Reshoring: Dealing with challenges of a changing fashion industry.
University of Amsterdam Amsterdam Business School
Faculty of Economics and Business Msc. Business Studies
Master Thesis May 2015 Henne Tap 5768071
1st supervisor: Erik Dirksen MSc. 2nd supervisor: Dr. J.P. Lindeque
Henne Tap Universiteit van Amsterdam 2015 1 Content
Preface………. 2
1. Introduction………. 3
2. Theoretical Framework……… 5
2.1 Fast fashion changes the industry……… 5
2.2 Global sourcing……… 10
2.3 Driving forces of global sourcing………. 11
2.4 Countries to source from……….. 15
2.5 Supply chain, inventory and quick response……… 22
3. Conceptual framework and hypotheses………... 28
4. Research design and methodology……….. 35
5. Results……….. 39 5.1 Fast fashion……….. 39 5.2 Sourcing locations……… 42 5.3 Demand uncertainty………. 48 5.4 Sharing information……….. 49 5.5 Internal processes……….. 50 5.6 Costs………. 52 5.7 Transport………... 53
6. Discussion and limitations……… 55
6.1 Discussion………. 55 6.2 Limitations……… 58 7. Conclusion……… 59 References……… 61 Appendices……….. 64 Appendix 1: Sample………. 64
Appendix 2: Coding scheme……… 70
Henne Tap Universiteit van Amsterdam 2015 2 Preface
This research is written as master thesis to conclude Msc. Business Studies at the Amsterdam Business School. The topic of fast fashion and the sourcing strategy of Dutch based fashion companies stems from personal interest and professional background in the family for an industry which speaks to the imagination of most people on the outside, but also has
underlying business structures and strategies less known. With this thesis I have tried to make these structures and strategies more visible and show how the Dutch based fashion companies deal with a changing industry around them. The results show that the Dutch based fashion companies have the capacity to adapt, but the innovations and changes in the industry will not stop here, so it should be an ongoing process.
With regard to my own process of writing this thesis, I owe some people special thanks. First of all I would like to thank my respondents who were more than willing to cooperate and took their time to speak to me about the industry and answered my interview questions with care. Secondly, my thesis supervisor who was always available for help, suggestions and guidance through the process and I would also like to thank her for her patience and critical view on my work. And last but certainly not least I thank my father who, from his own professional background in the fashion industry, discussed the topic with me and opened doors to respondents for me which otherwise would have remained closed.
Henne Tap May 2015
Henne Tap Universiteit van Amsterdam 2015 3 1. Introduction
The global landscape for the textile and apparel industry has changed significantly in recent years. Production costs have risen in major sourcing markets, and sourcing costs are set to rise further in the next 12 months (Barrie, 2013) due to increase in costs of labour, energy and cotton, while growing demand for fast fashion has led all players in the industry to adapt. Not only changes in the key sourcing regions occurred, but due to the transformation of the fashion industry and traditional business models, fashion companies should meet new
requirements to survive in an industry with fierce competition (Salmon, 2013). The complete sourcing environment is starting to shift to new sourcing markets with specific risks and characteristics which need attention. In addition, overall supply chain management becomes more complex as a result of changing consumer demand, since fashion trends come and go at quick pace (Salmon, 2013).
Given these changes in the current circumstances in the fashion and apparel industry, the question is what does this mean for apparel and garment production worldwide? Retail and wholesale sourcing organizations are facing change as well. Consumer expectations are high and continue to grow, adding to the demands placed on sourcing organizations by fashion and apparel companies. Combined with competitive and regulatory changes means that sourcing organizations can no longer only operate as they always have (Salmon, 2013). For years, garment sourcing was about finding the place with the lowest labor costs
(Birnbaum, 2013). But nowadays many other factors play a role. This challenge also creates an opportunity for sourcing organizations to become a strategic part in the supply chain. Sourcing is not only focused on costs anymore, but becomes a competitive advantage for fashion and apparel companies.
Henne Tap Universiteit van Amsterdam 2015 4 More specific, in this research, the question is what does this mean for Dutch fashion and apparel companies and sourcing organizations? Are these companies leaving their current sourcing locations to benefit from a new sourcing strategy and location? So the research question is: How do Dutch based fashion and apparel companies deal with a changing fashion industry? The actual current trends and changes concerning global sourcing and the fashion industry are mentioned, before the actual relevance of these trends and changes is tested through interviews within the field and an analysis can be made to address the research question. Most important questions about these changes are: Do companies leave the current sourcing location and what determines the decision for a new sourcing location? Which factors play a role for companies during the decision making process? Do Dutch based fashion companies pursue a fast fashion strategy? And to what extent internal processes need to be adapted to respond to a new situation and a new sourcing location? First, the relevant theory, definitions and explanations about the subjects of global sourcing and fast fashion and the current situation will be given. Next, the research design is explained. The method, results of the interviews and discussion will follow and the limitations and overall conclusion will be the end of this thesis.
Henne Tap Universiteit van Amsterdam 2015 5 2. Theoretical Framework
This chapter is the theoretical basis of this research. The first part defines the fast fashion strategy and other changes in the fashion industry. The second part focuses on global
sourcing in the fashion industry and leading countries to source from. The final part is about other changes in the supply chain, inventory management and quick response to market needs.
2.1 Fast fashion changes the industry
Fast fashion is a business strategy which aims to reduce the processes involved in the buying cycle and lead times for getting new fashion product into stores, in order to satisfy consumer demand at its peak (Barnes and Lea-Greenwood, 2006). The increasing speed of consumer demand calls for differentiated supply models which provide sufficient flexibility to meet latest market impulses (Salmon, 2013). Because fashion trends come and go at enormous pace, researchers and professionals agree that fast fashion characteristics are changing the garment industry. These characteristics are quick response to fashion trends, short lead-times, small batches, frequent replenishment, less clearance, enhanced logistics and a new sourcing strategy. The traditional fashion supply chain models provide no longer a competitive advantage. The biggest changes in the fashion and apparel industry over the past years are rising consumer expectations, a shift to fast fashion strategy to meet those expectations and deliver new styles every few weeks, rising production costs and the search for new sourcing locations, capacity and regulations issues, increased awareness of quality issues and logistics to make sure supply and demand are balanced (Salmon, 2013). The garment industry needs to react to these changes, or so called idiosyncratic situations. Ahuja and Katila (2004) argue that firms respond to idiosyncratic situations by embarking on new search paths. The creation of new search paths is the start and most important factor of resource heterogeneity (Ahuja &
Henne Tap Universiteit van Amsterdam 2015 6 Katila, 2004). According to the resource-based view of the firm, resource heterogeneity in turn is a source of performance differences across firms, since the idea of this perspective is that firms differ in their resource positions (Ahuja & Katila, 2004). In their paper, Ahuja and Katila (2004), try to answer the question where resource heterogeneity comes from and propose that such heterogeneity is a result of how firms respond to idiosyncratic situations and develop resources to manage these situations. When fashion companies manage these situations successfully, the sourcing strategy can become a source of competitive advantage for the business.
