AMERICAN APPAREL PRODUCERS’ NETWORK -...

AMERICAN APPARELPRODUCERS’ NETWORK

RE-ENGINEERING YOUR SUPPLY CHAINMike TodaroNew YorkFebruary 3, 2009

It is how you affect business that determines your value.....

It is not do we have good laws,....do you have work?....are you staying in business?....are you making money?

OVERVIEW

1.PIECES – The Supply Chain

2.PROCESS – The Factory

3.PRODUCT ‐ Retail

PIECES – The Supply Chain

“What you see on our retail storefloor is the result of hundreds ofsupply chains.......”

HOW IS SOURCING BALANCED?China and not‐China

AAPN Members SurveyedRETAILERLands EndNordstromKohl’sBRANDAramarkCarharttDickiesJockeyKellwoodLevi’sLion UniformOxford IndustriesPVHStandard TextilesSuperior UniformTimberlandVF FACTORYArgus GroupGreco ApparelKoramsa Palm ApparelRocedes

AGENTFashion SourcesSource-IFABRICBeal Mfg.BuhlerCarmel KnitsCarolina CottonContemporaGreen TextilesHamrick MillsMilliken Vertical TextilesYARNBuhler Yarns LenzingRadiciSpandexTuscarora YarnsUnited KnittingTECHNOLOGYGerberLectraTradeCardTukaTech

TRIMA&EAsheboro ElasticsAvery DenisonCOATSFinotex Ideal Fastener Premier QST YKK SHIPPINGCaribExCEVA LogisticsCTSCrowleyDHLMaersk Seaboard MarineUPSINDUSTRYBureau VeritasC.I.T.SGS Testing

WHAT HAPPENED?Yesterday was “Easy”

--The Industry Changed1.Quota system eliminated 2.Asia (China) redefined global competition 3.More styles, smaller orders4.Greater emphasis on speed-to-market5.Fewer and bigger brands and retailers 6.Shift of risk to factories7.From CMT (FOB) to Full Package (LDP)8.More sophistication in sourcing 9.Going factory-direct

The Big Four Criteria1.Speed to Market

– infrastructure

2.Access to Raw Materials – cycle times and financing

3.Flexibility– products with margin

4.Cost Competitiveness – company and country

SUPPLY CHAIN: “There is extreme value in looking further back into the supply chain into raw materials management”

SPEED TO ‘MARGIN’:“You have to be a SPEED thinker. You have to build SPEED into your corporate culture”

PARTNERSHIP:“... most suppliers are capable of quick response if their customers commit to capacity and raw materials. The occasional losses appear to be more tangible than the far greater opportunity losses due to markdowns and stockouts at the other end of the supply chain”.

INFORMATION:“We preach to the brand and retailer that they should involve us early in the game. They wait too long. They sell, then PO to factory, then PO to knitter, then PO to spinner. Days are lost.

The spinner just needs total pounds to spin”.

RESPONSIBILITY:“I would need in place … a person… logged into a whatever collaborative software is used … an employeededicated to facilitating the informationflow.”

RELATIONSHIPS:“...The days of beating up your suppliers for price concessions are dead. It leads to constant supplier turnover, decreased service levels, and damaged relationships”.

EXPERIENCE:“Since the Brand/Retailer does not own manufacturing plants any longer, there are no more experienced factory managers who understand operations”

Garment Value Chain AS IT USED TO BE Under the Quota System

2000 Retail Stores

Retail DC Store Buyer Importer Agent Local Offices Factories

Post ProductionDistribution to Branches

Pre-ProductionTech DesignFabric DevelopmentTrim DevelopmentRaw Material PurchasingPattern MakingSamplesLocal TransportLOC PaymentCredit (if any)

Post ProductionShippingCustoms ClearanceDuty PaymentLocal Transport

ProductionCommunicationOrder TrackingInspection

Post ProductionShipping

ProductionCMT(Many just MT)FOB

Pre-ProductionTrend AnalysisConceptDesign

New Value Chain: Factory Responsibilities Changed Drastically

2000 Retail Stores

Retail DC Store Buyer Factories

Pre-Production ProductionCollaborative Trend Dev. CommunicationsCollaborative Concept Order TrackingCollaborative Design RM PurchasingTech Design CMTFabric Development InspectionTrim Development Floor Ready PrepPattern Making Post-ProductionSamplesLocal Transport Post ProductionLOC Payments LDPCredit (if any) Distribution to Stores

Customs ClearanceDuty

Pre-ProductionCollaborative Trend AnalysisCollaborative ConceptCollaborative Design

PROCESS – The Factory

“None of us is as smart as all of us”

A CAFTA Producer’s Program Flow

ProducerProducer

Trading DivisionTrading Division

Sewing Factory Sewing Factory

ClientClient

Mill (USA)Fabric and

Trims

Cut Piecesand Trims

Invoice Full Package DDPImp. of Record: Logistics Division

ExportFinished Product

Invoice Full Package

Flow of Goods

Invoice

TRIMS (USA)

