The communication vacuum in the wool supply chain insights from an exploratory study of the Australian apparel wool textile industry

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1 The communication vacuum in the wool supply chain insights from an exploratory study of the Australian apparel wool textile industry S.C. Champion 1,3* and A.P. Fearne 2 1 Tasmanian Institute of Agricultural Research (TIAR), School of Agricultural Science, University of Tasmania, GPO Box , Hobart, TAS, 7001, Australia. 2 Agricultural Economics & Business Management Research Group, Department of Agricultural Science, Imperial College at Wye, Wye, Ashford, Kent, TN25 5AH, United Kingdom. 3 Current address: The New Zealand Merino Company Ltd, PO Box , Christchurch, New Zealand Ph: , Fax: , scott.champion@nzmerino.co.nz *author for correspondence KEYWORDS Communication, Quality, Wool, Textile, Australia ABSTRACT Supply chain management is currently receiving much attention in the wool textile industry especially following recent wool industry enquiries in Australia and New Zealand that have highlighted the need for improved communication between processors and wool growers. Supply chain management is also seen as a way of improving on-farm innovation, which is currently low compared to other agricultural and fibre industries. Improved communication is the key yet there are a number of barriers to the development of this communication including biological lag and the presence of functional silos due to the traditional arms length approach to wool fibre procurement. This paper highlights the weaknesses inherent in the traditional approach to wool marketing and provides some evidence of a change in trading arrangements as stakeholders in the Australian apparel wool supply chain recognize the need for change and seek to create vertically co-ordinated supply chains from wool grower to garment manufacturer. INTRODUCTION Supply chain management (SCM) approaches are currently receiving much attention in the wool textile industry, especially in Australia and New Zealand, who together account for 92% of world raw wool exports (IWS, 1997). Amongst wool growers (on-farm), the interest has developed largely from the desire to get closer to downstream chain members (post-farm). This was a factor identified as critical for industry development in major wool industry reviews commissioned in both Australia (Wool Industry Future Directions Taskforce, 1999) and New Zealand (McKinsey and Company, 2000) and arises due to the need for the on-farm sector to better understand the requirements of the post-farm sector with respect to raw wool quality. A macro-analysis of the wool textile supply chain suggests that greater vertical co-ordination and improved communication is especially important given that significant challenges to the industry exist with respect to wool s ability to compete as a textile fibre (Wool Industry Future Directions Task Force, 1999) and the need for improved levels of innovation on-farm (McKinsey and Company, 2000). Points of competitive disadvantage include the time from wool harvesting 1

2 (shearing) to availability at retail (up to two years) (Seaman, 1998a; Wool Industry Future Directions Task Force, 1999) and that compared to cotton and synthetic fibres, wool is expensive and difficult to process, and as a result typically maintains a 3.5:1 price premium against these 'benchmark' fibres (Seaman, 1998a). These cost differences were underlined clearly by McKinsey and Company (2000) who found a NZD $8/kg ( 3.84/kg) cost disadvantage for a carpet manufacturer to produce a wool carpet, compared to making a carpet of similar style from nylon (see Table 1). Similar cost disadvantages exist within the apparel wool sector. Table 1. Comparative processing costs (NZD$/kg) for carpet made from competing fibres. Fibre Spinning/dyeing Tufting Total cost cost Wool (scoured) Nylon staple Polypropylene Source: (McKinsey and Company, 2000). As mentioned previously, levels of innovation are currently low in the wool industry compared to other agricultural industries and to the competing synthetic fibre industries. Annual on-farm productivity increases in both Australia and New Zealand of between 0.5 and 1%, compare poorly to 1.6% in beef and between 3 and 4% p.a. in the cereal and cotton industries (Ward, 1998; Wool Industry Future Directions Task Force, 1999; McKinsey and Company, 2000). They also compare poorly post-farm with respect to wool s competing synthetic fibre industries where annual productivity improvements have been in the order of 5 to 6% (Ward, 1998). Given the low levels of productivity gain in the wool industry and the established link between innovative farm management practice and farm profitability (O Keeffe and Fletcher, 1998; Samson, 1999), all available levers to enable innovation must be utilised. Other authors have suggested that supply chain management potentially provides a useful pathway for the dissemination of best-practice (Newton, 2000), and Faulkner (1995) states that the nature of a true strategic alliance (or supply chain) is to develop joint sustainable competitive advantage and to extend individual and joint core competencies. When these circumstances are linked to those of being demand, rather than supply driven (Janzen and de Vlieger, 2000) so that customers needs are clearly defined, as is the case with SCM, a stable environment for innovation and productivity improvement are created. Given these problems and opportunities, it seems likely that SCM can be used to drive the process of, and increase the rates of innovation throughout the industry. However, if on-farm rates of innovation are to be increased through the harnessing of effective information flows up and down the supply chain, co-ordinated information flows across the point of intersection between the vertically and horizontally co-ordinated components of the supply chain will be required. That is, there needs to be co-ordination across the farm gate, between the on- and postfarm sectors. One major impediment to chain function and communication can be the lack of willingness of the various chain actors to co-operate effectively (van Beek et al., 1998). However, an additional problem may be the inappropriate nature or form of information generated by one chain member for the use of either an upstream or downstream chain member, with respect to the improvement of their business performance and that of the chain overall. This paper presents the preliminary results of exploratory research into the Australian apparel wool textile supply chain, with specific emphasis on the communication of quality attributes and 2

