Supply Chain Management Final report

The Case Analysis of

Fast Retailing Co, Ltd. (UNIQLO)

Group 3

2B3011 Garcia Mendoza, Jose Manuel

2B4003 Adachi, Hiromitsu

2B4040 Patumma Peankit

2B4047 Senwayo, Lucia Veronica Denis

2B4054 Win Thuzar Than

2B4203 Chuluunbaatar, Bilguun

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Phase Ⅰ: Supply Chain Strategy (Jose & Win) Company Overview (Jose) Fast Retailing’s Competitive Strategies (Corporate Level) Fast Retailing’s Current Financial Situation and Related Problems Competitive Strategies (Business Level) (Win) Branding Strategy

Phase Ⅱ: Regional Facility Configuration (Patumma & Hiromitsu) Regional demand (Patumma) Production Technologies (Hiromitsu) Aggregate factor and logistic costs Tariffs and tax incentives Political, Exchange rate and demand risk

Phase Ⅲ: Desirable Sites (Bilguun) Potential sites Transportation services Utilities Community receptivity to business and industry

Phase Ⅳ: Location Choices (Lúcia) Facility location Raw Materials Supima cotton (Mexico and Latin America) Cashmere and Merino wool Logistic factors

Appendices

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Phase Ⅰ: Supply Chain Strategy (Jose & Win)

Company Overview (Jose) Background of Fast Retailing

Since its establishment in May of 1963, Fast Retailing has grown to become a

truly global company which takes pride in its culture, brands, and network. Fast

Retailing’s line of business resembles that of a “Holding” Company, by controlling and

managing the overall group activities as its main owner. Since its inception in the early

1960’s until 1999, Fast Retailing was consolidating its position in the Japanese market

through organic growth by building a chain of suburban roadside stores and later by

urban stores opening. However during the 2000’s and until the present day, Fast

Retailing’s expansion policy has become more aggressive and international oriented, by

entering the Chinese, European, and American market through means of new-­store

openings and acquisition of brands to increase its brand portfolio. As of 2014, Fast

Retailing owns and manages the following brands:

UNIQLO

GU

Theory

Comptoir des Cotonniers

Princesse tam.tam

J Brand

Fast retailing is divided into three business units for a better performance

managing and tracking. Those three divisions are UNIQLO Japan, UNIQLO

International, and Global Brands (which comprises all of speciality stores of

non-­UNIQLO branded items). Since 2010, Fast Retailing has been increasingly

concentrated in expanding its market reach and profits of the UNIQLO International

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division, while consolidating its position with UNIQLO Japan, and rationalizing its

extensive Global Brands division.

This report will focus on the UNIQLO International division, more in specific its

UNIQLO US expansion campaign.

Fast Retailing’s Competitive Strategies (Corporate Level)

SAP Supply Chain Strategy and Business Model:

Fast Retailing is considered as a Specialty-­store of Private-­label Apparel (SPA),

therefore, and as a holding company, they implement a high degree of control

throughout their estire clothes-­making process (Exhibit 1) . Fast Retailing’s control on its

supply chain extends from design to manufacturing, all the way to the retail. Through

this strategy, Fast Retailing has been able to achieve “low costs” on its final product and

a high degree of flexibility to meet fashion trends. The SPA model also incorporates the

procurement of raw materials, production planning, development and manufacturing, as

well distribution and inventory management. As well, Fast Retailing has created R&D

centers (currently located in Tokyo, New York, and Shanghai) in order to reduce lead

times of product design and development, localize fashion trends, assure quality and

pricing of raw materials, and reduce lead times (specifically with distribution centers and

manufacturers).

Fast Retailing has announced its intention for the short-­term future to open new

R&D centers and full-­fledged product development facilities in Paris, London, and Los

Angeles. It is worth mentioning that Fast Retailing is currently shifting its “overseas

management control” of its retail stores to “local management”. The rationale behind

this change is in order to allow the end-­point of its supply chain to be more responsive

to local needs in terms of product-­availability, inventory management, and

end-­customer satisfaction.

