infants' and kids' wear, the average fob price fell by around 9%. 2 8 Textiles Intelligence Limited

3 To stay competitive, firms must remove hidden costs in the whole supply chain Given these challenges, it is essential that companies remove hidden cost elements in the whole supply chain if they are to remain competitive. Furthermore, all links in the supply need to undertake this process Furthermore, this effort cannot be limited to just a few producers: if any one firm is to succeed, all the links in the supply chain need to undertake this process. All players need to evaluate all possible solutions for creating and preserving value in the chain To proceed, all players in the textile and clothing supply chain need to evaluate all possible solutions for creating and preserving value in the chain. This will require them to redefine various processes. CHARACTERISTICS OF THE TEXTILE SUPPLY CHAIN Most product categories can be segmented under two types of economic networks Most product categories can be segmented under two different types of international economic networks: ** producer-driven supply chains; and ** buyer-driven supply chains. In producer-driven supply chains, large transnational manufacturers play the central roles in coordinating production networks Producer-driven: in producer-driven supply chains, large transnational manufacturers play the central roles in coordinating production networks. Industries characterised by producer-driven supply chains are typically capital- and technology-intensive sectors such as automobiles, aircraft, and computers. In buyer-driven chains large retailers, marketers and branded goods manu-facturers play a pivotal role in setting up decen-tralised production units in exporting countries Buyer-driven: buyer-driven supply chains are those in which large retailers, marketers and manufacturers of branded goods play a pivotal role in setting up decentralised production units in various exporting countries. Consumer goods industries such as garments, footwear, toys, consumer electronics and handicrafts follow this pattern. Retailers such as Wal-Mart and Sears, footwear companies such as Nike and Reebok, and brands such as Gap and Liz Claiborne source their products from labour intensive factories in developing countries. Buyer-driven supply chains are labour intensive, thus manufacturing shifts to lower cost countries The characteristics of a buyer-driven supply chain are as follows. ** Buyer-driven supply chains tend to be labour intensive. Thus manufacturing tends to shift to countries with a lower cost base. They also tend to be global, decentralised -- ** Buyer-driven supply chains are global in nature and in most countries decentralised. -- and highly competitive -- ** The decentralised nature of buyer-driven supply chains makes them highly competitive. 8 Textiles Intelligence Limited 3

4 -- with low entry barriers ** Most buyer-driven supply chains have low entry barriers. The main leverage in buyer-driven supply chains is exercised by marketers and merchandisers Unlike producer-driven supply chains -- which have large manufacturers such as IBM, Airbus Industries, General Motors, and Intel controlling the chain -- the main leverage in buyer-driven supply chains is exercised by marketers and merchandisers. The textile and apparel supply chain is a classic example with all the "clout" at the "front end" The textile and apparel supply chain is a classic example of a buyer-driven supply chain. Although the chain spans several stages 2, the "clout" is entirely in the hands of the "front end" -- in other words, the stage of the supply chain which is closest to the consumer. Retailers decide on the season's collections The retail end, for example, makes decisions about a new season's collections. Sara Lee, being close to consumers, designed the Wonderbra, creating added value and commanding higher prices Sara Lee -- being close to consumers and therefore able to understand their consumer needs -- designed the Wonderbra, leading to the evolution of a new category. In the process, it created additional value for consumers, for which those consumers, were willing to spend more. THE NEED TO CREATE AND PRESERVE VALUE IN THE TEXTILE AND APPAREL SUPPLY CHAIN The textile and apparel supply chain is being impacted by retail consoli-dation, deflationary price trends, and impending quota-free trade The textile and apparel supply chain is being, and will be, impacted by: ** retail consolidation; ** deflationary price trends; and ** quota-free trade from January 1, RETAIL CONSOLIDATION The retail sector is under-going major restructuring The retail sector in the USA and in the other developed countries is undergoing major restructuring. Retailers are sourcing from low cost countries, and developing strong ties with global suppliers Global retailing is dominated by large organisations such as Wal-Mart and Target which are differentiated by price. To match target prices, these retailers are sourcing from low cost countries and are developing strong ties with global suppliers. 2 The textile and apparel supply chain can be defined as comprising the stages from fibre supply through yarn manufacturing and fabric formation to dyeing, printing finishing, apparel making, aggregation and retailing. 4 8 Textiles Intelligence Limited