3 the perceived need amongst the key supply chain stakeholders for more effective communication from garment manufacturer to wool grower. In the next section we briefly describe the key characteristics of the Australian wool textile supply chain. Following an explanation of the research methodology, the preliminary findings are presented and some conclusions are drawn with respect to the dynamics of the Australian wool textile supply chain and future research thereof. CHARACTERISTICS OF THE AUSTRALIAN APPAREL WOOL TEXTILE SUPPLY CHAIN Apparel wool production is an important primary industry for New Zealand (>NZD$100 million or > 48 million), but particularly Australia where in , exports of raw and processed wools accounted for 16% of Australia s total rural exports by value (AUD$3.74 billion or 2.27 billion). Exports are highly concentrated with the top six markets of China, Italy, France, Taiwan, Japan and Germany, taking 68% of these (Ward, 1998). In , 46,300 farms ran sheep in Australia, although only 12,700 (27%) received the majority of their income from sheep and wool and hence are often referred to as specialist wool producers. Approximately 75% of Australia s wool production comes from the 37% of farms producing more than 11,000kg p.a. (Martin, 1998). Average annual farm production ranges from 7 to 22 tonnes of clean wool per annum, whereas early stage processing mills will process 10,000 to 20,000 tonnes per annum and a late stage processor between 1,000 and 4,000 tonnes per annum (Dolling, 1999). This size imbalance between mill and farm production batch means that to build effective supply chains, considerable horizontal co-ordination is required in the on-farm sector to generate sufficient quantities of wool to process as a mill batch. This has the potential to limit the likelihood of improved communication flow as information generated from the processing of a mill batch is irrelevant to a farm lot (Dolling, 1999). This is compounded by the complexity of the apparel wool supply chain itself (see Fig. 1) which is, arguably, one of the more complicated and elongated (in terms of transformation stages, lead times and geographical location of the different players) within the food and fibre industries. Auction markets currently dominate as the preferred method of sale in the Australian wool and animal industries. Despite their popularity, auctions perpetuate communication problems through the separation of buyer and seller, producer and processor, by creating difficulties for both parties in understanding the actions of the other (O Keeffe, 1998). Moreover, the continued dominance of the auction system as the point of communication between the growers and wool users, means that wool is treated largely as a commodity. This fails to recognise the need for holistic marketing systems that efficiently transmit market signals and add value through preserving and identifying important product characteristics. Auctions further limit communication as they entrench the adversarial win-lose arrangement between buyer and seller. This arises as the sum of value in the marketing system is fixed and the variability in income for individual stakeholders stems from the division of value between members along the chain (O Keeffe, 1998). Given these problems, the task is to capture value through systems that allow effective communication and the transmission of important product characteristics from raw material to the consumer. The study on which this paper is based was designed to examine the effectiveness of communication in the Australian apparel textile supply chain, in terms of the important quality attributes from the processors perspective, and the extent to which supply chain stakeholders perceive the need for a more co-ordinated approach to the production and marketing of Australian wool for the apparel wool textile supply chain. 3

