Offshore Manufacturing And Distribution

www.foxfiretechnologies.com(678) 445-7763

Foxfire Technologies Corporation

Supply Chain Opportunities for Integrated Manufacturing

and Distribution in El Salvador

Jack Peck

April 2006



References & Sources

• Harvard study – The Future of the Textile and Apparel Industries

– www.hctar.org/pdfs/GS10.pdf

• China Competitiveness & the Future of the Textile Sector in Latin America

– www.iadb.org/laeba/downloads/Annual%20Conference%202004/PPT_ArturoCondo.pdf

• The post-MFA in El Salvador – The Future is Now and It is not Pretty

– www.iadb.org/csramericas/doc/researchinelsalvador.pdf

• Numerous experiences & conversations



Overview of Presentation

• The Threat to El Salvador

• Current US supply chains

• Future supply chain model for store-direct replenishment without using a DC in the US

• Future supply chain model for consumer-direct order fulfillment

• Why this is important to El Salvador



The Threat to El Salvador



The Threat to El Salvador• The textile/apparel industry employs

75,000 people in El Salvador

• This represents 65% of all industrial jobs

• Maquilas represent 65% of all exports

• Maquila jobs are formal and generally provide for social security

• Most jobs are held by women - often single with children




• On January 1, 2005 quotas were removed on all textile and apparel products in WTO countries

• China & other Asian countries began dumping low-labor produced products

• China’s exports to the US grew by an average of 85% during the first 8 months of 2005 (cotton shirts by as high as 250%).

• The Maquila industry in El Salvador is being seriously threatened




• China’s labor rates are much lower• China’s electricity rates are much lower• China has government subsidies that are

masked as loans• China has invested in more technology• The burdened cost of producing a men’s

shirt with 20 standards minutes:– China $1.12 USD– El Salvador $1.85 USD



The Reality of the Threat

• The Multi-fiber Agreement (MFA) ended in January 2005

• During 2004 exports from El Salvador fell by 5.2% and 6,000 jobs were lost

• During the 1st quarter of 2005 exports fell by 3.8%• During the 1st quarter of 2005 twelve Maquilas

folded• Edgar Moreno (Economic Assistant at the US

Embassy in San Salvador) predicted 40,000 – 50,000 jobs will be lost in 2005.



What advantages does El Salvador have?

• Closer proximity to the US market

• China has a 17% average tariff while CAFTA drops this for El Salvador

• CAFTA allows fiber to originate from any CAFTA country, without tariffs

• Unfortunately, apparel products manufactured in El Salvador will still cost more than those from China



So what is the answer?• El Salvador must exploit its geographical advantage

over China• 29% of the cost of a men’s shirt is unrelated to raw

materials and labor – i.e. in other parts of the supply chain

• El Salvador must help to reshape the supply chain, from fiber to retail, to reduce this 29%

• El Salvador can help to reduce the total inventory in the supply chain by more than 50% - a huge savings

• The parts of the supply chain that cause companies to hold inventory are those of transportation and distribution



Current Supply Chain Example



Current Supply Chain Example

• Orders originate in the US

• Textiles are often cut and sent to El Salvador

• Products are manufactured in El Salvador

• Finished products are returned to the US and placed in a Distribution Center (DC)

• Products are pulled from the DC and embellished or prepared to customer needs

• Products are shipped to customers in the US



El Salvador

El Salvador

Current Supply Chain Example 1



Problems• Cycle time from manufacturing to customer

– 3 days to make patterns, cut and pack raw materials– 7 days to ship cut parts– 5 days to sew– 7 days to ship finished goods– 4 days to embellish product– 3 days to ship

• Minimum of 29 days for backordered products to reach the customer

• Most companies are more than 60 days!