Fast fashion has the objective of getting clothing into store within the shortest time possible. In short, supplying small quantities of the latest fashion with agility is key to explain the fast fashion strategy (Choi, 2011). Zara is seen as a pioneer of fast fashion and is able to produce the latest trends quickly by sourcing closer to home (Tokatli, 2008). With an in-house design team based in La Coruña, Spain, and a tightly controlled factory and
distribution network, the company says it can take a design from drawing board to store shelf in just two weeks. That lets Zara introduce new items every week, which keeps customers coming back again and again to check out the latest styles. The fast fashion approach also helps Zara reduce its exposure to fashion mistakes. The company produces batches of
clothing in such small quantities that even if it brings out a design that no one will buy, it can cut its losses quickly and move on to another trend. Zara's fast pace means that some popular items appear and disappear within a week, creating an image of scarcity that many shoppers find irresistible. Furthermore, empty racks or stock-outs don’t drive consumers to other stores because there are always new items to choose from, with that same scarcity. Being out of stock of one item, helps sell another (Ferdows et al., 2004). Kumar and Linguri (2006) also state that Zara is prepared to tolerate stock-outs, because it may encourage customers to make frequent visits to the stores. In this way, Zara is dealing with strategic consumer behaviour,
Henne Tap Universiteit van Amsterdam 2015 7 namely consumers who choose to delay their purchase and are first in line in the clearance season (Bruce and Daly, 2006). Many customers at Zara have the idea that they have to buy an item now or never. Zara controls strategic consumer behaviour by offering limited quantities of the latest fashion at affordable prices (Choi, 2011). As well as keeping sales high throughout the year, it also keeps clearance pricing to a minimum. Zara collects 85% of the full ticket price, while the industry average is 60% to 70%, which keeps Zara’s net margins high (Ferdows et al., 2004; Caro and Gallien, 2012). Matthijs Crietee, deputy secretary general of the International Apparel Federation (IAF), also explains that there is a need for companies to operate with consumer demand in mind and produce less, to bring down costs. The biggest component of retail price the retailers needs to cover is the losses of items sold at a lower price. If a retailer can find a way to reduce the number of items they have to sell, but when that items are sold for full retail price, that is more efficient and it cut costs (So, 2013).
As manufacturers of fashion and apparel face demand uncertainty and new – fast fashion – retail practices, such as filling frequent and small replenishment orders, agility has become an important competitive tool (Christopher et al., 2004). By sourcing globally, manufacturing firms can reduce production costs in low labour cost countries, but may not be agile enough to meet retailers’ needs in time. To minimize the cost/agility trade-off, many firms are combining global and closer to home market sourcing (Jin, 2004). Earlier, research in the fashion industry was about forecasting the demand for fashion products. The point of view that demand for fashion products cannot be forecasted is now generally accepted and a new strategy, earlier referred to as ‘fast fashion’, is adopted by some retailers. Today’s fashion market place is highly competitive and the constant need to refresh product ranges means that there is an inevitable move by many retailers to extend the number of seasons, which is the frequency with which the entire merchandise within a store is changed. In
Henne Tap Universiteit van Amsterdam 2015 8 extreme cases, typified by the successful fashion retailer Zara, there might be 20 seasons in a year (Christopher et al., 2004).
The implications of this new strategy for global sourcing and supply chain management are profound. For manufacturers, it has been vital to establish an efficient supply chain and make use of international resources to cut costs, improve quality, and spur innovation. Along with the boom of globalization, global sourcing strategies are a key differentiator for the most successful demand-driven global value chain organizations. As stated before by Christopher et al. (2004), demand for fashion products cannot be forecasted and the fashion industry becomes more demand driven. The fast fashion strategy is about consumer demand fulfillment, by quick response and the design of popular products at that moment for the latest consumer trends and reach minimal production lead times to match supply with uncertain demand (Cachon and Swinney, 2011). So first, recognizing high demand for a certain fashion product and then very quick design, production, logistics and retail. In terms of production, it is not the production time itself that is faster. A manufacturer still needs a certain amount of minutes to produce a shirt. But the processes around the production are very efficient in fast fashion. For example, all fabrics are already in house ready for production at Zara. They forecast the fabric they will use most, but color, style, zip and buttons design are decided at the very last moment. Making the right decision on raw materials is what really shortens the time to market (So, 2013). This requires upfront planning and at the same time postponing decisions as late as possible, with regards to colors, details and final quantity (Salmon, 2013). It might still be difficult to forecast demand for a fabric, so reacting to poor sales of a product is another area where effective decision making is
important in the supply chain. Best prepared companies possess lean and flexible supply chains in order to be able to quickly adjust production capacity and reallocate resources. This provides the opportunity to meet consumer demand of the latest styles, but also withdraw
Henne Tap Universiteit van Amsterdam 2015 9 quickly when demand drops (Salmon, 2013). Deciding to stop production so extra inventory is avoided means there will be fabric left unused. But it is cheaper to amortize on some fabrics than on ready for sale products. These products include design, production, marketing and inventory costs. The fabrics can also still be used in some other form or in another season (So, 2013).
To meet the desire of brands to pursue a fast fashion strategy, or at least try to cut lead times, manufacturers will have to use such new production processes to improve efficiency, agility and performance. Manufacturers can speed up the production process by better organizing their production lines (So, 2013), as discussed with the Zara example. According to Esther Lutz, the tighter the collaboration level in the supply chain, the better to achieve speed. In the supply chain there are safety buffers and removing these buffers could remove half the time in the supply chain because all players want to make sure they can do their job in time. Another thing that can be removed to speed up the process is repeatedly confirming the same information throughout the supply chain. Eliminating repetitive work and entering data which can be used across the network can save a lot of time (Lutz, Apparel, 2013).