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Lastly, from several public documents we came to understand that Fast Retailing

(as a group) has the following capabilities:

ease of access to financial resources

store operations know-­how

production management and planning

low cost production systems (owned and outsourced with production

partners)

Owned production bases: Japan, China, Vietnam, Bangladesh,

Cambodia, Indonesia, Thailand, The Philippines, Singapore, Sri

Lanka, and India.

M&A Strategy:

Regarding Fast Retailing’s M&A strategy, the company is currently engaged in

active acquisition of brands that demonstrate “potential for global development”,

specifically brand development in the US, Europe, SEA, and South Korea (brands like

Theory, Comptoir des Cotonniers, Princesse tam.tam, and J Brand). The company

seeks to become a top-­tier global competitor in the apparel manufacturing and retailing

industry.

Expansion Strategy:

Brand development in US, Europe, SEA, and Oceania through the opening of

global flagship stores

priority is to expand and establish UNIQLO to the US market

turn UNIQLO US profitable by developing its network to support the

opening of 100-­stores per year on the East and West Coast

Creation of global headquarters that allow the establishment of locally-­managed

stores and networks, reducing operational costs

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create design HQ in NY, E-­Commerce HQ in San Francisco, HQ in Paris

and London

establish strong global R&D centers in NY, Paris, and London that allow

for strategic and local collaboration with business partners

Build top-­class global supply chain

strategically-­locate factory networks, distribution centers, and retail stores

allow the creation of real and virtual market capabilities (top-­class global

direct sales business)

Fast Retailing’s Current Financial Situation and Related Problems

Fast Retailing Consolidated Analysis:

After conducting a quick financial analysis of Fast Retailing Consolidated

operations from FY 2010 to FY 2014 (Table 1) , we came to understand that despite

showing profitability growth in terms of Net Sales (11.16%), Working Capital (23.97%),

and Net Income (4.84%) Fast Retailing exhibits some fundamental problems in its

current operational strategy, namely in how it utilizes its assets and how it manages its

supply chain. These problems are reflected in the decrease of its ROE from FY2010 at

21.24% to FY2014 12.5% (negative growth of 10.26%).

Regarding the asset utilization efficiency of Fast Retailing, it was observed that

its low Asset Turnover ratio had a negative growth of 2.51% (1.61 to 1.41), however this

ratio includes accounts receivables, inventory, and depreciation. By excluding such

accounts and only focusing on the efficiency of the net PPE utilization, we were able to

observe a relatively high and consistent Fixed Asset Turnover ratio (5.04 to 5.35) which

exhibit growth of 1.21%. These two ratios suggest that Fast Retailing manufacturing

capabilities are seemingly efficient. However its RONA (Return on Net Assets)

displayed a negative growth of 10.64% (from 20.2% to 11.15%);; this suggests that Fast

Retailing has serious operational inefficiencies that harm its ability to create long-­term

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value and that they might be rooted in its Fixed Assets accounts (excluding PPE and

Net Working Capital).

Regarding its supply chain strategy effectiveness, it was observed from a Cash

Conversion Analysis that the Days of Inventory Outstanding component, which

measures current inventory levels and how long it will takes to sell, showed a 8.58%

growth rate (from 68.9 days to 103.9 days) suggesting that the company is “piling-­up”

too much inventory as they expand (inventory management inefficiencies). The Days

Payable Outstanding component, which measures how much a company owes its

current vendors for inventory and when the company will pay off its debt, showed a

growth rate of 6.55% (from 24.9 days to 34.2 days) suggesting Fast Retailing inability to

pay off its debt to suppliers in short periods of time and suggesting as well the

postponement of such payments.

In overall, Fast Retailing with its current aggressive expansion policy is creating

operational issues in its supply chain that are reflected in its ability to timely convert its

investment in inventory, assets, and other resource into cash inputs (Cash Conversion

Cycle) from 50.9 days in 2010 to 80.0 days in 2014 (growth rate of 9.47%).

