If you own a pair of Wrangler, Lee or 7 For All Mankind jeans, carry a North Face backpack or like to pad around the pool in a pair of Reef sandals, then you are a customer of VF. Not that you would know it, though, because this Greensboro, North Carolina, based firm likes to let its expanding collection of consumer lifestyle brands take the limelight.
From its roots as a manufacturer of everyday denim, underwear and company clothing, VF has grown aggressively in recent years and is now second only to Nike in sales in the American apparel industry. VF’s labels are on display everywhere from its 650 branded stores in shopping malls to the fields of all 30 Major League Baseball teams, to whom it is the official supplier of players’ uniforms.
To support its growth, in 2004-05 VF revamped its supply chain organisation to get better linkages between operating companies. It introduced a matrix reporting structure and appointed its first global president of supply chain and a vice-president of procurement at the corporate level. The latter role is occupied by George Irion, a 29-year VF veteran who had previously led procurement for its jeanswear division.
CPO Agenda talked to him recently about trends in the industry and how he and his team are keeping the company competitive.
How is VF organised in terms of its sourcing and manufacturing?
Jeanswear and imagewear (workwear) are the two businesses that have been around the longest – those are our heritage brands, and they include Wrangler, Lee and Red Kap. We manufacture about 45 per cent of those garments ourselves and the rest are sourced from Asia. All of our internal manufacturing used to take place in the US, but between the mid-1990s and 2002 it was moved to Mexico and Central America – countries such as Nicaragua and Haiti. We have about 18,000 employees there now. In these two “coalitions”, as we call them, we look for steady, strong performance, because they are pretty mature markets.
We also have our “lifestyle” brands. These are newer businesses that we have acquired and where we expect exponential growth. They are grouped into three coalitions: outdoor, sportswear and contemporary, and those products are 100 per cent sourced in Asia, from countries such as China, Bangladesh, Vietnam and Cambodia.
I’m responsible for all the direct materials spend to support our internal manufacturing for jeanswear and imagewear – that’s about $750 million annually. We have about 40 individuals in procurement located in those businesses, plus another three or four based in our Asia sourcing organisation in Hong Kong. We’ve experienced rapid growth there and it’s now the second largest sourcing organisation after Li & Fung. In 2001, we had 80 people and we were sourcing roughly $180 million of product. Today, we have over 1,000 people sourcing about $1.8 billion. I also have a slim central team of eight people here in Greensboro who primarily look after indirect spend of about $200 million.
That you are still manufacturing as much as you are might surprise some people. Why is this?
We have a lot of capabilities in terms of manufacturing that no one else has, it’s a clear competitive advantage that we are recognised for in the market. Blue Bell, the maker of Wrangler jeans, which VF bought in the mid-1980s, was a company with a strong engineering culture that had invested heavily in R&D. We still make a lot of our own manufacturing equipment and a lot of our processes are proprietary. It has worked for us, but not for anyone else.
If you contrast us with a certain competitor on the West Coast beginning with “L”, they had a similar platform in the 1990s but decided to get out of manufacturing altogether. Today, they are 100 per cent sourced. We don’t have the same level of competitive advantage in sourcing, simply because we have grown that organisation only since 2001. Two years ago we would have said we were a C-minus; today we are probably a B-minus. But as our volumes grow, we are bringing in more talent and we’re getting better at it.
From a procurement perspective, what are the biggest challenges you are facing?
On the direct materials side, the biggest challenge is the shrinking supply base. In 2000 there were 14 denim mills in the US, but in 2006 half of those went out of business or exited the country. That’s a big deal because 80 per cent of our direct material costs are fabric related and we are purchasing 28 million yards of denim a quarter to service our internal manufacturing. Nafta [the North American Free Trade Agreement] requires us to use fabric originated in Mexico, the US and Canada, otherwise when we bring garments back into the US we have to pay duties of roughly 17.5 per cent, which is prohibitive. The same thing is true in Central America under Cafta [Central America Free Trade Agreement].
Market forces worked in our favour for a long time and now they don’t. From 2000, because apparel producers were shifting production out of the US, we became an even more important customer to the textile industry here. We could offer the volumes, stability and growth they were looking for.
By 2002 we had probably taken 15 per cent out of our direct material cost in jeanswear and imagewear – close to $100 million a year – and we held that all the way through 2006 despite inflation in commodities such as cotton, petroleum and polyester. In 2006, though, we saw contraction in our supply base and inflationary pressures increased. So we’ve had to think about our direct material sourcing in a different way, create a new vision of how we engage with suppliers.
What have you done there?