Invoice Sew + Laundry

Invoice Cut + Transportation

Invoice Fabric FOB Mill

Invoice Trims (USA) + Fabric

Logistics

Local Trims

Invoice Trims

Invoice Trims

Cutting DivisionCutting Division

Laundry Supplier

Finished Product for

Laundry

Washed Finished Product

InvoiceLaundry

Finished Productin Client’s DC

Trims

Factory Selection Criteria1. Strong product development and design2. Technically competent3. Capable multiple product in multiple fabrics4. Financially sound5. Good communication flow (email, no faxes)6. Appropriate infrastructure 7. Have and follow a compliance program8. Have a quality assurance program9. Must be "right sized"

It Starts with DesignThe Forgotten 85% of the Process

Friedman, “Today, what you make is quickly copied. But how you engage your customers, how you keep your promises and how you collaborate with partners,that’s not so easy to copy, and that is where companies can now really differentiate themselves”.

It Starts with DesignDesign is the ultimate consultative selling, the ultimate ‘us’

Barbara Zeins, "There are lots of companies who make clothing.But it is the design element that gets you working outside thecost sheet. The product is the key....If I cut as late as possible,I am always better off. In fact, when I track this with my customer,I always watch the mark downs decline”.

9 BIG FAT GARMENT LIES1. Vendors are substitutable 2. There is no cost in setting up a new vendor 3. Costs are linear, increasing in direct proportion

to quantity produced 4. Last years performance is a good prediction

of next year’s performance 5. Your people are a variable cost -- when there is

a downturn in business just lay them off 6. Customization is always expensive 7. All costs are either fixed or variable 8. As long as you are competitively priced you will survive 9. The only way to lower product costs is

through cheaper labor or materials

Time to rethink offshoring? “Consider sharply scaling back offshore production plans and bringing manufacturing back or close .... determine the total landed cost of each productproduced offshore, understand the shifting trade-offsbetween cost savings from offshoring (such as lower

wages) and rising logistics charges”.

“The greatest problem solvers today are the factories”

“You’ll make money from the factory you pick”

Advantages of ‘Near Sourcing’1. Ability to react quickly to home runs

– sell more of what’s hot, drop what’s not2. Lower inventory levels

- more turns, lower carrying costs, faster pipeline3. Lower markdown risk

– attack markdowns and stockouts, dynamic inventory4. Lower fashion risk

– closer collaboration, cut later, make what’s selling5. Higher product success

- more relevance, more visits, more colors and mix6. Better reaction to supply chain shocks

- proximity, same time zone, common language

PRODUCT – Retail

“the faster the turns, the more importantthe data and the harder it is to get itright. This is no time for amateurs, youhave to really crunch the data.”

How accurate is our

misinformation?

Threats – from one’s annual report.....competition .....consumers .....vendors .....foreign sources .....loss of key personnel .....information systems .....failure to react to fashion trends.....(there might even be a recession)

“What I admire about Zara is their ability to charge a fair price for what they sell. They do this by creating a beautiful product as quickly as possible then bring itto a customer who has money to spend and knows they are getting a fair price and having a great shopping experience. Zara has built a huge barrier to entry by anyone else in their space”.

Andrew Grossman, CEO, Georgia Armani, USA

Zara overtakes Gap to become world's largest clothing retailer

...Beloved by proponents of fast-fashion,

...Zara's recorded a 9% increase in sales

...through innovative management and logistics techniques,

...time is the principal factor to take into account,

...more so than the costs of production."

NEW RETAIL GOALSDo You Agree?

Product developmentSmaller ordersMore frequent deliveryFaster cycle timesCloser productionFloor-ready merchandiseStrategic partnerships

STRATEGIES“.....retailers want speed to market. They want to shift product development to the factory. They really need to know the cost of one week in their cycle”.

Attack MarkdownsSource Factory DirectNear Here vs. Far EastMore Trials, fast, constantFlexible LogisticsShared InventoryCommitment to Fabric

Tom Peters .RE-IMAGINE!: Business Excellence in a Disruptive Age“If you don’t like change, you’re going to like irrelevance even less.”

Slow but sure.......fast but sureTechnology supports change.......technology drives changeMeetings as scheduled.........AAPNetworks as neededSame old gang.......ever expanding AAPNetwork Technology links everyone.....an AAPNetwork of everyoneMinimize expense.....maximize value addManufacturing rules.......the supply chain is seamless A sales department.......everyone is the sales department Information: need to know........information: want to share

HTS CODE:

16.00%

12000

17404746

60

Womens Fashion Matte Jersey DressDR China

FABRIC yieldTOP FAB & TRIM 56.5 3.60$ 2.50 9.00$ 9.00$

9.00$ 9.00$

LABOR AND OVERHEAD0.25$ 0.13$ 9.00$ 6.75$ 9.25$ 6.88$

FREIGHT, DUTY AND CLEARANCE

-$ 2.54$ QUOTA -$ -$

0.15$ 0.40$ 0.15$ 2.94$

18.40$ 18.81$

Direct Costs

CuttingSewing (.$.15/SAM)

