Supply Chain Metrics That Matter:A Focus on ApparelUsing Financial Data from Corporate Annual Reports toBetter Understand ...
Copyright © 2013 Supply Chain Insights LLC Page 1ContentsResearch ...........................................................
Copyright © 2013 Supply Chain Insights LLC Page 2ResearchSupply Chain Metrics That Matter is a series of reports published...
Copyright © 2013 Supply Chain Insights LLC Page 3In addition, in our ongoing effort to provide the latest research for our...
Copyright © 2013 Supply Chain Insights LLC Page 4Executive OverviewDifferent industries are making progress on supply chai...
Copyright © 2013 Supply Chain Insights LLC Page 5Setting the StageApparel manufacturing companies face a variety of challe...
Copyright © 2013 Supply Chain Insights LLC Page 6Where and How to Operate?Over the course of the last decade, apparel manu...
Copyright © 2013 Supply Chain Insights LLC Page 7This happened less than six months after a fire occurred in another Bangl...
Copyright © 2013 Supply Chain Insights LLC Page 8However, five of the six companies demonstrate slowing growth in 2008-201...
Copyright © 2013 Supply Chain Insights LLC Page 9Profitability: On the RiseWhen it came to margin management, fashion good...
Copyright © 2013 Supply Chain Insights LLC Page 10production to third parties actually have reduced their inventory stores...
Copyright © 2013 Supply Chain Insights LLC Page 11Table 6. Revenue per Employee (2000-2011)RecommendationsThe financial me...
Copyright © 2013 Supply Chain Insights LLC Page 12Figure 2. Respondent Rankings from Corporate Social Responsibility Study...
Copyright © 2013 Supply Chain Insights LLC Page 13ConclusionOver the course of the last decade, the apparel industry had a...
Copyright © 2013 Supply Chain Insights LLC Page 14AppendixOther Reports in This Series:Supply Chain Metrics That Matter: A...
Copyright © 2013 Supply Chain Insights LLC Page 15About Supply Chain Insights LLCSupply Chain Insights LLC is a research a...
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Supply Chain Metrics That Matter: A Focus on Apparel - 9 May 2013

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Different industries are making progress on supply chain excellence at different rates. In the writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer electronics industry is one of the only sectors making consistent and sustainable progress in balancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal plateau. They are treading water with no company able to move forward. In contrast, we see that the apparel industry is trending backwards.
When we analyze progress in the apparel industry over the last decade, we see a degradation of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and three of the six companies show flat or decreasing performance on operating margin. This is the sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain Metrics That Matter series (for a complete series listing see the Appendix).
Figure 1 illustrates the intersection of inventory turns and revenue per employee over the preceding decade. Ideally, companies would be moving consistently from the lower left to the upper right as they increased both inventory turns and revenue per employee performance. Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.

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Transcript of "Supply Chain Metrics That Matter: A Focus on Apparel - 9 May 2013"

  1. 1. Supply Chain Metrics That Matter:A Focus on ApparelUsing Financial Data from Corporate Annual Reports toBetter Understand the Apparel Supply Chain5/9/2013By Abby MayerResearch AssociateSupply Chain Insights LLC
  2. 2. Copyright © 2013 Supply Chain Insights LLC Page 1ContentsResearch ................................................................................................................................... 2Disclosure.................................................................................................................................. 2Research Methodology .............................................................................................................. 2Executive Overview ................................................................................................................... 4Setting the Stage ....................................................................................................................... 5Where and How to Operate?...................................................................................................... 6Growth: Bumpy Ride.................................................................................................................. 7Profitability: On the Rise............................................................................................................. 9Cycle: Stuck on Inventory .......................................................................................................... 9Complexity: Manage, Don’t Simplify..........................................................................................10Recommendations....................................................................................................................11Conclusion................................................................................................................................13Company Profiles ..................................................................................................................13Appendix...................................................................................................................................14Other Reports in This Series:.................................................................................................14About Supply Chain Insights LLC..............................................................................................15About Abby Mayer.....................................................................................................................15