5 By 1995 the top five US retailers accounted for 68% of all apparel sales Between 1987 and 1991, the top five retailers of soft goods in the USA increased their share of the apparel market from 35% to 45%. By 1995 the top five -- Wal-Mart, Sears, Kmart, Dayton Hudson and JC Penney -- accounted for 68% of all apparel sales, while a further 24 retailers accounted for the remaining 30%. In 2003 the top two discounters controlled one quarter by volume In 2003, according to Unido, the top two discounters -- Wal-Mart and K-Mart -- controlled one quarter by volume of all apparel sold in the USA. Globally, the top ten could be controlling 25-30% of world trade by 2010 Globally, KSA has forecast that the top ten retailers could be in a position to control almost US$130 bn worth of world textile and apparel trade by 2010, representing 25-30% of the total forecast for the year. This would truly mark the era of retail consolidation. Sales growth by the top 200 has been slowing but the top ten increased sales by 28% in 2000 It is interesting to note that, although the rate of growth in sales of the top 200 global retailers (all products) has been slowing down -- to around 2.6% in sales generated by the world's top ten retailers grew by a remarkable 28% in 2000, something that had never been seen in the past. Consolidation has increased retailers' influence Although retailers do not wield ultimate power, consolidation has led to an increase in their influence in the textile and apparel supply chain. DEFLATIONARY PRICE TRENDS Falling prices are a nightmare for retailers -- The trend of ever declining retail prices is a boon to shoppers but has been a nightmare for retailers. With margins under continuous pressure, opportunities to reduce costs are eagerly pursued In the highly competitive world of garment retailing, price deflation is putting margins under continuous pressure. Consequently, all opportunities to reduce costs are therefore eagerly pursued. US import prices fell by 8.5% between 2000 and 2002 US imports increased in volume by around 9.5% between 2000 and But the average price of imports fell by around 8.5%, reflecting the highly competitive business environment and efforts by retail buyers to cut their procurement costs. QUOTA-FREE TRADE FROM JANUARY 1, 2005 Remaining quotas will disappear on January 1, 2005 Quotas restricting textile and apparel trade have been progressively eliminated since January 1, On January 1, 2005, all remaining quotas will disappear. After more than 40 years of formalised protection the market will suddenly become open Thus, after more than 40 years of formalised protection 3, the market will suddenly become open and quotas will not imply assured business. Market shares will no longer be gained through quota holdings but 8 Textiles Intelligence Limited 5

6 by competing internationally in a more open market. More players will enter the global market, leading to further pressure to reduce prices and lead times The end of quotas will lead to a shake-up in the sourcing locations used by retailers. More players will enter the global market, leading to further pressure to reduce prices and lead times. "Operational excellence" will prove to be a necessity in order to meet buyers' needs in terms of price and lead times. Retailers will also offload more responsibilities on to suppliers Retailers will also offload more responsibilities on to suppliers. Suppliers will, in turn, be required to invest in the establishment of collaborative processes with buyers in the areas of forecasting, designing, and product development. OPPORTUNITIES FOR CREATING AND PRESERVING VALUE IN THE TEXTILE AND APPAREL SUPPLY CHAIN Competitiveness can be raised by promising more value or reducing costs Creating and preserving value can help textile and apparel firms to become more competitive, and hence gain market share. Value can be created or preserved by: ** reducing costs; and ** improving products, and thus promising more value. Costs can be reduced through manufacturing process improvement and business process optimisation Reducing costs can help to improve margins. Costs can be reduced through: ** manufacturing process improvement to increase productivity; and ** business process optimisation, through collaboration; and Improving products will generate additional demand and provide additional value Improving products through innovation will generate additional demand and therefore provide additional value. Consumers are often willing to pay a premium for products which are differentiated and adapted to their needs. OPPORTUNITIES FOR COST REDUCTION 3 Internationally agreed and formalised protection for the textile and clothing industry was provided for under the Short-Term Arrangement Regarding International Trade in Cotton Textiles (1961), the Long-Term Arrangement Regarding International Trade in Cotton Textiles ( ), and the Multi-Fibre Arrangement ( ), and continues to be provided for under the Agreement on Textiles and Clothing ( ). 6 8 Textiles Intelligence Limited