Duty rate from AsiaAssume Short SupplyAssume 40 foot containerUnits per Container:

Puerto Plata to MiamiShanghai to MiamiSAM VALUE

Total Direct, Manufacturing and Country Costs

Manufacturing Costs

Duty

Freight and ClearanceCountry (Macro) Costs

HTS CODE: 6109.90

32.00%

30000

17404746

15

Poly Span (MMF) Fashion TopDR Asia

FABRIC yieldTOP FAB & TRIM 60 3.90$ 1.25 4.88$ 4.88$

4.88$ 4.88$

LABOR AND OVERHEAD

0.05$ 0.03$ 1.80$ 1.35$ 1.85$ 1.38$

FREIGHT, DUTY AND CLEARANCE

-$ 2.00$ QUOTA -$ 0.29$

0.06$ 0.16$ 0.06$ 2.16$

6.78 8.41$ Total Direct, Manufacturing and Country Costs

Manufacturing Costs

Duty


Direct Costs

CuttingSewing (.$.12/SAM )

Duty rate from Asia

Assume 40 foot containerAssume Short Supply

SAM VALUE

Units per Container:

Puerto Plata to MiamiShanghai to Miami

Duty rate from Asia 32.00%

15000

Puerto Plata to Miami 17404746

45

Man Made Fiber Yoga Top

DR AsiaFABRIC Price YieldTOP FAB,LINING, TRIM 56.5 6.00$ 1.25 7.50$ 7.50$

7.50$ 7.50$

LABOR AND OVERHEAD0.25$ 0.156.30$ 4.73$

6.55$ 4.88$

14.05$ 12.38$ FREIGHT, DUTY AND CLEARANCE

-$ 4.08$ 0.29$

0.70$ 1.89$ 0.70$ 5.97$

14.75$ 18.35$

Direct Costs

CuttingSewing (.$.14)

Assume 40 foot containerUnits per Container:

Container Freight to MiamiCountry (Macro) Costs


Manufacturing Costs

Duty

Shanghai to MiamiSAM VALUE

Assume Short Supply

HTS CODE: 6109.10

16.50%

36000

17404746

15

SAM VALUE 6

Cotton Tee Shirt DR HONDURAS Asia

FABRIC yieldTOP FAB & TRIM 56.5 1.50$ 0.50 0.75$ 0.60$ 0.60$

0.75$ 0.60$ 0.60$

LABOR AND OVERHEAD

0.05$ 0.05$ 0.03$ 0.72$ 0.72$ 0.54$ 0.77$ 0.77$ 0.57$

quota

1.52$ 1.37$ 1.17$ FREIGHT, DUTY AND CLEARANCE

-$ 0.19$ QUOTA 0.18$

0.05$ 0.05$ 0.13$ 0.05$ 0.05$ 0.32$

1.57$ 1.42$ 1.67$

Puerto Plata to MiamiShanghai to MiamiSAM VALUE

Duty rate from AsiaAssume Short SupplyAssume 40 foot containerUnits per Container:

Direct Costs

CuttingSewing (.$.12/SAM vs $.15/SAM VS. $.06/SAM)



Manufacturing Costs

Duty

Duty Free for CaftaDuty Rate from Asia: 8.4%Duty Rate from Columbia 18% Materials + Labor40 foot container: 16,000 units by Ocean

Girls Woven DressFABRIC p/yrd yield EL SAL COL DRDRESS POPLIN PRINT 56 2.25$ 9.75 21.94$ 21.94$ 21.94$ WAIST POPLIN DOT 58 2.50$ 2.60 6.50$ 6.50$ 6.50$ RUFFLE NETTING 54 0.85$ 9.00 7.65$ 7.65$ 7.65$ LINING BATISTE 58 1.00$ 1.25 1.25$ 1.25$ 1.25$

TRIM 37.34$ 37.34$ 37.34$ BOW 4" H X 2"T hc DZ 1.59$ 1.86 2.96$ 2.96$ 2.96$ RIBBON 1/2 " GROSGRN YRD 0.13$ 6.00 0.78$ 0.78$ 0.78$ ZIPPER STANDARD PC 0.18$ 0.05 0.01$ 0.01$ 0.01$ LABELS etc STANDARD DZ 6.00$ 1.00 6.00$ 6.00$ 6.00$

9.75$ 9.75$ 9.75$ 47.08$ 47.08$ 47.08$

LABOR AND OVERHEAD4.50$ 4.50$ 4.50$

27.84$ 34.80$ 27.84$ 5.50$ 6.68$ 5.50$ -$ -$ -$

37.84$ 45.98$ 37.84$

FREIGHT, DUTY AND CLEARANCE6.58$

3.72$ 10.44$ 1.56$ 3.72$ 17.02$ 1.56$

88.64 110.09 86.48

7.39$ 9.17$ 7.21$ per unit

FinishingManufacturing Costs

Duty

CuttingSewing (.$.12/SAM vs $.15/SAM)

Labor Overhead

Direct Costs



“None of us is as smart as

all of us”

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