Business Segments Analysis:

After conducting a quick financial analysis (Table 2) of Fast Retailing three

Divisions (from FY 2010 to FY 2014), we came to understand that it's most fast growing

business is UNIQLO International by displaying a 36.0% y/y growth rate in its number of

stores (136 to 633 stores). Net Sales yearly growth of 41.58% contributing to 30% of the

Consolidated Sales (with and expected growth of 40%). UNIQLO International showed

a fairly stable EBITDA margin (reflects core operating profitability after removing effects

of depreciation and amortization) despite its 1.65% negative growth rate suggesting the

existence of operational problems (assets utilization, management overheads, etc.).

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By taking a closer look at the opening of new retail stores of UNIQLO

International among its different locations (Table 3) , we were able to determine that The

Philippines (92.0% growth), US (90.4%), Malaysia (80.0%), and Thailand (71.0%)

exhibit the fastest growth rates. Suggesting these locations as future targets of Fast

Retailing M&A and expansion policies.

For this report we will focus on developing a supply chain strategy for the

growing business of UNIQLO International at the US location.

Competitive Strategies (Business Level) (Win)

UNIQLO is a Japanese causal wear manufacturer and retailer under a division of

Fast Retailing Co.Ltd and providing customers with high quality, fashionable, affordable

and comfortable lifewear,every day clothes, and becoming a truly global company.

UNIQLO’s Strengths

Seeking the world’s best materials – UNIQLO is offering fashionable clothing

made by luxury materials with reasonable prices because they can directly negotiate

with global materials manufacturers and secure mass-­volume orders with low costs.

Creating new markets with new materials – Another unique factor is the ability

of creating new products by using new functional materials to provide fresh value and

affordable price to our customers. As an example, they developed HEATTECH items

with Toray industries and received acceptance from customers.

Unique Clothing and Focusing on Fast Fashion – UNIQLO differentiates itself

from other companies by developing well-­designed unique products and closely focus

on world’s fast fashion and quickly make adjustments to production to reflect the latest

sales trends.

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Control over the products – Under control, we would like to describe with two

facts;; Quality and Production Control and Inventory Control. UNIQLO always

emphasizes its product quality with skillful employees and visits partner factories every

week to check the production status and resolve the issues. Moreover, customer’s

concerned quality issues are valued and conducted improvement by quickly

communicating with responsible production departments.

For the inventory control, they maintain optimum level of inventory by

monitoring sales and stock on a weekly basis and dispatching necessary inventory and

new products to fulfill orders.

Effective Marketing – UNIQLO conducts seasonal promotion campaigns for the

core products such as fleece, Ultra Light Down, Airism and HEATTECH by advertising

its products’ unique qualities and features on TV and in other media. At the end of each

season, there are the timing of markdowns and limited period sales (typically 20-­30% off

the regular price) to ensure that inventory sells out.

Widespread Stores in Japan and outside Japan -­ There are 846 stores (direct

run stores-­ 816 and franchise stores-­30) in Japan by May 31, 2015 and 633 stores

outside Japan including 374 in Greater China (Mainland, Hong Kong, Taiwan), 133 in

South Korea, 80 in Southeast Asia and Oceania. They have enjoyed rapid expansion in

Asia and are developing a full fledged store network in US. They are expanding in

E-­Commerce by offering Online sales in Japan and also in Greater China, South Korea

and US.

Their Customer Center received more than 100,000 comments and requests annually

and act on them with appropriate departments to improve products, stores and

services.

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Branding Strategy

All employees are encouraged by Group CEO to embrace Fast Retailing’s

Japanese qualities as integrity, heartfelt consideration of customer needs and a

commitment to superior quality and services. Actually, UNIQLO is offering simple,

well-­designed clothes to be affordable and accessible to everyone.