One thing we’ve done is supported probably the only denim facility that has opened in the US this decade. It’s in Liberty, South Carolina, and is a mill that closed and was then bought by an investment group. That facility, which employs about 250 people, is 100 per cent dedicated to us. We guaranteed it volumes and since September 2002 it has provided enough denim to enable us to produce 75 million pairs of jeans.
We have transparency in the relationship, which I think is important. We sit down once a quarter and go through their financials so that we understand where they are and what their needs are. The idea of Liberty was to take a few products where we need a lot of volume, such as Wrangler and Lee, and eliminate the need for huge product development investments that are common at other denim mills. We give them stability and large volumes so that they can run a very efficient and cost-effective mill. The benefit for us is certainty of availability, in terms of fabric, and a low-cost platform.
Are there any downsides?
Yes, there are some. We have to fill a capacity of between 3.5 million and 4.5 million yards a quarter. Right now, when our total demand is down, that’s a little bit more of a struggle. We are introducing some new products into Liberty to make up the volumes. That can mean switching volumes from other suppliers, but we recognise that we’ve got to protect this strategic relationship above all others. Although we have two other suppliers for denim in North America that are very important to us, and we sit down with them and do strategic planning, it’s not the same relationship as the Liberty model.
If you use 100 per cent of Liberty’s capacity, why not own it?
It’s a question of where you want to spend your money, and VF’s focus is on buying more brands. The apparel industry, like many others, has been in a period of global consolidation for a number of years. The economic climate we’re in is just accelerating that consolidation among producers and our retail customers, and in this environment if you’re not growing, you’re shrinking. So for those reasons we are reserving our investment for brands.
But consolidation also means there are going to be fewer players in every category in the supply chain. We need to pick the suppliers that we think are winners, we need to form more collaborative and transparent relationships, and we need to get innovative about how we create value for both of us – just like having the dedicated mill scenario. We’re currently looking at extending that model with the same investor for another denim mill in Rockingham, North Carolina, which closed in December.
How would that operation compare with Liberty?
It would be roughly the same size, but it would produce more fashion denim and more seasonal products. There would still be a sizeable component of basic denim – probably 40 per cent of its output – but it would also produce another 30-40 per cent of value-added denim for us and 20-30 per cent for other customers. So there would have to be a different level of investment in product development.
Although we wouldn’t have 100 per cent of the capacity, we would have 100 per cent transparency, compared with probably 80 per cent at Liberty. We would have one of our engineers onsite in the plant who knows as much about their cost structure and day-to-day operations as they do. We would be working collaboratively on virtually every operational decision that’s made. And we would be sitting down together and determining product pricing and jointly setting margins. In some cases, the margin on a particular product might not be as much as the mill would want, but we would be able to pay more for other products so that it makes its targeted margin overall.
Having that kind of transparency on cost would also allow us to be much more intelligent in negotiations with our other suppliers. The other thing about “Liberty 2” that is attractive is that there is the opportunity to expand it in a few years’ time to produce non-denim fabrics: piece-dyes and twills. In 2000, we had seven suppliers of these types of fabrics; today, we have two. When you get down to two, it really does become a threat to your supply.
How likely is this initiative to go ahead?
To be honest, in this environment it may be 50:50. Six months ago, I would have said 70:30. But with all the pressures we’re under right now, it’s tougher to make the business case. A decision will probably be made in the next month or so, and if it does go ahead the mill would start producing in the second half of this year.
What was procurement’s role in making the business case?
It’s basically a procurement-owned initiative. We developed the concept and the relationship with the investor, and we’re the ones who have been selling it to internal stakeholders in our jeanswear coalition. We would not be investing for an ownership position, so it doesn’t have to considered by our board, but we would be guaranteeing volume and we might have to provide some short-term working capital.
Do you have a similar strategy in your Asia sourcing operation as well?
We haven’t invested the same amount of resources in developing our strategic fabric suppliers in Asia as we have done in North America. With the rapid growth, it was all we could do to absorb it; we were doing well just to keep providing the product.
Last year we visited mills in China, Thailand and Bangladesh that have been servicing us on full-package garments. It was a reaching out in terms of taking this whole strategic thought process to these mills. But it’s going to take a greater investment of time because these suppliers are used to working on the opportunity at hand, not a longer-term strategic relationship.
Is supply base consolidation the reason you want to develop those in Asia?