  3. 3. Copyright © 2013 Supply Chain Insights LLC Page 2ResearchSupply Chain Metrics That Matter is a series of reports published throughout the year by SupplyChain Insights LLC. They are a deep focus on a specific industry.These reports are based on data collected from financial balance sheets and incomestatements over the period of 2000-2011. In these reports, we analyze how companies madetrade-offs over the course of the last decade in balancing growth, profitability, cycles andcomplexity.Within the world of Supply Chain Management (SCM), each industry is unique. We believe thatit is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,we believe that we have to evaluate change over time by peer group. In this series of reports,we analyze the potential of each supply chain peer group, share insights from industry leadersfrom each industry, and give recommendations based on general market trends.DisclosureYour trust is important to us. As such, we are open and transparent about our financialrelationships and our research process. This independent research is 100% funded by SupplyChain Insights.These reports are intended for you to read, share and use to improve your supply chaindecisions. Please share this data freely within your company and across your industry. All weask for in return is attribution when you use the materials in this report. We publish under theCreative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and youwill find our citation policy here.Research MethodologyThe basis of this report is publicly available information from corporate annual reports from theperiod of 2000-2011 for publicly-owned companies involved in apparel manufacturing activities.In picking companies for the Supply Chain Metrics That Matter report, we traditionally rely oncompanies recently listed in the Fortune Global 500. However, due to the smaller size ofcompanies operating in the apparel industry, we have taken our peer group from the U.S.-focused Fortune 500. In choosing our peer group we identified three companies, ranked in the2012 Fortune 500, operating within the industry of focus. We augmented them with three hand-selected companies that we believe provide a meaningful comparison.
  4. 4. Copyright © 2013 Supply Chain Insights LLC Page 3In addition, in our ongoing effort to provide the latest research for our clients and readers, weare now linking all Supply Chain Metrics That Matter reports to Morningstar industry sectors. Weutilize Morningstar industry sectors in creating the Supply Chain Index; a formulaicrepresentation of supply chain excellence, and the relationship between corporate financialperformance (market capitalization) and supply chain financial ratio metrics. Thus, allcompanies included in future Supply Chain Metrics That Matter reports will be aligned withinMorningstar sectors.The financial ratios used will enable supply chain leaders to better understand where theindustry is on the Supply Chain Effective Frontier. In this report, we share a framework forsupply chain excellence that balances growth, profitability, cycles and complexity metrics. Ineach Supply Chain Metrics That Matter report, we share insights from each of these metricscategories. Due to the fact that the supply chain is a complex system that must be managedholistically, we share the trends on each of these dimensions over the course of the last decade.We use the financial data to help readers learn from past trends, to better understand currentoperating environments, and we provide recommendations for the future. We augment thefinancial data analysis with information from our quantitative and qualitative research studies aswell as our work with clients operating within the industry.
  5. 5. Copyright © 2013 Supply Chain Insights LLC Page 4Executive OverviewDifferent industries are making progress on supply chain excellence at different rates. In thewriting of the Supply Chain Metrics That Matter series of reports, we see that the consumerelectronics industry is one of the only sectors making consistent and sustainable progress inbalancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontalplateau. They are treading water with no company able to move forward. In contrast, we seethat the apparel industry is trending backwards.When we analyze progress in the apparel industry over the last decade, we see a degradationof results on the Supply Chain Effective Frontier: days of inventory are flat or increasing andthree of the six companies show flat or decreasing performance on operating margin. This is thesharpest reversal in progress on supply chain excellence that we have seen in the Supply ChainMetrics That Matter series (for a complete series listing see the Appendix).Figure 1 illustrates the intersection of inventory turns and revenue per employee over thepreceding decade. Ideally, companies would be moving consistently from the lower left to theupper right as they increased both inventory turns and revenue per employee performance.Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.Figure 1. Inventory Turns vs. Revenue per Employee (2002-2011)
  6. 6. Copyright © 2013 Supply Chain Insights LLC Page 5Setting the StageApparel manufacturing companies face a variety of challenges. Products rely heavily oncommodities and thus fluctuations in commodity prices are a constant concern. Changingseasons and trends, and the birth of fast-fashion, create an environment where speed is of theutmost importance in bringing a product from concept to shelf as quickly as possible. In addition,the role of outsourced manufacturing has created supply chains spanning countries andcontinents and the inherent challenges of management and oversight. Finally, corporate socialresponsibility and a responsibility to society, the environment, customers and employeesremains a difficult balancing act.Unlike other industries, when we examine the sector’s numbers from the last decade, asoutlined in table one, there is no clear winner. The average results, for the period of 2000 to2001, for the apparel industry across the four categories of growth, profitability, and cycle andcomplexity metrics are outlined in table 1.Table 1. Apparel Industry Average Financial Metrics (2000-2011)In short, as the industry grew over the past decade, discipline on many supply chain metricsstagnated or degraded.