To be recognized, it conducts Wheelchair Tennis Tour and supports players with

high quality tennis wear and also sponsors sporting events worldwide. It also fulfills

responsibilities to society and it can make UNIQLO to be well-­known and successful.

Product Portfolio

UNIQLO’s basic merchandising concept is to offer clothes that can be worn by

anyone, anywhere, anytime and they perform as their slogan “ Made for All”.

The significant and main products are classified as UT collection, UJ collection

and Fleece collection for both genders. There are many different T-­shirts with various

colors and designs in UT collection, different color and style jeans in UJ collection and

wide ranges of colors and designs with rich patterns jackets under Fleece collection.

Competitive Situation

The group engages in intense competition with other companies in the same

industry both in Japan and in other markets. In Japan, main competitors of UNIQLO are

H&M, Zara and GAP and their customers are always discriminating about products,

prices and services.

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Phase Ⅱ: Regional Facility Configuration (Patumma & Hiromitsu)

Regional demand (Patumma) Background of UNIQLO in US

In 2005, the company launches in the United States opening 3 stores in New

Jersey shopping malls. In 2006, the company was forced to rebrand their American

stores due to dwindling sales.

Through communication with employees and customers, mid-­management

discovered that the low sales were due to the unpopularity of the loose fitting apparel.

Typically at the time, apparel brands like The Gap and Banana Republic catered to a

universal fit, “with a looser, relaxed-­in-­the-­middle fit”. UNIQLO decided to experiment by

introducing slimmer Japanese sizes. As a result, brand equity and location sales rose.

The company is not usually concerned with to change their brand line for fads or

short-­term trends, but the skinnier and slimmer fits’ demand in apparel has now become

a new universal fashion norm. UNIQLO’s timeless, functional apparel, with its

combination of superior quality and low prices, has proven recession proof on two major

occasions. During the decade long recession in Japan throughout the 1990s, UNIQLO

succeeded in dominating the market as the go to apparel store for price sensitive

shoppers. During 2009 global recession , their profits rise 17%. Up to now, UNIQLO has

1400 stores worldwide and 40 stores in the United States.

Positioning

In the United States, stores are located currently in high traffic urban areas and

major shopping malls in the core of large cities. UNIQLO often positions their flagship

locations nearby competing flagship clothing stores. For flagship stores, UNIQLO is able

to gain brand exposure, and showcase their low price, high quality apparel among the

other top clothing retailers around the world.

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Expanding UNIQLO's Presence in US Markets

At the end of August 2014, UNIQLO is now focusing on another promising

location for future expansion: the United States.They have now reached a point where

they can begin building a genuine store network in the United States. They aim to

expand our store network in the United States to 100 stores over the next few years by

opening between 20 and 30 new stores each year.

Production Technologies (Hiromitsu)

It is assumed that UNIQLO manufactures clothing mostly in China. However, it

can be argued that North America, either the US or Mexico, will be more preferable to

manufacture rather than China in terms of several aspects discussed further hereinafter

given the company’s expanding strategy in the US market.

As discussed earlier, UNIQLO’s strategy is to enjoy economies of scale by

producing a narrow variety of exceptionally high quality basic items such as

“HEATTECH”, “Airism”, extra fine cotton T-­shirts. Because UNIQLO’s strong partner,

Toray Japanese chemical manufacturer, produces chemical raw material for Heattech

and Airism, the company itself does not require special technology. Therefore, the

production method is labor intensive rather than depending on high-­tech equipment and

technologies. Now that labor cost and other manufacturing cost in China have been

dramatically increasing, the Boston Consulting Group points out that China has lost a

competitive advantage of cheap labor cost as the world’s factory (Exhibit 2). All things

considered, it would not be uneconomical for UNIQLO to open a manufacture in North

America.

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Aggregate factor and logistic costs

Compared to current distribution most likely from China, the US and Mexico are

more promising as a manufacturing location for several reasons. Because of its

closeness to US market, transportation cost from factories either in the US or Mexico to

warehouses in the US will be significantly lower than that incurred from China to the US.