7 ANALYSING AREAS FOR IMPROVEMENT Cost and value addition throughout the supply chain needs to be analysed To identify areas for improvement, it is essential to analyse the distribution of cost and value addition throughout the textile and apparel supply chain. Distribution of cost By way of illustration, it is useful to examine what happens to 1 kg of cotton fibre as it is processed and eventually reaches the consumer By way of illustration, it is useful to examine what happens to 1 kg of cotton fibre as it is processed into a product in the textile and apparel pipeline and is eventually retailed and sold to the consumer. Consider first a shirt retailed by a mass merchant, made from 132 x 72 piece-dyed poplin (powerloom fabric) dyed to a medium shade. The fabric is woven from combed yarn of Ne40 count 4 made from 100% cotton. Now compare this with a pair of classic khaki chinos, again retailed by a mass merchant, made from mill-made twill fabric of Ne2/40 combed yarn. 1 kg of cotton fibre made into a shirt becomes US$23 at retail, but in the form of trousers it retails for the equivalent of US$37.50 Table 1 and Figure 1 show that the value of 1 kg of cotton fibre, costing around US$1, increases to about US$23 by the time it reaches the retail stage in the form of men's shirts. And when converted to men's casual trousers, the same 1 kg of fibre retails for the equivalent of US$ Some products could sell for five times the cost price Similar products sold by speciality stores or by higher end retailers could sell for as much as five times the garment cost price. Table 1: Value addition in the supply chain for poplin men's shirts and khaki casual trousers Fibre Yarn Fabric Garment Retail Poplin men's shirts a Amount b 1 kg 0.80 kg 4.85 m 2.1 shirts 2.1 shirts Value c (US$) Value added d (US$) n/a Value added as % e Khaki casual trousers f Amount b 1 kg 0.75 kg 2.30 m 2 trousers 2 trousers Value c (US$) Value addition d (US$) n/a Value addition as % e a Made from 132 x 72 piece-dyed poplin powerloom fabric dyed to a medium shade, woven from a combed yarn of Ne40 count made from 100% cotton. b Calculated as 1 kg of fibre, leading to the number of apparel items after accounting for all wastage in the chain. c Value realisation of the end product at the stage indicated. d Difference in value between the two stages. e % value added of the overall value of the garment at retail. f Made from mill-made twill fabric of Ne2/40 combed yarn. Source: KSA Technopak analysis. 4 Ne = English cotton count, a measure of linear density. The count indicates the number of 840 yard (768 metre) lengths of yarn which weigh 1 lb (0.453 kg). 8 Textiles Intelligence Limited 7

8 The biggest value addition in the chain takes place at the garment to retail stage On analysing the value addition at each step, it is revealed that the biggest value addition in the chain takes place at the garment to retail stage. In fact the value is doubled at this point. Savings in the supply chain can be made through collaboration, better planning, and shorter lead times. Categorisation of cost Costs can be broken down further into three broad categories -- It is also useful to break costs down further and place them under the following three broad categories. This enables the cost of conversion -- ie excluding raw material costs -- to be calculated at each stage. The three broad categories are as follows: -- manufacturing costs -- ** manufacturing costs: costs which are attributed purely to manufacturing operations, including labour costs, utility costs, manufacturing overheads, administration and project finance costs; -- business process costs, and -- ** business process costs: costs related to planning, product development, sampling, administration, marketing, non-manufacturing staff salaries, and other overheads; an -- logistics costs ** logistics costs: costs which are due primarily to freight and inventory holding. The breakdown of categories has been assessed Based on a survey undertaken by KSA Technopak, the breakdown of each of these categories by sector has been assessed and the results are shown in Table 2 and Figure 2. Table 2: Share of manufacturing, business process and logistics costs by manufacturing process stage (% shares) Garment Spinning Weaving Processing making Manufacturing Business Process Logistics Total Source: KSA Technopak research. Manufacturing costs In spinning and weaving, manufacturing is by far the main cost component In spinning, manufacturing accounts for 90% of total costs, making it the main cost component. Similarly, manufacturing accounts for 85% of total costs in weaving. But with efficiency levels already high, the scope for improvement is limited But most operations in spinning and weaving have high efficiency levels -- 96% on an average for spinning and almost 85-90% in case of weaving. Thus the scope for improving efficiencies -- and hence margins -- is limited unless there is a dramatic change in technology. In fabric processing there is a strong focus on imp-roving the technology In fabric processing -- ie dyeing, printing and finishing -- there is a strong focus in India, as in many developing countries, on improving the technology. 8 8 Textiles Intelligence Limited