  7. 7. Copyright © 2013 Supply Chain Insights LLC Page 6Where and How to Operate?Over the course of the last decade, apparel manufacturers have chased a lower cost of laboraround the world. We have seen manufacturing move from in-country production to China, Indiaand Bangladesh as companies chased lower production costs. The expiration of a quota systemin 2005—limiting fabric and cloth imports to large Western markets—as well as ongoing WTOregulations and negotiations has gradually shifted the apparel landscape, but not stymied thetrend of offshoring and outsourcing the labor intensive portions of the apparel industry.1American Apparel, Inc., however, has continued to source and manufacture in-country, whileothers in the peer group built longer supply chains overseas to reduce cost structures. Selectedquotations from recent American Apparel, Inc. annual reports indicate some of the advantagesenjoyed due to the unique structure of the business.The industry has to face the fact that not only have they been unable to improve operatingmargin, they have also not been able to meet their own commitments on “Fair Labor” asoutlined in their Corporate Social Responsibility (CSR) documents. Recent news fills the papers.For example, on April 24, 2013 a garment factory in Savar, Bangladesh collapsed. As of May 1,the death toll had topped 400 people and is projected to climb over 1,000.2Multiple factorieswere housed in the eight-story Rana Plaza where over 3,000 individuals were at work at thetime of the incident. Despite the orders of factory inspectors who ordered immediate evacuationafter discovering significant cracks in the building’s structure, factory workers were expected toreport to work on the fateful day. Clothes labels found in the rubble include Benneton, Mango,Joe Fresh, Primark & C&A.3Now, two weeks after the building’s collapse, the toll sits at 900.1The Washington Post. “China to Raise Tariffs on Clothing Exports.” http://www.washingtonpost.com/wp-dyn/content/article/2005/05/20/AR2005052001519.html2The Sydney Morning Herald. “What price $10 dresses and T-shirts now?”http://www.smh.com.au/comment/what-price-10-dresses-and-tshirts-now-20130430-2iqwa.html3Fox News. “Death toll from Bangladesh factory collapse tops 400, officials say.”http://www.foxnews.com/world/2013/05/01/death-toll-from-bangladesh-factory-collapse-tops-400-officials-say/“Because we manufacture domestically and are vertically integrated, webelieve this enables us to more quickly respond to customer demand and tochanging fashion trends and to closely monitor product quality.”•American Apparel, Inc. 2011 annual report (10K), page 6“We believe that bringing certain elements of our production process in-houseaffords us the opportunity to exert higher quality control while simultaneouslylowering production costs.”•American Apparel, Inc. 2011 annual report (10K), page 8
  8. 8. Copyright © 2013 Supply Chain Insights LLC Page 7This happened less than six months after a fire occurred in another Bangladesh factory killing112 and leaving companies, including Wal-Mart Stores, Inc. and Sears, answering toughquestions as to lax oversight and insufficient supplier management.4The occurrence of anothertragedy will only increase the scrutiny of apparel manufacturers and their extended supplychains. While the industry enjoys a hearty debate on when and where to source andmanufacture, when it comes to financial results, there is no clear winner.Growth: Bumpy RideGrowth has been the number one priority for the industry. It has been a bumpy ride. Theindustry experienced wild gyrations in volume and was continuously forced into reactive modewith changing demand levels.When it comes to supply chain planning, the apparel industry has a low level of capabilities fordemand management and network design. They are unequal to their consumer electronics orconsumer packaged goods peers. As a result, they were unable to stay balanced and managegrowth through the period’s dynamic market changes.Table 2. Year-over-Year Sales Growth (2000-2011)The growth levels over the years are wildly divergent, from a high of 39% demonstrated byAmerican Apparel, Inc. during 2004-2007, to a low of -3% for VF Corp. from 2000-2003.4ABC News. “Fire kills 112 workers making clothes for US brands.” http://abcnews.go.com/Blotter/fire-kills-112-workers-making-clothes-us-brands/story?id=17807229#.UYFb7LVQF30