4 Chain Members are Who seek Retailer Consumer Garment Maker Purchase Properties Garment Properties Knitter/Weaver Fabric Properties Spinner Yarn Properties Wool Buyer Topmaker Top Properties Wool Broker Raw Wool Properties Wool Growers Figure 1. The Australian apparel wool supply chain (adapted from Seaman, 1998b). METHODOLOGY Given the exploratory nature of this study, a qualitative approach was regarded as most appropriate. A series of semi-structured interviews were undertaken with stakeholders at each point in the supply chain, with a small sample of European processors identified with the assistance of the Australian Woolmark company, and a small number of wool growers identified with assistance of the Tasmanian Wool Board. A two-stage approach was adopted with the European processors interviewed first, during the summer of 2000, followed by the growers, twelve months later. The two-stage approach was necessary due to the exploratory nature of the research and our desire to establish the extent to which Australian wool growers were aware of the preferred product attributes of their processing customers in Europe, from whom they have been isolated due to the dominance of the auction system and the traditional role of the merchant and topmaker. 4

5 Permission to record the interviews was requested from all informants. Where given, transcripts were prepared from the recordings. Where permission to record the interviews was not given, detailed notes were taken and later transcribed as a record of the meeting. The sample verbatims presented below are taken direct from the transcripts and represent unaltered comments from the interviewees. It should be noted that not all informants were able to answer all questions and, given the small samples involved, the results of this exploratory study cannot be extrapolated to the Australian apparel wool textile industry as a whole. However, we do believe that they provide interesting and invaluable insights into the inadequacies of the traditional approaches to wool marketing and the need for a more co-ordinated approach to the exchange of information within the wool supply chain, particularly from downstream processors to wool growers. RESULTS The results of the first stage of the study. which are discussed in some detail in an earlier paper (Champion & Fearne, 2002), are summarized in Table 2, which shows quite clearly that whilst downstream stakeholders perceive limited improvements in the quality of Australian wool over the past ten years, there preferences in terns of wool attributes differ considerably and their level of direct contact with growers is negligible, which is at odds with the growing interest in purchasing greasy wool with specific attributes appropriate for specific products/processes/markets, which itself underlines the heterogeneity of woolen textiles. Contamination remains a problem, particularly with respect to polypropylene and the inadequacy of fibre diameter variability is a clear example of the failure of the auction system to deliver information that is valued by end-users. More worrying is the topmakers apparent reluctance to fill this particular information vacuum, along with their continued dependence on existing institutional arrangements and organizations, in contrast to the downstream stakeholders who show much greater interest in greater communication upstream and even making direct contact with growers, which thus far has been distinctly limited. The interest in getting closer to growers is best illustrated by this statement by one of the spinners, whose parent company had begun to make contact with growers, to positive effect: we show these people (wool growers) our production and explain our problems I think it is necessary to keep in contact with growers because I think the spinners and weavers can explain their problems much better than the combing mills (topmaker)], because we have the contact with the weaver and the weaver with the retailer However, not all comments about communication, actual or prospective, with woolgrowers were positive, with processors noting concern with respect to the size mismatch between farm production and mill batch, the geographic separation between growers and even a desire by some processors to limit interaction with respect to sectoral activity, highlighting the presence of functional silos. This last issue is best highlighted by the following comment from one of the spinners: I think the growers are making a good job but they should concentrate on their business and that means I think it s a problem if growers want to produce tops and all these things and he hasn t so much time for the farming, which is very important. 5

6 Table 2. Summary of processors perspectives on Australian wool quality and communication with Australian wool growers Weaver Spinner Topmaker Has wool quality improved in Yes & No Yes & No Yes, but not significant last 10 years? Do you have problems with Yes & No Yes (polypropylene and Yes contamination? dark fibre) Has the level of Not sure Dark fibre - yes, N/A contamination decreased over polypropylene - no the last ten years? (sporadic but costly when it occurs) What quality characteristics Decreased fibre diameter Decreased fibre diamter but Higher staple strength, should growers focus on in variability, but not always other characteristics more decreased fibre diamter the future? measured so can be hard to important, higher staple variability but not yet source strength but more important actively seeking lots for woven wear than for measured for low variability knitwear, decreased fib re diamter variability Do you currently Direct contact through Informal links only through Member of grower communicate directly with parent company only. visits to Australia. Growers organisation and have input growers? Some contact with the should concentrate on their from growers through topmaker but always business topmaking activities. through the spinner. Do you see any benefit in Yes - to have precise Yes to improve quality Not really. Difficult due to doing this in the future? information on wool quality and provide early warning mismatch between farm lot and support move to greasy of problems due to and processing batch. wool purchases seasonal conditions. How can growers and Get all sections of the chain Don t Know Use existing channels such processors improve mutual together growers, as IWTO and grower understanding? processors & marketers associations. Source: Adapted from Champion & Fearne,