9 Innovations are resulting in lower water and energy usage Technological innovations are already being implemented, resulting in lower water and energy usage. Further developments are expected, leading to further cost reductions. Business process costs Towards the end of the supply chain, there is scope for increasing margins by reducing business process costs Towards the end of the supply chain, there is an increase in the relative importance of business process costs. Reducing business process costs in these areas therefore provides scope for significantly increasing margins. Such costs could be reduced by making business processes more efficient. Costs equal to 35% of the retail price could be saved The total potential for a reduction in costs across the supply chain is around 35% (on the retail price). But the scope is greatest towards the end of the chain However, there is more potential to improve margins in garment making and in retailing than in spinning, weaving or processing (Table 3). Margin improvement in retailing can be achieved through collaboration and partnerships Margin improvement in retailing can be achieved through collaboration and by forming partnerships throughout the textile supply chain. Such steps would also result in better margins for all the other players in the supply chain. Table 3: Potential for cost reduction in the textile and apparel supply chain (%) Garment Spinning Weaving Processing making Retail Manufacturing n/a Business process <1 < Logistics <1 <1 < Total Reduction in cost as a % of final product <1 <1 < Source: KSA Technopak analysis. REDUCING MANUFACTURING COSTS The potential for cost reduction through further productivity improvement is minimal in spinning and weaving The potential for cost reduction through further productivity improvement is minimal in spinning and weaving. The sectors run at relatively high level of efficiencies and, compared with garment making, are, to a large extent, automated. But there are a number of technological innovations in processing A number of technological innovations are, however, taking place in processing. Among these innovations is machinery which combines multiple steps within the production process to save on cost and time. Power and steam account for much of the total cost Power and steam account for a large percentage of the total cost incurred in processing. Currently, steps are being taken to reduce water consumption during processing in order to reduce costs further. 8 Textiles Intelligence Limited 9

10 Production efficiency in apparel factories can be significantly improved Production efficiency in apparel factories can be improved to a significant extent. Efficiencies can be improved by around 15-20%, leading to cost reductions of around 10%. A focus on manpower can lead to major productivity improvements Since apparel manufacturing is very labour intensive, a focus on methods and training of manpower can lead to major improvements in productivity. Apparel production costs can be reduced by focusing on the use of standardised industrial engineering practices -- In the case of apparel manufacturing, focusing on the following areas can reduce production costs: ** use of standardised industrial engineering practices in apparel factories: -- by following accurate production standards; -- by focusing on methods improvement; -- by using advanced and specialised machinery and attachments; -- by using machine layouts which are most suited to the production; -- efficient production management, flexibility, training, management development and improving quality ** efficient production management; ** flexibility in operations, thus reducing the idle time; ** operator training; ** middle management development; and ** improving quality. COST REDUCTION THROUGH BUSINESS PROCESS OPTIMISATION: COLLABORATION Retailers must find ways of cutting costs other than by minimising labour costs -- Retailers and suppliers have in the past sought to cut overall costs by minimising labour costs. However, they are now under pressure to find alternatives to these strategies. -- because of falling prices and lower potential for cost reduction in manufacturing The need for a change of approach has been necessitated by deflationary price trends in apparel retailing, and the reduced potential for cost reduction in manufacturing. Time and unpredictability have become significant cost factors The scope for reducing costs by increasing productivity is minimal. Also, with a more responsive consumer market, time and unpredictability have become significant cost factors for retailers. Collaboration among partners is becoming a necessity In order to make the supply chain efficient, collaboration among partners is becoming a necessity. Retailers prefer to form partnerships with suppliers who have gone ahead and implemented processes and systems which facilitate collaboration. The textile and apparel industry needs to catch up with the automotive sector Companies in the automotive and consumer durables sectors have been active on that front for some time. Vendors work in close coordination with brand manufacturers in those sectors. The textile and apparel industry needs to graduate to that level of coordinated supply system Textiles Intelligence Limited

11 Collaboration between buyers and suppliers can provide a number of benefits -- Collaboration between buyers and suppliers is especially advantageous in the textile and apparel supply chain. It can be used to: ** reduce a company's exposure to certain risks; ** reduce inventories; ** increase capacity utilisation; ** optimise logistics; and ** reduce product development expenses. -- and has a number of key elements Supply chain relationships are high on the strategic agenda of many retailers. The key elements in any collaboration between buyers and suppliers are: ** dedication of some production capacity to the buyer; ** a transparent cost accounting system; ** collaborative product development; ** standardised processes and controls; ** optimised logistics and routing; and ** exchange of POS (point-of-sale) data for planning purposes. Figure 3 here 23 line spaces One retailer discovered benefits such as -- For one leading European apparel retailer, some of the benefits to be gained by collaborating with buyers were: -- reduced manufacturing time, greater capacity utilisation, fewer charge-backs, improved ontime deliveries, a lower rejection rate, and a higher sample adoption rate ** a 20% reduction in manufacturing cycle time; ** a 40% increase in capacity utilisation; ** a 96% reduction in charge-backs arising from improved order conformity; ** an improvement in the percentage of on-time deliveries to more than 98%; ** a rejection rate down to less than 1% through implementation of quality control procedures; and ** an improvement in the sample adoption rate, in some cases to as much as 70%. Technology has become a major facilitator in information-sharing 8 Textiles Intelligence Limited 11