For really fast fashion, it is common sense that sourcing should take place as close to the home market as possible in terms of costs (So, 2013). The biggest benefit is clearly turnaround time or lead-time. It is also possible to slim down inventory and react quickly to current sales, for example producing more of an item which is selling well. Because the management of fast fashion is not only about maximizing speed to market, it is for a large part about flexibility as well (So, 2013). The supply chain and decision making process should be both quick and flexible to meet consumer demand at that moment. According to Stefano Turconi, strategy lecturer and researcher at London Business School, ‘integration is key to ensure the flexibility and agility needed to respond to changes in consumer demand and trends (So, 2013). Turconi adds that fast fashion companies manage two distinct supply
Henne Tap Universiteit van Amsterdam 2015 10 chains, one provides basic items in high volume and the other provides garments driven by trends and consumer demand of that moment, in smaller volumes (So, 2013). The basic items are mostly shirts and sweaters in basic colors with steady demand, so low cost is more
important than speed for these items. The items based on consumer demand and trends need to be made and sold within weeks, to meet consumer demand at its peak, so lead time is way more important for these items. Within these fashionable items, a fast fashion company has multiple variations ready for production in limited badges. Only the first variation goes into production and when its sold out, the second variation comes into store. This is repeated to limit inventory costs and leftover, where it is also creating a sense of scarcity and avoiding markdowns (So, 2013).
2.2 Global sourcing
The fashion and apparel industry is an industry in which the characteristics, benefits and risks of global sourcing reflect quite well, especially in this time when fast fashion strategy grows. Due to the costs of transport, local labor contract requirements, and available low-cost sources, organizations today are surveying the world to develop strategies for manufacturing and supply chain sourcing outside their home country. Companies have been forced by increasing global competition to devise and pursue international purchasing strategies that hinge on reducing prices and optimizing quality, fulfillment, production cycle times, responsiveness and financial conditions. Global sourcing, which differs from international purchasing in scope and complexity, is seen as a corporate strategy aimed at the worldwide utilization of materials and resources (Arnold, 1989). Depending on the level of global activities, companies need to develop a sourcing strategy based on the integration and coordination of suppliers across worldwide purchasing, engineering, and operating locations with regard to materials, processes, designs, and technologies (Monczka and Trent, 1991; Arnold, 1989).
Henne Tap Universiteit van Amsterdam 2015 11 Global sourcing, which differs from international buying in scope and complexity, involves proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering, and operating locations (Trent & Monczka, 2003). Global sourcing is not only a starting point of logistical activities, but is also a set of managerial activities. The process of global sourcing is a long-term strategy, which includes the evaluation and selection of foreign potential suppliers. Global sourcing strategy is decided upon by the head administrator of companies, and global sourcing strategy is the main significant direction of competitive strategy for companies. Therefore, global sourcing should be completely coordinated with other business strategies. Hence, the global sourcing strategy can help businesses to be more competitive only insofar as the strategy can be adopted within the framework of overall competitive strategies of businesses. In this thesis, the global sourcing strategy of fashion companies is indeed
considered to be adopted within overall competitive strategies, mostly including fast fashion characteristics. In order to successfully implement such a fast fashion strategy, including global sourcing decisions, the companies’ resources should be matched with this strategy.
2.3 Driving forces of global sourcing
According to Porter's generic strategies, the competitive strategies can be divided into low cost strategy, product differentiation strategy and a focus strategy. These strategies are highly related to global sourcing strategy. There is no doubt that the search for lower costs has been the greatest driver of global sourcing. But also the differentiation and focus strategy have their influence in the fashion industry, due to the wish of some brands to stand out or to focus on a particular focus group. Other factors related to global sourcing include a search for higher quality, greater material availability, and access to product and process technology (Kotabe, 1998). These factors of global sourcing include that one business is obliged to
Henne Tap Universiteit van Amsterdam 2015 12 pursue global sourcing because of the pressures from international competition and high-demand of customers. Other factors are voluntary, which means global sourcing is a main part of business strategy and it can help the business to be continuously competitive (Kotabe, 1998). In order to win the preference of consumers, each enterprise is striving to provide cheaper and more distinct products for potential consumers (Kotabe, 1998). From this point of view, the demand of consumers is a main reason driving companies to implement global sourcing. The market today is highly affected and dominated by enterprises acting globally, which results in much fiercer competition than before. Additionally the pressure from
consumer demand is higher today (Trent & Monczka, 2003). But the traditional supply chain is not only challenged by increased consumer demand requirements, but also by a changing sourcing environment (Salmon, 2013). Now that the peaks in cotton price have slowly returned to normal, the industry’s attention shifts to rising oil and other raw material prices. Companies are continuously searching for ways to cope with these raw material price fluctuations (Salmon, 2013). Another factor that is changing the sourcing landscape is the rising labor and production costs in traditional sourcing countries, most clearly in China where wages have risen. But not only higher wages, but also growing domestic demand in emerging countries and the need for more production capacity propels production costs (Salmon, 2013). This triggers shifts within global sourcing regions and lower cost sourcing markets. This leads to a need for constantly reviewing countries and if necessary
redistributing sourcing activities and volumes accordingly (Salmon, 2013). For many reasons there is a greater possibility to source from suppliers all over the world, allowing companies to tap into technical capabilities unavailable domestically, improving quality and availability of products. Besides cost savings, plenty of studies have also identified quality and
availability as critical aspects for global sourcing (Cho & Kang, 2001). As stated before by Jin (2004), many firms are combining global and closer to home market sourcing. Buyers mix
Henne Tap Universiteit van Amsterdam 2015 13 and match production of collections from different sources around the world (So, 2013). Sourcing close to retail markets or sourcing only from low wage countries is not always the answer. There are several factors that contribute to value for the consumer: quality, design, cost, lead time and brand integrity and these factors should all be taken into account when deciding on the production location and partners (So, 2013). When it comes to deciding on a location the factor costs consist of more than raw material and labor costs, because factory, utility, financing transport, duties and warehousing costs are also involved. Other important factors are reliability, local infrastructure, availability of fabric and ethical and environmental compliance (Barrie, 2013). So, garment sourcing is a lot more than finding the place with the lowest labor rates (Birnbaum, 2013).
In terms of the fashion industry, the demand of consumers is taken into account through the fast fashion strategy. Consumer demand in the fashion industry can be described as: ‘The consumer wants everything right here and right now’. Due to the financial crisis there is less spending in retail and fashion, but the supply is still overwhelming. So retail prices will have to decrease in order to keep sales volume at an acceptable level. Also, the consumer has all the information available through internet. Price differences and different styles and colors available are all known. Fashion retailers have to offer the current consumer what he or she wants for a low price and the supply is more and more demand driven.
Furthermore, the increasing speed in collection cycles has become a basic expectation of the consumer, instead of a differentiation strategy (Salmon, 2013). In terms of sourcing, this means that low cost sourcing locations are pursued. But in the fast fashion strategy, low production costs is not the only important factor anymore.