7 As a result of the findings from the first stage of the research, which provided some evidence to support the need for and downstream interest in a more co-ordinated approach to information flows from wool growers to garment manufacturers, in the second stage we chose to obtain the views of growers who had been proactive in participating in a vertically co-ordinated wool supply chain, all of whom were members of Tasmanian Quality Woolgrowers (TQW). TQW is a wool producer group seeking to differentiate and add value to its wool on the basis of region and an onfarm quality assurance scheme designed to help it to develop closer linkages with processors, for the purpose of improving fibre quality, reducing the lead time from the shearing of the sheep to the retailing of garments and to securing a price premium for the grower members. The three grower members that were selected, in consultation with the management of TQW, were interviewed specifically about communication flows up and down the chain, with customers who purchased their wool direct rather than through the wool auctions. Their responses are summarized in Table 3. Table 2. Woolgrower response to questions relating to supply chain communication. Woolgrower Question A B C Do you think there is more interaction between the participants in your supply chain compared to your traditional approach? Some but not significant. Yes. Receiving more market information. Yes. Received report on all wools entering the chain, both theirs and other growers. Is more/better communication useful in your view? Yes Very useful and assist with breaking down the traditional barriers within the chain. Yes Is more information shared? If yes, which way is this information passed, i.e. up or down the chain? What form is the information in? Some information on top performance (a semi -processed stage) and descriptive information on the finished product from the retailer. Not really. Not receiving information from further downstream. No clear response. Overall, has a supply chain approach met the objective of the other participants? Thinks so. Not sure. No feedback. Not sure. Unable to comment. All woolgrowers were generally positive about their experiences in the supply chain and agreed that the chain had provided improved interaction between chain participants. However, it interesting to note that, when asked about whether communication within the supply chain had improved compared to the traditional approach (i.e. auction selling), the focus of two of the growers was on improved horizontal (ie with other growers) rather than vertical communication. 7

8 Another grower commented on the usefulness of receiving aggregated data on all the wools making up a processing batch, for the purpose of benchmarking, as it enables growers to see information relating to the wool quality of similar clips: The wool that we put in, we got a report on. It was a full report on all the wools that were in that contract. So everybody got everybody else's information. Which wasn't bad actually, because it lets you know it lets you benchmark your own performance. One reason for the focus on greater horizontal communication may have been that information flow from post-farm members of the chain (vertical communication) seems to have been poor. Certainly, all three growers agreed that more information from downstream chain members would be positive and two indicated that there had not been more information shared beyond the farm-gate. Indeed, two were unsure whether the chain had met the objective of the post-farm members at all. It should be noted that the grower who felt the objectives of the post-farm members had been met was closely involved with the co-ordinating grower group and hence may have received information over and above that which was provided to all the growers. Given these apparent limitations it is interesting to note one grower s comment about the differences between the traditional auction selling system and a more co-ordinated approach, that may indicate an expectation amongst growers that the principal information flow beyond the farm gate should relate to the wool s destination rather than its performance: But with a supply chain set up like this, it's a lot easier to track lots of wool through the system. Data of this sort may serve to build relationships through the generation of an intangible belonging to the chain but it does not fully harness the power of the chain to address the systemic industry problem highlighted at the outset. CONCLUSION Previous research has considered the conditions under which SCM might be most appropriately used in the apparel wool textile industry (Champion and Fearne, 2001), however there are few concrete ideas on how to operationalise the transition to widespread adoption of SCM principles quickly, efficiently and effectively and recent history is scattered with failed attempts on behalf of various growers and grower groups, to add value to their wool in various ways (Seaman, 1998a). Further work is now required to overcome systemic barriers critical to co-ordination beyond the farm-gate. The functional silos highlighted by the downstream stakeholders interviewed in this study must be broken down to ensure greater transparency, to assist the translation of technical data into forms that can be shared and acted upon by all stakeholders in the chain. Grower members of the TQW supply chain viewed the co-ordinated approach to marketing their wool as providing more information than the traditional system and thus rated the project to be a success. Additionally with respect to the price of raw material, the programme was successful with increased returns to woolgrowers (+14%) and the effective development of a new product. Work is on-going to establish the extent to which downstream stakeholders in the TQW supply chain perceive the benefits of a more co-ordinated approach to wool fibre procurement to outweigh the costs, in terms of higher wool, top, and yarn prices. 8