12 Technology has become a major facilitator in information-sharing throughout the supply chain. It is estimated that the opportunity to increase earnings for the retailer could be as high as 45%. This benefit could then be passed down the chain. A supplier must develop effective "back end", manufacturing, and "front end" processes A supplier, in order to collaborate with branded goods companies and retailers, needs to: ** develop effective "back end" processes; ** develop effective manufacturing; ** develop effective "front end" processes. Developing effective back end processes calls for a focus on sales forces, materials procurement, forecasting, product devel-opment, and procedures The development of effective back end processes requires: ** an effective sales and marketing workforce; ** effective materials procurement and inventory management; ** accurate forecasting; ** product development skills; and ** use of standardised procedures. Developing effective manufacturing calls for a focus on production plan-ning, work in progress, operations and colla-boration with developers The development of effective manufacturing requires: ** effective production planning; ** reduction of work in progress; ** efficient operations; and ** coordination and collaboration with product development. Developing effective front end processes requires efficient distribution centre operations, customer visibility to order status, and value added services The development of effective front end processes requires: ** efficient distribution centre (DC) operations; ** customer visibility to order status; and ** value added services such as: -- collaborative planning, forecasting and replenishment (CPFR); -- vendor-managed inventory (VMI); -- direct to store delivery; and -- EDI (electronic data interchange). CPFR is assisting retailers and suppliers in the areas of forecasting and planning Collaborative planning, forecasting and replenishment (CPFR) technology is assisting retailers and suppliers in the areas of forecasting and planning. Shipments can be planned when they are required rather than keeping expensive inventory. Ownership of the task of managing replenishment orders would rest on the entire textile and apparel chain Textiles Intelligence Limited

13 VMI keeps suppliers better informed about buyers' sales Vendor-managed inventory (VMI) technology enables suppliers to be better informed about their buyers' (retailers') sales. Suppliers have the responsibility of shipping in time to designated places. More and more retailers are asking suppliers to deliver goods directly to their stores to cut down lead times and reduce costs More and more retailers are asking for suppliers to deliver goods directly to their stores in order to cut down on lead times and reduce inventory holding costs. Direct to store delivery reduces the lead time from the inward delivery of goods to their availability on the shop floor. EDI (electronic data interchange) helps both suppliers and retailers by sharing information Exchanging information through EDI (electronic data interchange) helps all players in the supply chain. A retailer sends orders, lay-plans, and product specifications via an EDI system to the supplier. The supplier can look at product sales via Epos (electronic point of sale) information sharing. Many buyers are willing to pay a premium to companies which are able to provide full service packages Today, a supplier is expected to provide a complete range of services to buyers -- right from product design and development to vendor-managed inventory for fulfilling replenishment orders. Many buyers are willing to pay a premium to companies which are able to provide full service packages. Companies which are vertically integrated and can supply an entire package to the retailer therefore stand to benefit. Hong Kong-based Luen Thai and Li & Fung are growing by servicing the various needs of buyers For example, Luen Thai and Li & Fung, two Hong Kong-based companies, are benefiting and growing by servicing the various needs of buyers -- such as product design and development, raw material sourcing, finished goods logistics, information technology, EDI and e-commerce. Figure 4 23 line spaces IMPROVEMENT THROUGH INNOVATION Creating value through innovation is difficult in fashion where there have been few basic changes -- 8 Textiles Intelligence Limited 13