Problems

• Costs – – US labor rates for

• Cutting fabric

• Handling & Shipping Raw Materials

• Receiving of Finished Goods

• Inventory movement in DC prior to use

• Embellishment

• Handling & Shipping Finished Products



Problems

• Costs – – Excessive shipping costs to and from USA– Excessive inventory costs to protect against stock

outages

• And the biggest costs of all:– Mark downs on excess inventory at end of season– Mark downs on excess inventory when styles change



Future Supply Chain Model 1

Store Direct Replenishment from Distribution Center in

El Salvador



Future Supply ChainsIntegrated Manufacturing &

Distributionwith Store-direct Replenishment

• Orders originate in the US• Textiles will be created and cut and in El Salvador• Products are manufactured in El Salvador• Finished products are stored in a Distribution Center

in El Salvador• Stores send Point-of-Sale (POS) data to El Salvador• Products are pulled from the DC and embellished• Products are shipped directly to stores in the US



El Salvador

El Salvador

Future Supply Chains Integrated Manufacturing & Distribution



Expected AdvantagesIntegrated Manufacturing & Distribution

• Raw materials are acquired locally– Lower cost

– Faster deliver

– Lower raw materials inventory required

• Fabric will not be cut until the production order is obtained electronically from the USA

• Only small quantities of finished goods need be warehoused to eliminate delays in manufacturing

• Quick response manufacturing lines will address cases in which finished goods are out of stock



Integrated Manufacturing & Distribution

• Finished goods will be warehoused next to manufacturing

• Finished goods will be pulled from inventory for embellishment prior to packing

• Embellishment and packing will be performed with low-cost labor

• Transportation time to most customers is almost the same as within the USA – thus backorder replenishment time can be less than 5 days (not 60 days)

• Shipping costs to the US from El Salvador may be lower cost than cost within the US



Advantages Summary

• Closer proximity of manufacturing to distribution

• Lower inventory levels

• Lower cost labor

• Greater availability of labor

• Extension of “full package” model



Example 2 Incassa C.V. de S.A.

El Salvador

• Contract sewing company with US ownership• Manufactures knitted apparel products for multiple

clients in the USA• Highly skilled, low-cost labor force• 2000 employees (mostly sewing operators)• Traditionally did not integrate Mfg & Distribution



Future Supply Chain Model 2

Customer Direct Distribution



ExampleMyGarb, Inc.

El Salvador• Manufactures and distributes using the web to more

than 300 Universities & Organizations across the US and to sell directly for promotional events



MyGarb, Inc.El Salvador

• Co-located with and uses Incassa for manufacturing• Produces knitted garments

– Long/short sleeve tee shirts

– Golf shirts

– Long/short sleeve sweats

– Pants

– Baby bibs

– Mouse Pads

– Others




• Manufacturing is at the extreme end of “Lean”

• Finished Goods inventory turn time can be less than 8 hours(inventory turns can be more than 350 per year!)

• Quick response manufacturing is used to replenish inventory during manufacturing




• Orders accepted in quantities as small as one unit• Garments can be embellished by

– customization (logos & slogans chosen from predefined set) or

– personalization (using customer uploaded pictures & slogans)

• Embellishment types– Decals– Embroidery– Screen printing– Sublimation printing



Your Company’s Logo



Your Grandkid’s Pictures!



El Salvador

Customer Direct

…



Summary• Integrating manufacturing and distribution can

produce significant savings by– Reducing supply chain participants (chain length)– Reducing transit costs– Reducing handling costs– Reducing inventories– Reducing stock-outages– Increasing inventory turns– Reducing labor costs (particularly if manufacturing is

conducted in other countries)



Why this is Important to El Salvador



The Choices for El Salvador

• Lower labor rates • El Salvador can offer something of value

that Asia cannot offer to maintain current labor rates

• Asia will never get any closer to the US than it is today

• If this can be done then the movement of manufacturing from El Salvador to Asia can be stopped, and in fact, reversed

(NO!)



How can the exodus of manufacturing be stopped?

• El Salvador must offer distribution to US companies to integrate with manufacturing

• Both store direct and customer direct distribution must be offered



Why this is important to El Salvador

• There is a window of opportunity that may close if no action is taken– Relationships with manufacturers in Asia are

difficult to break once they have been made– Once Asia invests in expensive factories, their

governments will likely subsidize the companies to keep them

Offshore Manufacturing And Distribution

Business

Transcript of Offshore Manufacturing And Distribution