9 ACKNOWLEDGEMENTS This study has been supported by the Australian Government and Australian woolgrowers through funding provided to the project by The Woolmark Company. REFERENCES Champion, S.C. and Fearne, A.P. (2001). Supply Chain Management. A 'first principles' consideration of its application to wool marketing. Wool Technology and Sheep Breeding, 49 (3), Champion, S.C. and Fearne, A.P. (2002). Alternative marketing systems for the apparel wool textile supply chain: filling the communication vacuum. International Food and Agribusiness Management Review. (in press). Dolling, M. (1999). Wool Producer Groups; Lessons Learned. Melbourne, Australia: The Woolmark Company. Faulkner, D. (1995). International Strategic Alliances. Co-operating to Compete. IWS (1997). Wool Marketing and Productivity: A Guide for Wool Grower Groups. (International Wool Secretariat: Melbourne, Victoria, Australia). Janzen, R. and de Vlieger, J.J. (2000). Social Network Theories as a Tool for Chain Building. From the Promise of Profit to the Promise of Persons. In 'Chain Management in Agribusiness and the Food Industry', Proceedings of the Fourth International Conference. (Eds. Trienekens J.H. and Zuurbier P.J.P.) pp (Wageningen Pers: Wageningen, The Netherlands). Kohls, R.L. and Uhl, J.N. (1990). Marketing of Agricultural Products. (Macmillan Publishing Company: New York, U.S.A.). Martin, P. (1998). Profile of Australian Wool Producers. Research Report Canberra, ACT, Australia: Australian Bureau of Agricultural and Resource Economics (ABARE). McKinsey and Company (2000). Report to New Zealand Woolgrowers on Improving Profitability. Summary of Recommendations. ( Newton, D. (2000). Supply Chain Learning for Australian Agribusiness. Chain reversal and shared learning for global competitiveness. (Agriculture, Fisheries and Forestry, Australia (AFFA): Canberra, Australia). O Keeffe, M. and Fletcher, M. (1998). Towards a new perspective on productivity gains in the wool industry: A qualitative market research project. (Rabo Australia Ltd for the International Wool Secretariat: Melbourne, Australia). Samson, D. (1999). Wool Profit Map. Where are you? (The Woolmark Company: Melbourne, Victoria, Australia). Seaman, S. (1998a). Alliance Development. In 'Marketing the Wool that the Customer Demands'. Session 4, Selling Alternatives and Avoiding Risk. Access to the Experts Program. pp (The Cooperative Research Centre for Premium Quality Wool: Melbourne, Australia). Seaman, S. (1998b). Genes to suit. Responding to consumer wants and customer needs. Agdex 437/81. Orange, NSW Australia: NSW Agriculture. van Beek, P., Beulens, A.J.M. and Meffert, H.F.Th (1998). Logistics and ICT in Food Supply Systems. In 'Innovation of Food Production Systems. Product Quality and Consumer Acceptance'. (Eds. Jongen W.M.F. and Meulenberg M.T.G.) pp (Wageningen Pers: Wageningen, The Netherlands). Ward, L. (1998). A Global Perspective of the Australian Wool Industry. (The Co-operative Research Centre for Premium Quality Wool: Melbourne, Victoria, Australia). 9

10 Wool Industry Future Directions Task Force (1999). Diversity and Innovation. Report of the Wool Industry Future Directions Task Force. Volume 2: Main report and Appendices. July (Commonwealth of Australia: Canberra, ACT, Australia). 10