To reduce time to market and reach very short lead times, shipping times from suppliers must be taken into consideration (Jin, 2004). Distance is key, goods from China can have a
Henne Tap Universiteit van Amsterdam 2015 14 shipping time of 22 days, compared to five days or less from Turkey. So, taking Zara as example again, Zara has at least half its factories in Europe, where wages are many times higher than in Asia and Africa. Looking at the comparison of China and Turkey again, in 2009 the production cost index in Turkey was approximately three times as much as that in China, but in 2011 it was only twice that much. It turns out that short shipping time from these close to market countries outweighs the advantage of low wages in Asia and Africa (Tokatli, 2008), certainly when shorter lead times mean a reduction in markdowns. Proximity to the consumer increases flexibility and responsiveness. A first interesting direction of possible research could be whether there’s a trend going on in international fashion industry of moving production closer to the home market, although wages are much higher than in Asian countries like China, Vietnam and Bangladesh. This trend seems to occur already, as sourcing is steady but slowly shifting away from China (Flanagan, 2013). A study by McKinsey & Company (2013) found that 72% of the surveyed Chief Purchasing Officers in 29 European and US apparel companies are planning to decrease the sourcing value share from China. Many of the CPO’s say they want to respond to the expected rise in sourcing prices, including the shift of their sourcing from China to countries with lower labour costs (McKinsey, 2013). Bangladesh has been a major beneficiary of this shift, but due to some tragic events last year, executives take a more cautious view of Bangladesh as a sourcing destination (Barrie, 2013). The garment industry has suffered numerous recent instances of catastrophic failures in the form of quality associated with the outsourcing of production, notably, in Bangladesh. A fire at an unauthorized sub-contracted garment factory took at least 112 lives in 2012, which was the deadliest in the history of Bangladesh. Only five months later, a similar illegally constructed commercial building making clothes for major European and American brands collapsed. 1,127 people were killed and 2,500 injured, which makes this the deadliest accidental structural failure in modern human history.
Henne Tap Universiteit van Amsterdam 2015 15 2.4 Outsourcing in the fashion industry
The definition of outsourcing stems from the basic idea of paying another party to do work for you, mostly activities the other party can do better, at lower costs or more efficient. Following McIvor (2005), outsourcing is defined as the sourcing of goods and services previously produced internally within the sourcing organization from external suppliers. The decision regarding which operations should be carried out internally and which should be performed by suppliers is crucial to the competitiveness of the firm (Venkatesan, 1992). Two theories were developed to address this issue, namely Transaction Cost Economics and the Resource Based View.
Transaction Cost Economics was developed through the contributions of Coase and Williamson. Coase (1937) was the first economist to examine ‘the nature of the firm’, through the concept of transaction costs. According to Coase (1937), firms incur costs when buying a product or service. These costs include searching, negotiation and contracting and are named transaction costs. Firms and markets are different ways of organizing the
management of transactions. The choice of where to carry out these transactions determines the efficiency (Coase, 1937). It is essential to compare costs involved in carrying out
transactions in the open market to the costs incurred in organizing resources internally (Ietto-Gillies, 2005).
Later, Williamson (1979) extended Coase’s research by describing two factors which could lead to transaction costs, namely bounded rationality and opportunistic behavior. Bounded rationality is the inability and lack of analytical capacity of humans to process a huge amount of information effectively. It is therefore not the absence of information, but the limited cognitive abilities which are part of humans’ nature to process it, which lead to possible incorrect decisions (Williamson, 1979).
Henne Tap Universiteit van Amsterdam 2015 16 Opportunistic behavior occurs under the assumption that agents are motivated by self-interest and could even be opportunistic. Not all agents act opportunistic, but finding out who does and who does not is costly (Williamson, 1979). Where bounded rationality simplifies the make or buy decision making process, opportunistic behavior makes the decision making process more complex, since the other party could perform intentional unpredictable and self-interest driven. It is the combination of both behavioral assumptions that would force to internalize some transactions. However, when both parties, although bounded rational, can be trusted and act as agreed to in the form of a contract in a mutually beneficial manner there is no reason to internalize a transaction (Williamson, 1979).
The main characteristics of a transaction, as stated by Williamson (1979) are uncertainty, frequency and asset specificity. Analyzing Transaction Cost Economics from the perspective of the decision to make or buy, the theory predicts that managers will implement the
organizational form that minimizes transaction costs. This decision is driven by economic factors of uncertainties, the investments in specialized assets and the frequency of a
transaction (Williamson, 1979). The greater the uncertainties and investment in specialized assets surrounding a transaction, the greater the tendency to carry it inside the boundaries of the organization.
Uncertainty is considered an important factor of transaction costs (Williamson, 1979), since uncertainty increases the costs of making specified contracts before committing to a
transaction and monitoring during and after a transaction. Unstable and dynamic
environments increase uncertainty and transaction costs. Transactions between two parties require investments from both sides. The second factor is asset specificity, which means the extent of specificity of an asset for the transaction. If the asset of one party loses value when the other party would pull out, the asset is specific to the transaction. Non-marketability arises when the specific identity of both parties is important to the transaction (Williamson,
Henne Tap Universiteit van Amsterdam 2015 17 1979). The last characteristic is frequency, simply the amount of times a certain transaction takes place. For instance only once, occasional or recurrent. One thing that might justify investing in assets specific to a transaction is the frequency at which that transaction occurs. Costs are more easily to regain in recurring transactions (Williamson, 1979). Additional advantage of recurring transactions is an improved supplier-buyer relationship between the partner firms. This could reduce the risk of opportunistic behavior and uncertainty during the transaction.
The transaction costs theory was further developed by Dunning (1988) into the OLI framework. According to Dunning (1988), not only the structure of the organization is important, but there are three more factors: Ownership advantages, Location advantages and Internalization advantages. Dunning refers to three different types of Ownership advantages. The first is the advantage a firm may have over another firm operating in the same location. The second advantage is the one the firm enjoys over a new firm in the industry. The third variety of ownership advantages refers to the benefits a company obtains from its multi-nationality (Dunning, 1988). Location advantages refer to those aspects unique to a particular country which would draw foreign companies and Internalization advantages are those which may give a firm an incentive to internalize its operations rather than lease or rent them to external firms (Ietto-Gillies, 2005).