14 Creating value through innovation can be a difficult exercise, especially in an industry such as fashion where there have been few fundamental changes. In this respect, the apparel industry contrasts markedly with sectors such as automotive and telecommunications. -- except in the area of functionality Apparel has barely changed, except in the area of functionality. Here, durability has improved and extra features -- such as fishing jackets, cargo trousers, and washes in trousers and denims -- have been added. Significant growth in revenue will only come by bringing "jaw-dropping" new products Significant growth in revenue will only come by bringing "jaw-dropping" new products and services to customers. Achieving this does not come easily -- especially in companies where there is a continuous focus on meeting daily deadlines. The percentage of income spent by consumers on apparel has been falling The percentage of income spent by consumers on apparel has been falling over the years. However, customers will always make room for something new, useful, and "value-packed". The key is to bring to customers something unexpected and exciting. Retail prices of apparel have continued to decline Retail prices of apparel have continued to decline over the last few years (Figure 5). Deflationary price trends have forced companies to accept lower margins and seek ways of cutting costs. Most companies can only dream of increasing prices in real terms. Figure 5 23 line spaces Starbucks has turned drinking coffee into "a powerful customer experience" On the other hand, Starbucks is able to charge its US customers US$3.50 for a caffe latte. Starbucks came up with an array of alternatives to traditional American coffee. It has turned the activity of going to the corner coffee shop, hanging out and drinking coffee into "a powerful customer experience". Starbucks has demonstrated the potential for charging people a premium price for something they love. Reversing margin erosion needs radical innovation Reversing years of steady margin erosion requires "a truly novel value proposition" requiring systemic, radical innovation. Companies can deliver dramatically improved results by revamping their product development 14 8 Textiles Intelligence Limited

15 efforts Companies can deliver dramatically improved results by revamping their product development efforts. This process, in turn, requires them to: ** collaborate with others in their supply chain; and ** incorporate information on consumer demand, fashion, and retail. MAKING INNOVATION PART OF THE CORPORATE CULTURE Managers need to start thinking about innovation as a business concept in its own right Managers need to start thinking about innovation as a business concept in its own right. Pioneers do not adapt or make adjustments to current concepts, they build from the ground up in unconventional ways to create more value. Dell, Starbucks and Wal-Mart have all created new business models. The entire company should be driven towards innovation, not just the top management But while innovation has to be driven from the top, it does not come about solely as a result of the efforts and focus of the top management. The entire company should be driven towards innovation. The top management acts as a sieve and filters out the workable, brilliant ideas. To make innovation part of the corporate culture, define what innovation means for the company -- How does one make innovation a part of the corporate culture? ** Define what innovation means for the company and keep it simple. -- keep innovation customer-focused -- ** Keep innovation customer-focused. Use market research and information about consumer trends to understand lifestyle, aspirations, society needs, and the shopping patterns of target consumers. -- use insight to anticipate needs -- ** Use insight to anticipate needs and be future-focused. Anticipate consumer requirements and consumer segment needs. -- innovate to add value and generate new ideas -- ** Innovate in order to add value and generate new ideas. Test market the concept. -- encourage innovation by unleashing ideas, passion and commitment across the organisation - - ** Encourage innovation by unleashing ideas, passion and commitment across the organisation. Companies must no longer view innovation as an exceptional activity, as a specific structure, and as a once in a while project. Instead innovation needs to be seen as a deep capability. People who come up with innovative ideas should be rewarded. -- and create awareness of the product among customers and consumers ** Create awareness. The importance of creating awareness among customers and consumers cannot be emphasised enough. This is the key is to commercialising innovation. Lycra, for example, commands a 8 Textiles Intelligence Limited 15

16 price premium not only because it adds functionality but also because of the high level of product awareness built up by its former owner, DuPont 5. A survey conducted by Strategic Insights Inc in June 2002 found that 83% of respondents in Asia and 99% in Latin America had heard of the Lycra brand. CURRENT INNOVATIONS Innovations utilise a wide variety of technologies 5 In January 2004 DuPont sold Invista, formerly DuPont Textiles & Interiors (DTI), for US$4.4 bn in cash to two subsidiaries of US-based Koch Industries, a diversified privately owned company with interests in trading, investments and operations in more than 30 countries (see also "DuPont: Still a Key Player in Technical Textiles" and "Global News Round-Up", Technical Textile Markets, Nos 54-55, 3rd-4th quarters 2003, published by Textiles Intelligence) Textiles Intelligence Limited