Thousands of fabric mills have closed in China, but there are 10,000 left, so there isn’t the same amount of pressure. But for jeanswear in Asia they are sourcing half the volume of denim that we are in the US from 33 suppliers rather than eight. So there’s an opportunity to pick the winners, invest more in these relationships and give more direction to our merchants as to where they source these fabrics. This is something we really haven’t done in Asia before. What we are hoping to do is to transfer the strategic view of fabric sourcing to Asia, and to really elevate our relationships in terms of direct materials sourcing.
One of the other things we are doing is looking to see if we can source more Asian fabrics for our internal manufacturing in Mexico or Central America at a low enough cost to allow us to absorb the 17.5 per cent duty. We are having some success in today’s environment, but we’ll never get away entirely from the need for regional fabric. The potential might be that we could get up to 20 per cent of our fabric needs through these other mechanisms.
Your CEO talked recently about declining revenues in 2009 and the need for $100 million of “aggressive” cost cutting. What is procurement’s contribution going to be?
I believe that 2009 is really the year of procurement, because all the dynamics are in place to accelerate our engagement, particularly on the indirect side where it’s not been as robust. One of the biggest opportunities is in retail. We really have not done anything collaboratively across our retail businesses in terms of supplier identification, combining spend and rationalising our supply base. We hope to really make good strides this year in that area – everything from fixtures to heating, ventilation and air conditioning, and store maintenance. And by the way, retail is one of our primary initiatives in terms of how we are going to grow and promote our lifestyle brands.
There are probably some other areas where we haven’t had quite as much engagement on the indirect side, and we’re in the process of figuring out priorities two and three. But certainly retail is our number one focus and we’re working much more tightly with our CFOs. We’re all under tremendous pressure in this industry, everyone is focused on managing cost.
On the direct materials side, in this environment we are certainly focused on what we can do to drive short-term value. We are going back and challenging every agreement we’ve got, because a lot of things have changed over the last six months. Commodity pricing in virtually every category peaked in Q3. Cotton, for example, went to 90 cents a pound and now it’s in the low 50s. And, at the same time, all of our suppliers’ volumes are decreasing, so the business we offer our supply base is more valuable than it was.
Is there a tension between seeking cost-reduction opportunities as a result of commodity price falls and your desire to foster closer relationships with suppliers?
I don’t think so, because the reality is their costs have gone down. If it were a situation where we were trying to go back and take something away from them that they cannot give, then that would create tension. It’s in their interests to help VF to be competitive in this environment, and they can’t afford to put any volume at risk because frankly there’s no place else to get it.
Does strategic supplier relationship management make procurement a more significant contributor to VF’s competitive position than the old leverage approach?
Yes, the true value of procurement is delivered at the strategic level, not at the transactional or executional level. The things we are doing with Liberty 1 and Liberty 2, and forming these enhanced strategic relationships, is driving more value and laying the foundation for future value. Not all of our relationships will be strategic. But we are trying to elevate the strategic part of what we do overall, because we think as we go forward that is probably going to be more important than it was in the past. We are going to have fewer suppliers, there will be fewer brand providers like VF, and there will be fewer customers for VF to sell to. We are going to have to learn to interact with each other in a different way.
What has your experience so far in pursuing closer relationships taught you?
One thing is that you have to have shared values, trust and predictability in the relationship. You can only get that at the top of the organisation. Strategic relationships have to be managed top to top. It also means that you have a lot more connectivity throughout the organisation. It’s not just the CPO talking to the supplier’s CEO, it’s also many touch points outside procurement – merchandisers talking to product development, your financial people talking to their financial people, and so on. It requires more investment on both sides to make it work.
The second thing is that we’ve had to educate our internal customers to take a more holistic view of these relationships. People tend to manage the business one programme at a time, so when they need to source they go out and get bids and award it. That’s not the way to do it strategically, because you have shared commitments and, in the case of Liberty 2, you would be figuring out which products can accept which price points. There has to be a much more collaborative mindset to do that.
COMPANY PROFILE:
VF at a glance
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Founded in 1899
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Headquarters in Greensboro, North Carolina
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Chairman and CEO: Eric Wiseman
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No. 335 on Fortune 500 list (No. 2 in apparel after Nike)
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$7.4 billion revenue and $592 million profi t in 2008
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Annual procurement spend: c$4 billion
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44,000 employees
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Sales in 150+ countries
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600 million+ items produced annually
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Manages 650 branded retail stores
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Products: jeans, sportswear, fashionwear, footwear, bags and backpacks, climbing gear
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Brands include: Wrangler, Lee, The North Face, Nautica, Reef, JanSport, Eastpak, Kipling, 7 For All Mankind, Vans, Majestic
Geraint John (geraint.john@cpoagenda.com) is editor-in-chief of CPO Agenda
