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In this excerpt from his interview with the Harvard Business Review, Victor Fung explains how big global consumer products companies are moving toward "dispersed manufacturing," becoming, in effect, their own supply chain managers.
Fung: Large manufacturing companies are increasingly doing global supply-chain management, just as Li & Fung does for its retailing customers. That's certainly the case in the auto industry. Today assembly is the easy part. The hard part is managing your suppliers and the flow of parts. In retailing, these changes are producing a revolution. For the first time, retailers are really creating products, not just sitting in their offices with salesman after salesman showing them samples: "Do you want to buy this? Do you want to buy that?" Instead, retailers are participating in the design process. They're now managing suppliers through us and are even reaching down to their suppliers' suppliers. Eventually that translates into much better management of inventories and lower markdowns in the stores.
HBR: Explain why that translates into lower markdowns for retailers?
Fung: Companies in consumer-driven, fast-moving markets face the problem of obsolete inventory with a vengeance. That means there is enormous value in being able to buy "closer to the market." If you can shorten your buying cycle from three months to five weeks, for example, what you are gaining is eight weeks to develop a better sense of where the market is heading. And so you will end up with substantial savings in inventory markdowns at the end of the selling season.
Good supply-chain management strips away time and cost from product delivery cycles. Our customers have become more fashion driven, working with six or seven seasons a year instead of just two or three. Once you move to shorter product cycles, the problem of obsolete inventory increases dramatically. Other businesses are facing the same kind of pressure. With customer tastes changing rapidly and markets segmenting into narrower niches, it's not just fashion products that are becoming increasingly time sensitive.
Several years ago, I had a conversation about ladies fashion garments with Stan Shih, CEO of Acer, the large Taiwan-based PC manufacturer. I jokingly said, "Stan, are you going to encroach on our territory?" He said, "No, no, but the PC business has the same basic problems you face. Things are changing so fast you don't want to wind up with inventory. You want to plan close to the market." He runs his business to cut down the delivery cycle and minimize inventory exposure by assembling PCs in local markets. So what I have to say about supply chain management for fashion products really applies to any product that's time sensitive. Supply chain management is about buying the right things and shortening the delivery cycles. It requires "reaching into the suppliers" to ensure that certain things happen on time and at the right quality level. Fundamentally, you're not taking the suppliers as a given.
The classic supply-chain manager in retailing is Marks & Spencer. They don't own any factories, but they have a huge team that goes into the factories and works with the management. The Gap also is known for stretching into its suppliers.
HBR: Can you give me an example of how you reach into the supply chain to shorten the buying cycle?
Fung: Think about what happens when you outsource manufacturing. The easy approach is to place an order for finished goods and let the supplier worry about contracting for the raw materials like fabric and yarn. But a single factory is relatively small and doesn't have much buying power; that is, it is too small to demand faster deliveries from its suppliers. We come in and look at the whole supply chain.
We know the Limited is going to order 100,000 garments, but we don't know the style or the colors yet. The buyer will tell us that five weeks before delivery. The trust between us and our supply network means that we can reserve undyed yarn from the yarn supplier. I can lock up capacity at the mills for the weaving and dying with the promise that they'll get an order of a specified size; five weeks before delivery, we will let them know what colors we want. Then I say the same thing to the factories, "I don't know the product specs yet, but I have organized the colors and the fabric and the trim for you, and they'll be delivered to you on this date and you'll have three weeks to produce so many garments."
I've certainly made life harder for myself now. It would be easier to let the factories worry about securing their own fabric and trim. But then the order would take three months, not five weeks. So to shrink the delivery cycle, I go upstream to organize production. And the shorter production time lets the retailer hold off before having to commit to a fashion trend. It's all about flexibility, response time, small production runs, small minimum-order quantities, and the ability to shift direction as the trends move.
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