Moreover, it will contribute to being more responsive to the demand in the market

compared to current distribution from China. For instance, UNIQLO can adjust

production according to the actual demand. In addition, this can reduce excess

inventory that UNIQLO is facing now as well as inventory cost. According to

Chinaimportal website, it takes roughly one month to deliver products from China to the

US. This means manufactures need to produce at least 1-­2 months before UNIQLO

stores in the US start to sell them. Therefore, there is a big time lag between production

and sales. This time lag has a negative impact on the company’s cash flow. As for raw

material, taking cotton as an example, the US is the 3rd biggest cotton supplier and

Brazil is the 5 th biggest in the world according to the The Statistic Portal. Consequently,

the shipping cost will be inexpensive if UNIQLO can find a good supplier at a

reasonable price either in the US or Brazil rather than buying from Asian countries such

as China, and India.

Tariffs and tax incentives

Suppose current products sold in the US are made in China, and that the US

government imposes 15.9% tariff on women’s or girl’s blouses, shirts and shirt-­blouses,

knitted or crocheted according to the article in Examine China. The duty rate varies

according to commodity;; for example, the rate for men’s or boys’ shirts, knitted or

crocheted items is 19.7%. Furthermore, these tax system and regulations could

significantly change in the future. However, if UNIQLO produces either in the US or in

Mexico, the company can enjoy advantages that NAFTA brings to the company and

minimize the risk of changeable tax systems and regulations controlled by other

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governments . This is because NAFTA seems to be by far more stable than tax system

and regulations in China, being based on mutual agreements among the US, Canada

and Mexico.

Political, Exchange rate and demand risk

In terms of political risk, it would be a good idea that UNIQLO starts to produce

outside Asia to reduce heavy manufacturing dependence on Asia. Even if there is a

political tension or crisis in Asia, the company will be highly likely to be able to continue

producing if the company has manufacturing facility in North America.

As for exchange rate, US dollar is more preferable than Mexican peso because

USD has fluctuated less than Mexican peso has for the last 10 years. As of 2015, US

dollar has experienced 8% increase against Japanese yen since 2005, whereas

Mexican peso has devalued 22% against Japanese yen. As this shows, US dollar is

more stable.

Regarding the demand and market for clothing in general, it will increase rather

than shrink nor be a problem with UNIQLO as Exhibit 9 shows. First, the population in

the US is still growing and there is potential for further growth. Secondly, unlike H&M

and Zara, UNIQLO focuses more on basic clothing items with exceptionally high quality

such as down jacket, jeans and underwear rather than fashion-­oriented items.

Therefore, the change of fashion trend will not affect UNIQLO products demand as

much as it will other competitors’ demand.

Phase Ⅲ: Desirable Sites (Bilguun)

Potential sites

To choose favorable sites to open manufacturing factories, which support the

U.S. retail business of UNIQLO, proximity to U.S borders, lower labor cost and suitable

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hard and soft infrastructures are necessary. In order to lower the transportation cost and

to achieve effective response time, the factories should be located in proximity to U.S.

Regarding this situation, we have chosen Mexico as one of our suitable sites to

expand UNIQLO’s factories in terms of its global expansion plan. Especially, the

northern parts of Mexico where is demographically closer to U.S. would be the best

choice.

As our desirable sites in Mexico, the states of Tamaulipas, Coahuila, Chihuahua,

and Baja Califórnia where all are located in the north of Mexico.

Outsourcing to Mexico is becoming more attractive compared to other popular

outsourcing countries such as China from the perspective of U.S due to its closer

proximity, democratic government, and stronger relations between the two countries.

Infrastructure conditions in Mexico have been attractive enough for the

manufacturers and shippers who are setting Mexico as a production center, market, and

logistics channel to the rest of North America. Considering those of infrastructure

condition, the northern parts of Mexico is potentially favorable with establishing cross

border supply chain network with U.S.