17 Innovations in the textile and apparel industry utilise a wide variety of technologies and are aimed at highly diverse end uses 6. Machine washable wool was a major innovation One of the major innovations in recent times has been machine washable wool. Newer technologies include biodegradable fibres made from renewable sources -- Newer technologies include the use of biodegradable fibres derived from renewable sources such as corn starch, and lipase enzymes to remove waxes and oils from fabrics. -- garments which sense the wearer's physical state -- Radical developments are taking place in the production of garments which can sense the wearer's physical condition. -- and techniques for weaving fabric for making seamless garments Other innovations are directed at developing weaving techniques which enable an entire garment to be produced from a single, seamless piece of fabric. Other developments include anti-microbial fabrics, moisture management, stretch, breathability, temperature control -- Other areas which are currently being researched and associated products include: ** fabrics with anti-microbial properties 7 ; ** fabrics offering moisture management, stretch, waterproofness and breathability, temperature control, high strength and durability 7 ; -- intelligent and wireless fabrics, nanotechnology, and microencapsulation ** intelligent fabrics; ** wireless fabrics; ** nanotechnology 8 ; and ** microencapsulation. CONCLUSIONS 6 See also "Innovations in Fibres, Textiles, Apparel and Machinery", No 102, November-December 2002, and No 108, November-December See also Performance Apparel Markets, various issues, published by Textiles Intelligence. 8 Textiles Intelligence Limited 17

18 8 See also "Future Materials: Technical Textiles for the Information Age" and "Future Materials", both in the Textiles Intelligence publication Technical Textile Markets, No 51, 4th quarter Textiles Intelligence Limited

19 When quotas end in 2005, sourcing will become extremely competitive From January 1, 2005, when international textile and apparel trade is due to become quota-free, sourcing will become extremely competitive. But cost savings of 35% of the retail price could be realised by freeing poten-tial in the supply chain However, there is still scope for improvements in margins. Indeed, it is estimated that cost savings equivalent to around 35% of the retail price could be realised by freeing the potential which is trapped because of inefficiencies in the textile industry's long supply chain. Hidden benefits can be extracted by working towards operational excellence, collaborating with buyers and pursuing innovation Members of the textile supply chain can extract "hidden" benefits by employing any of the following three processes: ** working towards the achievement of operational excellence; ** collaborating with buyers; and ** innovation. Figure 6 23 line spaces WORKING TOWARDS THE ACHIEVEMENT OF OPERATIONAL EXCELLENCE Operational efficiency and high quality will be essen-tial to ensure survival Each company needs to realise that, as the market is getting extremely competitive, operational efficiency and high levels of quality will be the only qualifying criteria to ensure survival. For high efficiency levels, companies will need to -- In order to maintain high efficiency levels, companies will need to do the following. -- conduct an internal audit -- ** Conduct an internal audit of the factory operations. This will help to establish efficiency levels in the factory. While conducting an audit, all areas should be studied, including manufacturing efficiency, systems and controls, planning, and management skills. -- benchmark against worldwide best practice -- 8 Textiles Intelligence Limited 19

20 ** Benchmark against worldwide best practice and establish areas which need to be improved upon. -- form a steering committee to focus on operational improvements -- ** Form a steering committee to focus on operational improvements. The role of the steering committee would be to chart out an implementation plan for the areas identified in the audit. A team should be formulated which focuses on re-engineering operations -- re-engineer factory operations -- ** Re-engineer factory operations. Make sure that targets and timelines are clearly defined. Conduct regular reviews to ensure that re-engineering is progressing as per schedule. -- and internalise performance improvement as a continuous process ** Internalise performance improvement as a continuous process. At the end of the re-engineering process, the processes defined should become part of the company's daily functioning and should be totally internalised by the operations team. COLLABORATING WITH BUYERS The potential benefits "trapped" in the supply chain can be maximised by collaborating with buyers The potential benefits "trapped" in the supply chain can be maximised by collaborating with buyers. Most buyers are looking to reduce the number of their supply bases and to source from vertically integrated players. They are willing to invest in collaborations which bring benefits to all players. A company looking to collaborate needs to -- The following steps point the way forward for a company looking to collaborate. -- identify business constraints -- ** Identify business constraints in all aspects of the business, including planning, production scheduling, and product development. -- identify a collaborating partner -- ** Identify a collaborating partner whose needs the company can best satisfy and who is open to investing in collaboration. For a successful partnership, it is important to have a common vision, cultural compatibility, dedication to quality, technology and trust. -- understand and appreciate both companies' business constraints -- ** Understand and appreciate each other's business constraints. Collaborating partners need to understand the constraints that drive each others business. The company's expectation and the customer's expectation should be realistic and lead to a joint agenda. -- quantify the benefits to be gained through collaboration -- ** Quantify the benefits to be gained through the collaboration process. Agree on a common understanding of the partnership and define the status quo. Identify opportunities, threats, benefits and synergies in the partnership. Define the potential for improvement. -- establish a collaborative path and develop a road map -- ** Establish a collaborative path and develop a road map. Use the evaluation of alliance partners conducted earlier to define areas of quick improvement. Prioritise activities with responsibilities and timelines. Draft the improvement potential and necessary investments required. Define the next steps Textiles Intelligence Limited