  9. 9. Copyright © 2013 Supply Chain Insights LLC Page 8However, five of the six companies demonstrate slowing growth in 2008-2011; likely a result ofthe economic climate, and a decrease in consumers’ discretionary budgets.While economic volatility affects all companies, regardless of industry, some apparel companiesdemonstrated greater levels of resilience and more stability. While American Apparel, Inc.’ssales dropped from 39% to 10%, other companies such as Columbia Sportswear Co. andHanesbrands, Inc. showed smaller shifts. A quote from the 2011 Hanesbrands, Inc. annualreport indicates one of the reasons for this stability.It seems rather obvious, but the demand for socks is less elastic than the demand for designerjeans. This is reflected in the above information, both financial metrics and annual report quotes,and highlights the importance of understanding one’s products and the demand signals fromconsumers.Table 3. Operating Margin (2000-2011)“We believe that our status as a high-volume seller of core basic apparelproducts creates a more stable and predictable revenue base and reduces ourexposure to dramatic fashion shifts often observed in the general apparelindustry.”• Hanesbrands, Inc. 2011 annual report (10K), page 11
  10. 10. Copyright © 2013 Supply Chain Insights LLC Page 9Profitability: On the RiseWhen it came to margin management, fashion goods fared better than basics. Three of the sixcompanies profiled were able to improve operating margin. The results are shown in table 3.Companies with desirable brand names have been able to improve margin and create anenvironment of greater profitability. This is demonstrated through the performance of PV Corp.,Ralph Lauren Corp. and VF Corp. On the other hand, more commoditized products andbrands have struggled with shrinking margin. Columbia Sportswear Co. demonstrates a casestudy of falling margin from 0.19 at the beginning of the decade to 0.08 at the close. Thisdivergence of margin creates a two-tiered apparel industry.Cycle: Stuck on InventoryOver the past decade, many companies have invested in technologies and processes toimprove cash-to-cash cycles and reduce inventories. While many would argue that apparelcompanies grew bloated inventories, as they outsourced manufacturing and built a longersupply chain, not only did apparel companies not improve margins, but they also did notimprove inventory management. The results are shown in table 4.Table 4. Days of Inventory (2000-2011)Once again, we see that American Apparel’s significantly different operating structure sets itapart from its peers. It also illuminates the fact that companies that have chosen to outsource
  11. 11. Copyright © 2013 Supply Chain Insights LLC Page 10production to third parties actually have reduced their inventory stores and helps to negate thehypothesis that outsourced manufacturing has created a need for longer apparel supply chains.PVH Corp, Ralph Lauren Corp., and VF Corp are the three companies that demonstratefalling inventory stores. These companies experience a stronger business requirement tomaintain small inventory levels and create flexible supply chains that can react to the latestfashion trends.Complexity: Manage, Don’t SimplifyComplexity is rising across all industries in regards to their supply chain processes and one ofour preferred measures is revenue per employee. In general, all industries have shownimproved performance over the past decade, with the exception of apparel companies, asshown in table 5. While most industries have seen exceptional growth in revenue per employeesince the 1990s, apparel companies are moving backwards in terms of employee productivity.Table 5. Revenue per Employee Across Industries (1990-2011)Revenue per employee for the apparel industry indicates several striking conclusions which areunique to this industry. There is a wide discrepancy of values, based primarily upon the use ofoutsourced manufacturing partners, and also a pattern of falling revenue per employee metricsfor one company, Columbia Sportswear Co., which is rare both within and outside of theindustry.The financial results shown in table 6 illustrate revenue per employee for each of the sixcompanies profiled in this report. .
  12. 12. Copyright © 2013 Supply Chain Insights LLC Page 11Table 6. Revenue per Employee (2000-2011)RecommendationsThe financial metrics, news reports, annual report excerpts, and the commentary above presenta picture of an industry with different operating models and unique challenges. There areseveral recommendations we would make to apparel manufacturers to improve their supplychain processes based upon our analysis of their financial performance over the past decade.• Understand and embrace CSR. Corporate social responsibility is here to stay.Companies may have outsourced their supply chains, but they cannot outsource the riskor responsibility. Consumers today expect not only the products they want at the pricethey want when and where they want them, they also expect companies to activelymanage the supply chain and protect environmental and social interests. This is anexceedingly difficult balancing act for apparel companies requiring a redesign of thesupply chain and active work in supplier development. In our work on corporate socialresponsibility, we see that Patagonia, Inc. and Levi Strauss & Co. are two apparelcompanies that have been successful in meeting the challenge as rated by their peers.