Transportation services

In terms of logistics view of supply chain between U.S. and Mexico, land

transportation is the most major option regarding the cost efficiency.

In Mexico, the road network is the most common used infrastructure which is

composed of 370,000 km of toll roads, in which integrated with freeways, highways,

roads and trails that allow the accessibility to almost all locations in Mexico. Mexico

contains three types of highway system;; federal highways, state highways, and rural

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roads. Under there, the federal highway are that connect with other roads from adjacent

countries. There are four major highway routes that across the U.S. borders, and they

are located in our selected states. These highways have become wider and shorter in

time, so that it makes shippers drive safer and more efficient.

Exhibit 3: Mexico’s National Highway Network as of 2013

The railway transportation system in Mexico consists of 26,727 km of railways.

The freight railway system is owned by the national government and operated by

several independent carriers. Currently, 15% of both domestic and international freight

transit is operated with rail carriers. However, there are more potential exists that we

can expect.

In Mexico, there are two major freight railroads operators: Ferromex (FXE) and

Kansas City Southern de México (KCSM). In addition, railways links in freight train with

adjacent country U.S. matches its railway system in Mexico as they have same

standard gauge 1,435mm (4 ft 8 1⁄∕2 in).

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According to Bureau of Transportation Statistics from United States Department

of Transportation, the total number of incoming truck or rail in 2013 is 5,031,783 with

4,041,207 in top 5 gateways and 837,326 with 827,632 in top 5 gateways respectively.

Table 4: Figures of Incoming Containers Through Border Cities (as of 2013)

Utilities

Water supply in Mexico has gradually improved for decades. According to the

World Bank, percentage of population with access to water is 94.9% in 2012, which are

better rates than China 91.9% and India 92.6%.

According to the World Bank, Mexico’s percentage of population with access to

electricity was 99.2% in 2010, which is relatively higher value compared to the world

standard.

Community receptivity to business and industry

As a manufacturing factory, response time should be shortened so that

warehouses should be located in proximity of these factories. In Mexico, there are

adequate numbers of Mexico-­based sophisticated warehousing facilities across the

counties. Thus, new manufacturing factories of UNIQLO can run the supply chain

without struggling.

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The number of industrial parks in Tamaulipas, Coahuila, Chihuahua, and Baja

California are relatively high. Relatively, as the industry-­oriented area, there are

numbers of warehousing facilities in the states located in northern parts of Mexico.

Exhibit 4: Distribution of Industrial Parks in Mexico(as of 2013)

Workforce

According to UN Human Development Report and Individual Statistics

Departments, Mexico marked 93.4% in total (93.7% in male and 93.1% in female) of

literacy rates for all people aged 15 and over. Secondary school enrollment rate was

86% in 2012, which we can expect to hire enough numbers of educated employees.

According to the latest data of World Bank, Mexico’s estimated total population is

122.3 million in 2013. Among these, total workforce is 53,895,633 people, which are 11 th

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largest number in the world. Regarding this favorable amount of workforce with lower

labor cost, Mexico is suitable place to establish factories.

Phase Ⅳ: Location Choices (Lúcia)

Facility location

Currently, 90% of UNIQLO factories located in China and the remain 10% Asian

countries Vietnam, Bangladesh, Cambodia, Indonesia, Thailand, Philippines,

Singapore, Sri Lanka and India. Because all these factories are contractor based,

UNIQLO sends 170 of its own people to monitor and provide guidance to these factories

with regard to manufacturing quality, safety, trueness to the design, and manufacturing

volume. In addition, UNIQLO sends a team of specialists called takumis, each with 30

years or more experience in Japan’s textile industry, to these factories to transfer

know-­how . Even with all manufacturing facilities located in Asia, UNIQLO have received a

far greater response from American customers, by booming aggressively the demand

for its products.