In the case of Zara, the first and third type of ownership advantage is applicable. Zara has an ownership advantage through its ability to produce the trendiest clothing and bring it to individual stores in an extremely competitive lead time, owing to the efficiency of its suppliers. Also, through outsourcing its production, Zara obtains the skill and know-how wherein its in-house designers have the ability to create new clothing patterns at rapid paces, thus making design its core competency. Under the third variety of ownership advantage, Zara benefits simply from its multi-nationality. Zara has an advantage from using suppliers
Henne Tap Universiteit van Amsterdam 2015 18 from varied economic environments, for instance Turkey in Europe and Bangladesh in Asia, where it is better positioned to take advantage of the different market conditions and factor endowments specific to these suppliers’ countries.
In terms of location advantage, Zara gains from choosing specific suppliers in emerging economies. The factor endowments of these countries give Zara a specific advantage in outsourcing its operations to these locations. These countries benefit from lower input costs, labor costs, energy costs, relaxed legal and trade barriers, which lower production costs for Zara to a great extent.
The internalization advantage of the eclectic paradigm does not apply to a large extent to fashion companies. In the clothing and apparel industry, adaptability of the firm according to local and international wants and demands plays a crucial role. For this very reason, most companies believe in outsourcing and delegating its manufacturing assignments to other companies and focusing its resources on design. Some of the bigger companies may have their own factories as well.
The Resource Based View is a theory about the existence and performance of firms.
According to the theory, firms consist of a unique combination of resources and organizations should focus on the inside of the firm to find the source of sustained competitive advantages and core competencies (Prahalad and Hamel 1990; Barney 1991). The RBV proposes that firms should compare their resources with those of the markets and other firms and should not outsource core competencies involving special resources (Prahalad and Hamel, 1990). A firm is a combination of resources and when the unique set of resources contains four characteristics, they can lead to a sustainable competitive advantage (Barney, 1991). These characteristics are firstly value, since a resource should create value for a firm in the first place. Secondly, a resource should be rare, since scarcity creates more value than a
Henne Tap Universiteit van Amsterdam 2015 19 ubiquitous resource. A resource must be inimitable as well, or at least costly to imitate. Lastly, besides valuable, rare and imitable, there should not be a substitute. A resource which is non-substitutable lasts longer and leads to a sustained competitive advantage (Barney, 1991).
The decision to outsource an activity should focus on economic factors, while integrating the concepts of transaction costs and core competencies (Williamson, 1979). The question of which activities can be outsourced, based on RBV, has been examined by Quinn and Hilmer (1994). For these authors, firms must focus their resources on a set of core competencies in which they have definite advantages over their competitors and offer added value to their customers. In addition, the recommend activities to be outsourced should contain no critical strategic need or special resources and skills (Quinn and Hilmer, 1994).
In the fashion industry, different drivers for outsourcing production could occur. These drivers will be named shortly and linked to the outsourcing theory as discussed for the fashion industry.
One of the main arguments for the outsourcing of production, as well as distribution, is cost reduction. By transferring production activities to countries with high quality manufactured products, including the benefit of low cost labor and raw materials, fashion companies achieve high levels of cost effectiveness (McIvor, 2005). Moreover, the company saves on initial start-up costs of plant, equipment and building, since these costs are lower in these countries as well. In addition, outsourcing, as a strategy, may enhance a firm’s
competitiveness by improving manufacturing efficiency, by reducing excess production capacity, and/or by diverting resources, both human and natural, to focus on a firm’s core competitive competencies and advantages (Sink and Langley, 1997).
Henne Tap Universiteit van Amsterdam 2015 20 Another driver of production outsourcing is flexibility, since the fashion industry is ever-changing, the ability to modify production patterns plays a significant role in the company's profit margin. Clothes in greater demand can be or re-ordered where as those moving slower require lower order levels (McIvor, 2005). While some companies like H&M and Zara can bring finished products to its stores in as low as 15 to 20 days, other competitive players struggle. However, lead time may not be the only factor that governs a fashion companies’ success. The shortest lead time possible is not always favorable, since the goal is to reach the optimum equilibrium among price, time and quality (McIvor, 2005).
Finally, specialization of activities is a driver of production outsourcing. Through
outsourcing, fashion companies can focus on their core competency, which is designing. This assists the company to specialize on more value-adding activities and outsource the more production activity (McIvor, 2005).
Defining the sourcing location is something a lot of companies have to deal with. The solution depends on multiple factors. Local production often is more expensive, but the cost advantage provided by producing in cheap labor countries should be weighed against higher transport costs and higher costs of inventory. The inventory is needed to be able to be flexible in deliveries when demand rises, despite the longer lead-times from cheap labor countries. This consideration is more actual than ever nowadays. During the last decades, a huge amount of production is being relocated to cheap labor countries, attracted by low labor and raw material costs. But more and more companies rethink that strategy, due to higher labor and transport costs in China, the largest production source. On top of that, short lead-times and flexibility in deliveries is becoming essential. A lot of fashion products have a shorter life cycle, demand is uncertain and customers want their products as quick as possible. However, this does not mean that all production should be withdrawn to local facilities. Fashion
Henne Tap Universiteit van Amsterdam 2015 21 question is now, what can be produced best at a local facility or at least close to the home market and which production remains in far away, cheaper labor countries. However, firms should be careful when selecting activities to be outsourced, due to the loss of internal capabilities. Many fashion companies in the Netherlands for instance lost the knowledge, skills and experience to produce on a competitive level. Once these assets are lost, it is not easy to retrieve the required capabilities.
When performing a dual or multi sourcing strategy, the company should manage two or more production locations. But the advantage of having best of both worlds outweighs those managing issues. With multiple sourcing facilities in different locations, the company profits from cheaper labor and material at one location and profit from shorter lead-times and flexibility on the closer location.
Concluding, outsourcing is the replacement of activities originally performed in-house by a third party using non-company personnel both in the long term and short term. The purpose of outsourcing is to reduce costs by allowing a third party to perform the day to day functions of production while permitting the principal company a focus on core business strategies and initiatives (Gereffi, 2001).
Fashion companies related to apparel outsourcing could focus on ‘sweatshops’ and
deplorable working conditions in both developing and industrialized countries that shine a light on government labor practices and policies examining both labor conditions and wage structures. This confirms that principal companies could exploit and benefit from contractor partnerships with weak regulations of labor standards. Along the theme of international outsourcing effects, Glass and Saggi (2001) found that outsourcing lowered the marginal cost of production and increased profits, which can lead to greater incentives for product
Henne Tap Universiteit van Amsterdam 2015 22 as a downside of production in low labor cost countries. It is clear that cost reduction due to outsourcing, including offshore outsourcing, is an extremely important point of consideration for the original manufacturing firms. However, with the increasing volume of outsourcing and the increasing complexity of the supply chain networks associated with outsourcing, it is important for firms to be able to assess not only the possible gains due to outsourcing but also the potential costs associated with loss of reputation resulting from the possible quality degradation due to outsourcing.