21 -- implement the changes -- ** Implement the changes. Once the improvement areas are identified and the road map defined, a project team would need to be dedicated to initiate the changes. Information flow with the collaborating partners would need to be integrated with day to day activities. -- monitor the process and upgrade ** Monitor and upgrade. Define the monitoring system and review the partnership at a defined timeline. Monitor the process through key performance indexes. Continuously monitor benefits gained through the partnership. INNOVATION Innovation can result in quantum jumps in profitability Unlike the other two processes -- working towards the achievement of operational excellence, and collaborating with partners -- investment in innovation can result in quantum jumps in profitability for a company. The key is to differentiate oneself from others The key is to differentiate oneself from other suppliers by providing the customer with different products and services. Innovation must come from the whole organisation An organisation can become innovative only if the entire organisation is focused towards innovation. Isolating innovation from mainstream business can produce the dangerous perception that creativity and leadership are opposites Isolating innovation from mainstream business can produce a dangerous cultural side effect: a perception that creativity and leadership are opposites. In this situation, innovators could lack the visibility and clout to compete for the resources which are necessary for success. Only when innovators operate with the credibility of leaders will innovation become a productive part of everyday business. Innovative organisations are led by innovative leaders. Top management has to be deeply involved The top management has to be deeply and personally involved in the process. The steps are -- Steps for creating an innovation focused company are as follows. -- to define innovation for the specific company -- ** Define innovation for the specific company concerned. Innovation could mean different things to different companies. It could be innovation in services, products, technology or business models. Each company needs to define its area of focus. -- make innovation the norm and encourage it at all levels -- ** Make innovation the norm. Think of creativity not as a mysterious gift of the talented few but as the everyday task of making non-obvious connections -- bringing together things that don't normally go together. Encourage innovation at all levels. It is essential to build a culture where there is no such thing as a bad idea. Conduct regular brainstorming sessions to come up with new ideas. Ideas then become collective problems or puzzles which percolate throughout the group. Later, someone could have a breakthrough insight which allows the company to move forward. 8 Textiles Intelligence Limited 21

22 -- use consumer and market inputs -- ** Use consumer and market inputs. The best backdrop for spurring innovation is knowledge. Good ideas most often flow from the process of taking a hard look at customers, competitors, and the business all at once. -- innovate at full speed with all the company's resources -- ** Innovate. Once a good idea has been formulated go for it at full speed with all the company's resources. Place few constraints on researchers. The top management should provide a focus, set reasonable goals, and map out timelines for the project team. -- and invest in creating awareness of the innovation ** Create awareness of the innovation through branding. Invest in creating awareness of the innovation through branding, thus commercialising the investment made. Create a differentiation, position it correctly, and target it to achieve the maximum mileage out of it. The biggest potential for eliminating inefficiencies and making improvements lies in collaboration and integration The biggest potential for eliminating inefficiencies and effecting improvements in the chain lies in collaborating and integrating the supply chain. Every member of the chain should contribute towards making its front end -- the end of the supply chain which is closest to the consumer -- more effective. Collaboration can help to improve margins and delivery systems Collaboration between textile and apparel supply chain members would help to realise improved margins and build better delivery systems as far as the retail stage. But the industry needs to perpetuate a culture of innovation However, beyond collaboration, the industry needs to perpetuate a culture of innovation and commercialising that innovation. Product innovation and services offer the key to growth in the long-term future. KSA Technopak is a joint venture of Kurt Salmon Associates (KSA), one of the world's largest management consulting firm specialising in textile, consumer goods and retail sectors. KSA has assisted brand leaders and retailers worldwide in developing responsive business systems, enhancing performance and managing change. Among KSA's contributions are initiatives such as quick response and efficient consumer response. KSA Technopak has deep understanding of the textile and apparel industry and a unique vision of its future. Comprehending the needs of the fast changing global scenario, it formulates company strategies, augments business processes and develops systems to effectively manage change. KSA Technopak has successfully aided India's leading textile, apparel and retail companies in the areas of business planning and strategy, operations and supply chain management Textiles Intelligence Limited

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