To respond to increasing demand, UNIQLO U.S. has been aggressively opening

new stores across the United States, expanding its presence from New York, to New

Jersey and Connecticut, Boston, Philadelphia, and San Francisco and Los Angeles on

the West Coast, bringing the network to 25 stores at the end of August 2014.Going

forward, the company intends to build an initial network of 100 stores by steadily

opening 20 to 30 stores annually.

Exhibit 5 below shows increasing net sales. Moreover, as UNIQLO’s sales

network has become global, it has worked to expand its production operations to other

locations. Looking to the future, UNIQLO would be working to reduce the risk of

over-­concentrating production in China as well as the cost of production.

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Exhibit 5: Historical Perspective of UNIQLO’s Net Sales

While the demand for UNIQLO products in United States tends to increase, the

company faces poor inventory management and time to response. In order to improve

inventory management, responsiveness and keep cost effectiveness production,

UNIQLO should establish a factory closed to United States, where raw materials are

available, labor cost is low and communication infrastructure and transportation are

favorable.

Chihuahua is located in Northwestern Mexico and is bordered by the states of

Sonora to the west, Sinaloa to the southwest, Durango to the south, and Coahuila to the

east. To the north and northeast, it has a long line with the U.S.–Mexico border adjacent

to the U.S. states of New Mexico and Texas. It is the largest state in Mexico by area .

One of the reasons why UNIQLO should establish a factory in Chihuahua City is

its proximity to the United States. Without paying the higher costs needed to

manufacture in the United States, the Northern state of Chihuahua represents an

attractive option. Additionally, Chihuahua is a major cotton producer in Mexico, and the

city has large experience in diverse manufacturing industry. Additionally to easy access

to raw material, low labor cost, density population and favorable communication

infrastructure are the supporting key drivers.

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UNIQLO uniqueness is product innovation. The factory to be established in

Chihuahua would be located close to its New York R&D and another to be opened in

Los Angeles. The R&D staff from Los Angeles would be responsible for quality and

production control, maintain close contact between the partner factories in Chihuahua

and to monitor progress of production as well as identify problems. Similar procedure

has been followed in factories located in Asia.

Raw Materials

UNIQLO is able to offer reasonably priced garments made with luxury materials

such as cashmere, Supima cotton, merino wool and premium down. Originally, those

materials, especially cashmere, are expected to be expensive, but UNIQLO is able to

negotiate directly with global materials manufacturers and secure mass-­volume orders

at low cost.

Adding manufacturing capacity in Chihuahua , it gives advantage for UNIQLO not

only in point of view of transportation cost to end customers but also in terms of easily

access to raw materials. All materials needed to produce UNIQLO clothes can be

supplied internally in Mexico and from Latin America at a relatively low cost.

Supima cotton (Mexico and Latin America)

Organic cotton production in Latin America began in Peru in the 1980’s and has

since grown to include: Argentina, Brazil, Nicaragua, Paraguay and Peru. In this region,

farmers are keenly concerned with ensuring their food security. Small farmers are

particularly vulnerable to low prices and the global trading environment for both

conventional and organic cotton.

Inside of Mexico, cotton is most important commercial crop, second in value after

corn. Six districts in the northern borders states, Mexicali, Juarez, Conchos, Matamoras,

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Don Martin and Laguna account for 90% of the total production, the remainder is widely

scattered through a dozen states.

Exhibit 6 illustrates that the major cotton producers are concentrated in the

northern part of the country and Chihuahua, the leading producer of cotton with 58.7 % ,

followed by Baja California with 20.3 % , Coahuil a with 12.9 %, Sonora 4.8 % , Durang o

with 2.3 % and Tamaulipas with 1.0 % .

Exhibit 6: Cotton Producing States as per Government Report (2010)

Cashmere and Merino wool

Mexico is known as one of major international player of cashmere and wool

production. Located in Mexico’s capital city, Santiago Textil has focused on

manufacturing cashmere and wool used to tailor men’s suits, for over 100 years.