2.5 Countries to source from
China is the biggest source of garment production in the world with a 38% share of the garment export market to EU (Barrie, 2013) and for years, China was the only ideal country for sourcing. No country could match the Chinese combination of volume, product variety, expertise and quality. China's wage rates were unbeatable, and so everyone turned to China for their sourcing needs (Flanagan, 2013). However, wages are rising in China. Over the past decade, wages in China have tripled and are expected to continue with an annual growth of 10-15% for the next five to ten years (Salmon, 2013). Another problem European fashion and apparel companies are facing is the rising demand of the Chinese domestic market and the growing share of production capacity that Chinese factories use to meet this domestic
demand. The quantities that are produced for the Chinese market are much higher than for the European market. In addition, most European companies seem to choose for a strategy with more collections and smaller quantities of each product, so there is a conflict here in terms of quantities and capacity. This does not mean that companies will stop sourcing from China, but other options are investigated and sourcing from other countries is happening already. As shown in table 1 below, after China (38% of total import volume to EU) and a huge gap, Bangladesh and Turkey follow (11% and 10% of total import volume to EU respectively), in turn followed by India (5% of EU import volume) (Salmon, 2013). So, these top four
Henne Tap Universiteit van Amsterdam 2015 23 sourcing countries account for almost 65% of EU imports. But other countries are growing, both in capacity and importance and it is important to note that not all garment production will leave China in the upcoming years, simply because of the fact that the other countries together still don’t have the absorptive capacity to reach export demand. In fact, China will remain the number one sourcing location in the world for quite some time due to its massive size and because garment sourcing is a lot more than finding the place with the lowest labor rates (Birnbaum, 2013).
Table 1 Top Apparel Exporters to EU in 2012
Henne Tap Universiteit van Amsterdam 2015 24 2.6 Supply chain, inventory and quick response
An important capability for fashion companies is to organize the supply chain in a way that the company can deal with typical issues in the fashion industry. Except global sourcing and strategic consumers, fast fashion also deals with supply chain and inventory optimization, reverse supply chain to demand chain and global quick response (Cachon and Swinney, 2011; Caro and Gallien 2012). Since the clothing industry is one of the most mobile industries in the world, global supply poses challenges in ensuring the right volume and mix of products within retail stores. The concept of global quick response (GQR) strives to combine the cost and scale efficiencies arising from sourcing globally with quick response to market
requirements. GQR is based on lead time reduction, effective information management, dynamic planning and strong logistics (Cachon and Swinney, 2011). Fast fashion retailers have to deal with the challenge of distributing small batches of inventory across all the stores in the retail network. This asks for predicting sales in a single store very precise to determine weekly shipment quantities. There is a major role for information systems and warehouse management process in this challenge. Receiving, transferring, handling, storage, packing, and expediting operations at the warehouse directly affect the effectiveness of a company as a whole as well as its quality and logistic service level. In this sense, a proper warehouse management process has become critical to gain competitive advantage through better customer service and shorter lead times. Smaller inventories reduces costs and information systems with real time display of global sales enables a fast fashion company to produce designs for which demand is high (Caro and Gallien, 2010).
The fast fashion strategy depends on the regular and quick creation of small batches of new products. Zara’s designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. Since most garments come in five to six colors and five to seven sizes, Zara’s system has to deal with 300,000 new stock-keeping units, on
Henne Tap Universiteit van Amsterdam 2015 25 average, every year. About 2.5 million items per week are shipped from the distribution center in La Coruna, Spain (Ferdows et al., 2004). These amounts of products require a tightly controlled supply chain and careful timing through a precise rhythm, as described by Ferdows et al. (2004). The rhythm starts in the retail shops, where store managers place orders twice a week, before a strict deadline. Missing a deadline means waiting for the next opportunity. The rhythm is also followed at the order fulfillment in the distribution center in La Coruna. The shipments are loaded on a truck and the trucks and airfreights run on fixed schedules to deliver the orders at the retailers on time. Shipments arrive in European stores within 24 hours, US stores in 48 hours and Asian stores in 72 hours and store managers know exactly when to expect the order. When the trucks reach the stores, the rhythm continues. All items have already been priced, tagged, ironed and hung up on racks, so they are ready for sale immediately and since 98.9% of all shipments is accurate, not much control is needed at this stage (Ferdows et al., 2004). This practice is also referred to as bundling at the source. Matthijs Crietee (IAF deputy secretary general) explains that companies with retail activities could move the warehouse to the same country as where production takes place. After production, the boxes can be packed for each shop and the only thing left in the home region is to distribute the pre-packed boxes with ready for sale items to the retailers. This shaves off a couple of days in logistics and saves costs (So, 2013). The rhythm is not only precise and fast, it also contains some costly elements. It forces production in small batches, though larger batches would reduce costs. Deliveries to stores are twice a week, where one a week reduces distribution costs and transport by truck and airplanes is more expensive than by ship and trains. Further, the products reach stores on hangers, completely with price tags and ironed, though folding it into boxes would reduce air and truck freight charges (Ferdows et al., 2004). And at this moment, higher wages and other costs involved with production close to the home market are not even considered. Still, these costly practices pay off for Zara. The
Henne Tap Universiteit van Amsterdam 2015 26 stores and warehouse carry less inventory and net margin is higher as also stated before. Knowing the fast rhythm would imply that fast fashion practices might also work for non-fast fashion companies, at least they could learn from it, as long as some critical requirement in the supply chain are met.