  13. 13. Copyright © 2013 Supply Chain Insights LLC Page 12Figure 2. Respondent Rankings from Corporate Social Responsibility Study• Manage, but do not simplify. Complexity is the only constant in the 21stcentury’sglobal supply chains. It is here to stay. Apparel can take lessons from the consumerelectronics industry on how to design and implement planning systems to improveresiliency, and reduce the impact of complexity and market-to-market supply anddemand variation on the supply chain.• Inventory management is still fertile ground. As discussed earlier, days of inventoryfor the six companies profiled in this report demonstrates there is more work to be done.Gaining proficiency at supply chain planning and the redefinition of the channel demandsignal are opportunities for apparel companies.• Look outside the industry. The apparel industry has largely recruited for talent withinthe sector. As supply chain processes have matured over the course of the last decade,the gap has widened between this industry and others. The industry would be wellserved to begin recruiting outside the industry and focus on closing the gap.
  14. 14. Copyright © 2013 Supply Chain Insights LLC Page 13ConclusionOver the course of the last decade, the apparel industry had a bumpy growth ride with areversal of progress on supply chain performance. This gap will only worsen unless there isserious attention paid to supply chain processes, with a focus on the fundamentals of supplychain planning, network design and talent development. The financial metrics illustrate severalkey areas requiring further work and refinement, and highlight the importance of supply chain asa differentiator in today’s business world.Company Profiles
  15. 15. Copyright © 2013 Supply Chain Insights LLC Page 14AppendixOther Reports in This Series:Supply Chain Metrics That Matter: A Focus on RetailPublished by Supply Chain Insights in August 2012.Supply Chain Metrics That Matter: A Focus on Consumer ProductsPublished by Supply Chain Insights in September 2012.Supply Chain Metrics That Matter: A Focus on the Chemical IndustryPublished by Supply Chain Insights in November 2012.Supply Chain Metrics That Matter: The Cash-to-Cash CyclePublished by Supply Chain Insights in November 2012.Supply Chain Metrics That Matter: A Focus on the Pharmaceutical IndustryPublished by Supply Chain Insights in December 2012.Supply Chain Metrics That Matter: Driving Reliability in MarginsPublished by Supply Chain Insights in January 2013.Supply Chain Metrics That Matter: A Focus on HospitalsPublished by Supply Chain Insights in January 2013.Supply Chain Metrics That Matter: A Focus on Brick & Mortar RetailPublished by Supply Chain Insights in February 2013.Supply Chain Metrics That Matter: A Focus on Medical Device ManufacturersPublished by Supply Chain Insights in February 2013.Supply Chain Metrics That Matter: A Focus on Consumer ElectronicsPublished by Supply Chain Insights in April 2013.
  16. 16. Copyright © 2013 Supply Chain Insights LLC Page 15About Supply Chain Insights LLCSupply Chain Insights LLC is a research and advisory firm focused on reinventing the analystmodel. The services of the company are designed to help supply chain teams improve value-based outcomes through research-based Advisory Services, a dedicated Supply ChainCommunity and public/in-house training. Supply Chain Insights is focused on deliveringindependent, actionable and objective advice for supply chain leaders. As a companydedicated to research, turn to us when you want the latest insights on supply chain trends,technologies to know, and Supply Chain Metrics That Matter.About Abby MayerAbby Mayer (twitter ID @indexgirl), Research Associate, is one of theoriginal members of the Supply Chain Insights LLC team. She is also theauthor of the Supply Chain Index blog. Her supply chain interests includeconnecting financial performance and supply chain excellence, as well astalent management issues and emerging markets.Abby has a B.A. in International Politics and Economics from MiddleburyCollege and a M.S. in International Supply Chain Management fromPlymouth University in the United Kingdom. She has also completed athru-hike of Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the UnitedStates. As part of the planning and food prep process, she became interested in supply chainmanagement when she was asked to predict hunger pangs for the entire three-week trip beforedeparture. If that isn’t advanced demand planning, what is?!?!

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