Santiago Textil’s competitive advantage lies in its cost efficiency, its innovation, its

improvement of product quality and, above all, its long process of adaptation to meet its

customer's needs. The company has diversified its range of textiles to meet the needs

of the fashion markets. Santiago Textil has explored various other areas: ladies’

fashion, uniforms, felts for billiards tables and casinos, bedspreads, blankets and

upholsteries, among others.

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With easy access to raw materials at relatively low prices, UNIQLO might

maintain or reduce the production cost, comparing to China. Once cotton is available in

some Latin American countries, UNIQLO can easily negotiate the cotton acquisition

price with Mexican producers and thus lowering the production cost.

Additional to raw material access, Mexican manufacturing has a significant

advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S.,

which are exceptionally low because of a glut of supply on the market. China pays from

50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over

China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.

Exhibit 7: Mexican Manufacturing Labor Force Illustration

UNIQLO production process is high labor intensive. Mexico is beginning to beat

China in low labor manufacturing cost. Manufacturer wages, adjusted for Mexico’s

superior worker productivity, are likely to be 30 percent lower than in China by 2015.

China’s wages have soared. They were about one-­quarter as high as Mexico’s in 2000

but are catching up rapidly and tended to be slightly higher during 2015. Also labor

productivity remains higher in Mexico, even though the gap is narrowing. The crossover

point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity)

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grew to equal those in Mexico. By the end of 2015, Mexico will be around 29 percent

less expensive.

During times of global financial downturn, companies look to find ways to reduce

costs without sacrificing the quality of their goods. This has proven to be a real

advantage for areas like Chihuahua, where the average cost of manufacturing labor in

the region is around $6 dollars an hour. UNIQLO can take advantage of this low labor

cost.

Logistic factors

UNIQLO warehouse in US and outbound logistics cost, from UNIQLO warehouse

in US to stores, would reduce. Currently, products are shipped to UNIQLO's

warehouses in Japan from the partner factories overseas. UNIQLO uses a third-­party

transportation service provider to ship merchandise from the warehouses to UNIQLO

warehouse in US and finally to the stores stores in USA.

Since there is a significant increasing demand in US market and availability of

raw materials in Latin America, it may be better to locate manufacturing facilities closed

to North American customers. So, the inbound logistics cost (from manufacturer in

Mexico to UNIQLO warehouse in US) and outbound logistics cost (from UNIQLO

warehouse in US to stores) would reduce.

Due to favorable geographical location close to US, UNIQLO can use tracks to

transport merchandise to central warehouse in US. The transportation cost might be

relatively high comparing to shipment from Japan to US, when UNIQLO set contract

with manufactures in China and other Asian countries.

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Exhibit 8: Design of Proposed Supply Chain for UNIQLO International US

Briefly, the current distribution network used by UNIQLO when manufacturers are

located in Asia might change and the great difference is that the company will not need

to ship merchandise from Japan to US.

Table 5: Merits and Demerits of Manufacturing Locations

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Mexico has more free-­trade agreements than any other country. The North

American Free Trade Agreement gives UNIQLO access to U.S., as well as to Canada.

Additionally, Mexico has free-­trade agreements covering 44 countries. These

contributed to low transport cost, comparing to current chain. The trade agreements can

also contribute to quickly expansion of UNIQLO brand to some Latin American

countries, with strong purchasing power, such as Brazil.

Appendices

Exhibit 1: Fast Retailing SAP Business Model

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Table 1: Fast Retailing Consolidated Performance (FY2010 -­ FY2014)

Table 2: Fast Retailing Business Segment Performance (FY2010 -­ FY2014)

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Table 3: UNIQLO International Stores Opening (FY2010 -­ FY2014)

Exhibit 2: Comparison of Top 25 Export Economies (as of 2014)

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Exhibit 9 : Annual sales of Clothing and clothing access in the US

(2013 Annual Retail Trade Report, United Census Bureau)

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References

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