Non-fast fashion companies could benefit from the fast fashion strategy by using some elements in their own practices. First of all, in terms of sourcing, fast fashion
companies achieve agility in their supply chain by using different sorts of sourcing locations, both close to the home market and in low cost countries. The basic items, with steady demand or at least relatively easy demand forecast, can still be sourced from low cost countries in Asia. But fast fashion items, which are popular and with accurate demand forecast at that moment of time, have to be in stores quick to enhance sales. To reach the short lead time needed, these items should be sourced from countries close to the home market. Non-fast fashion companies could consider to source some items from countries close to the home market as well, to reach the same agility and flexibility as fast fashion companies (Choi, 2011). Second, a major problem for the fashion industry is demand uncertainty. Fast fashion strategy tries to overcome this problem by forecasting trends during the current season and companies using this strategy are able to have the actual product in store within weeks, where non-fast fashion companies finish production before the season starts which makes them very static and not able to make any changes in their demand forecast when needed. This results in risky and less accurate prediction of demand and markdowns during clearance periods. Non-fast fashion companies should probably consider a system through which they can produce a certain amount of products during the season too. This system might ask for production proximity for these products, because production must be quick and flexible (Choi, 2011). In addition to sourcing from countries close to the home market, it is important for the company considering a fast fashion strategy to establish a close relationship with local suppliers. These
Henne Tap Universiteit van Amsterdam 2015 27 local suppliers must be able to produce small batches in the shortest time possible to meet current consumer demand. The small batch orders may be more costly, but the benefits from this agile and flexible approach with higher probability of selling the products for full retail price will outweigh the cost. An important tool fast fashion companies are using in order to reach agility, flexibility and short lead times is the extensive use of IT to communicate with consumers, store managers, designers, distributors and suppliers in the supply chain (Ferdows et al. 2004, Choi, 2011). Non-fast fashion retailers should use their IT resources as well to identify best or worse selling items, inventory tracking, gather consumer demand
information, reordering items or replenishment planning. This will help in monitor the production and avoiding miscommunication, markdowns, mistakes and delays (Choi, 2011).
Clearly, there are points mentioned where non-fashion companies can learn from companies using fast fashion strategy, but not all elements might work for every company. A reconfiguration of resources might be needed for non-fast fashion companies. There is still some discussion within the industry about what is the best way to go in terms of sourcing, supply chain management and other processes involved for each individual company.
However, after discussing some situations, strategies, trends and practices, it is fair to say that fashion companies are looking for new ways of sourcing, production and supply chain
management. These global sourcing, lead time reduction, supply and demand chain
management, quick response, strategic consumer behaviour, inventory and information issues are the challenges that fashion companies are facing these days. The ways Dutch based fashion companies handle these changes and challenges that come with them, is investigated through interviews with high placed employees of Dutch based fashion companies. In the following chapter, the conceptual framework and hypotheses are presented, which will be tested later through analysis of the interviews and the answers provided by the respondents.
Henne Tap Universiteit van Amsterdam 2015 28 3. Conceptual framework and hypotheses
To test the way Dutch based fashion companies deal with the changing fashion industry and a challenging new situation, interviews are conducted under decision making employees of 18 Dutch based fashion companies. The first main question in this research is how the changes in the industry affected sourcing decisions and locations. The second question is whether the Dutch based fashion companies pursue a fast fashion strategy and how this strategy relates to sourcing decisions and locations. The next questions are about adjustments in internal
processes and how to deal with demand uncertainty. The final questions and hypotheses are about the amount of collections, costs, transportation and the use of IT systems. In the following chapter these questions and their relevance will be further displayed and the hypotheses will be given to test for in later chapters.
Fast fashion has the objective of getting clothing into store within the shortest time possible. In short, supplying small quantities of the latest fashion with agility is key to explain the fast fashion strategy (Choi, 2011). Zara is seen as a pioneer of fast fashion and is able to produce the latest trends quickly by sourcing closer to home (Tokatli, 2008). This strategy has been a major change in the fashion industry and one of the main questions in this thesis is how Dutch based fashion companies react to the changing strategy. So far, the literature provides some evidence that companies pursuing a fast fashion strategy have efficient supply chains and Hayes and Jones (2006) concluded that working with a fast fashion strategy increases stock turnover, which leads to less markdown in clearance and lower inventory costs. The benefits are mentioned before, but the entire operational processes have to be adapted to this strategy. It is expected that, due to the changing industry and example of Zara, more companies are implementing the fast fashion strategy or at least parts of it. The traditional fashion supply chain models provide no longer a competitive advantage, or is has to be executed perfectly with very high quality fabrics, design and production. The
Henne Tap Universiteit van Amsterdam 2015 29 resulting products are high priced in the high - or top segment of the industry and that is why this research is focused on the lower – and middle segment of the fashion industry, where the fast fashion strategy is more common (Barnes and Lea-Greenwood, 2006). Fast fashion also entails frequent filling of retail stores, quick and small replenishment orders and the constant need to refresh product ranges, which means that there is a need for many retailers to extend the number of seasons and deliveries to the retail stores. In extreme cases there might be 20 seasons in a year (Christopher et al., 2004). The supply chain and decision making process should be both quick and flexible to meet consumer demand at that moment. Fashion
companies could leave some space in their collections for products following the latest trend, which are produced on the very last moment, or reproduce very popular products. The small batch orders, more collections and deliveries may be more costly, but the benefits from this agile and flexible approach with higher probability of selling the products for full retail price will probably outweigh the cost. Furthermore, the increasing speed in collection cycles has become a basic expectation of the consumer, instead of a differentiation strategy (Salmon, 2013). Most companies want to satisfy these expectations by implementing at least part of a fast fashion strategy, like frequent and quick replenishment, switch during seasons or try-out products. This expectations lead to the first hypothesis:
H1.1: Most Dutch based fashion companies pursue a fast fashion strategy or at least part of fast fashion strategy.
H1.2: Dutch based fashion companies produce more collections and deliveries per year than five years ago.
The next questions and hypotheses all deal with the subject of the sourcing location. There are several factors that contribute to the decision of the sourcing location and all these factors should be taken into account when deciding on the production location and partners (So,
Henne Tap Universiteit van Amsterdam 2015 30 2013). When it comes to deciding on a location the factor costs consists of more than raw material and labor costs, because factory, utility, financing transport, duties and warehousing costs are also involved. Other important factors are reliability, local infrastructure,
availability of fabric and ethical and environmental compliance (Barrie, 2013). This makes garment sourcing more than finding the place with the lowest labor rates (Birnbaum, 2013). It is expected though that in an industry with such fierce competition price still play an
important role in the decision making process. Other expected very important factors are speed-to-market and flexibility, in line with the fast fashion strategy. This strategy might ask for production proximity for these products, because production must be quick and flexible (Choi, 2011). In addition to sourcing from countries close to the home market, it is important for the company considering a fast fashion strategy to establish a close relationship with local suppliers. These local suppliers must be able to produce small batches in the shortest time possible to meet current consumer demand. This leads to the following hypothesis:
H2: Most important factors when deciding on sourcing location for Dutch based fashion companies are price, speed-to-market and flexibility.
Since the fashion industry is going through changes and challenging times, the importance of factors in the sourcing decision making process might be affected as well. Some factors, for instance flexibility or the possibility to produce small batches, could grow in importance and some countries may become more or less popular destinations on the sourcing market. A factor that is always important in the sourcing market are labor and production costs, which are rising in traditional sourcing countries, most clearly in China. But not only higher wages, but also growing domestic demand in emerging countries and the need for more production capacity propels production costs (Salmon, 2013). This triggers shifts within global sourcing regions and lower cost sourcing markets. This leads to a need for constantly review countries and if necessary redistribute sourcing activities and volumes accordingly (Salmon, 2013).
Henne Tap Universiteit van Amsterdam 2015 31 H3.1: Dutch based fashion companies made adjustments in their sourcing locations in the past five years.
H3.2: Dutch based fashion companies nowadays source less from China than five years ago.
Fast fashion strategy asks for production proximity, agility and flexibility (Choi, 2011). For fast fashion, it is common sense that sourcing should take place as close to the home market as possible (So, 2013). The biggest benefit is clearly turnaround time or lead-time, but it is for a large part about flexibility as well (So, 2013). The growing interest for this strategy or at least parts of it, combined with rising costs and reduced capacity in China, leads to the
assumption that sourcing from Europe or countries close to Europe might be more beneficial than sourcing from China in some situations. This leads to the following hypothesis:
H3.3: Dutch based fashion companies nowadays source more from European countries or close to Europe than five years ago.
As stated before, agility has become an important competitive tool (Christopher et al., 2004). Fashion companies can reduce production costs in low labor cost countries, but may not be agile enough to meet retailers’ needs in time. To minimize the cost/agility trade-off, many firms are combining global and closer to home market sourcing (Jin, 2004). Fast fashion companies achieve agility in their supply chain by mix and match production of collections from different sources around the world (So, 2013), both close to the home market and in low cost countries. The basic items, with steady demand or relatively easy demand forecast, can be sourced from low cost countries in Asia. But fast fashion items have to be in stores quick to enhance sales. To reach the short lead time needed, these items should be sourced from countries close to the European market. Non-fast fashion companies could consider to source
Henne Tap Universiteit van Amsterdam 2015 32 some items from countries close to the home market as well, to reach the same agility and flexibility as fast fashion companies (Choi, 2011). So, the following hypothesis reads:
H3.4: Dutch based fashion companies create a mixed portfolio of sourcing countries, between far away (Asian countries) and near (European countries or close) sourcing.
The idea of the fast fashion strategy and accompanied proximity in production comes from the difficulty to predict consumer demand and fashion trends. Earlier, research in the fashion industry was about forecasting the demand for fashion products. The point of view that demand for fashion products cannot be forecasted is now generally accepted and a new strategy, earlier referred to as ‘fast fashion’, is adopted by some retailers. Additionally, the pressure from consumer demand is higher today (Trent & Monczka, 2003). To react quicker to market needs and fashion trends, more collections and deliveries per year can be offered. If a company makes a mistake, there are not so much leftovers and if the company is right about a product, new products which are more or less similar can be produced in short time. This makes companies less static and the chance that products are sold for full retail price is high.
H4: To deal with demand uncertainty, Dutch based fashion companies make use of higher frequency of collections and deliveries per year, repeating successful element of products and quick replenishment during season.
To deal with the topic of demand uncertainty, reproduction and replenishment, the
collaboration level in the supply chain has to be tight to achieve speed and efficiency. In the supply chain there are safety buffers and removing these buffers could remove half the time in the supply chain (Lutz, Apparel, 2013). Another thing that can be removed to speed up the process is repeatedly confirming the same information throughout the supply chain.
Eliminating repetitive work and entering data which can be used across the network can save a lot of time (Lutz, Apparel, 2013). But also sharing information and connect through the
Henne Tap Universiteit van Amsterdam 2015 33 same IT systems can save a lot of time and work and make sure that players in the supply chain can work closely together. Fast fashion retailers have to deal with the challenge of distributing small batches of inventory across all the stores in the retail network. This asks for predicting sales in a single store very precise to determine weekly shipment quantities. There is a major role for information systems and warehouse management process in this challenge.
H5.1: Dutch based fashion companies would like to see more collaboration and sharing information between partners in the supply chain.
H5.2: Dutch based fashion companies make use of IT systems.
In order to make a successful step from a traditional fashion strategy and pace to a fast fashion strategy or implementing parts of it, some internal processes should be adapted or even changed radically to reach that rhythm. In terms of production, it is not the production time itself that is faster. But the processes around the production are much more efficient in fast fashion. Manufacturers can speed up the production process by better organizing their production lines (So, 2013). For example, fabrics are already in house ready for production. They forecast the fabric they will use most and making the right decision on raw materials is what really shortens the time to market (So, 2013). This requires upfront planning and at the same time postponing decisions as late as possible, with regards to colors, details and final quantity (Salmon, 2013). Manufacturers can speed up the production process by better organizing their production lines (So, 2013) and outsource some parts of the supply chain to the production country, so products are shop ready when arriving in the home market. This practice is also referred to as bundling at the source.
H6: Dutch based fashion companies made adjustments in their internal processes to work faster and more efficient.
Henne Tap Universiteit van Amsterdam 2015 34 But the traditional supply chain is not only challenged by increased consumer demand
requirements, but as stated before also by a changing sourcing environment (Salmon, 2013). Fashion companies face rising production costs across the supply chain. Most visible are rising labor cost in China, but also raw materials and transportation costs are on the rise. Now that the peaks in cotton price have slowly returned to normal, the industry’s attention shifts to rising oil and other raw material prices. Companies are continuously searching for ways to cope with these raw material price fluctuations (Salmon, 2013).
H7: Dutch based fashion companies are facing rising production costs.
Since the pace of the rhythm for some fast fashion companies is so high, there is an important role for transport as well in the fashion supply chain. Transport by truck, ship and airfreight are used in the fashion industry, like in most other industries. Part of the really fast fashion strategy is the extensive use of airfreight transportation, to reach shortest lead times. To reduce time to market and reach very short lead times, shipping times from suppliers must be taken into consideration (Jin, 2004). Proximity is essential, since goods from China can have a shipping time of 4 or 5 weeks, compared to five days or less from Turkey. Airfreight from China can solve the problem, but is very expensive. Mostly, airfreight is only seen as a solution in case of delay, but for Zara for instance it is common practice (Ferdows et al., 2004).
H8: Dutch fashion companies use transportation by truck from European or close to Europe countries, by ship from Asian countries and by plane in case of delay.
Henne Tap Universiteit van Amsterdam 2015 35 4. Research design and methodology
This chapter presents the research design and methodology. First, the choice for qualitative research through interviews is discussed. Then a description of the sample is presented and the chapter ends with a description of the data collection and analysis.
The research to find valuable answers to the research questions utilized a qualitative and exploratory approach to gain a thorough understanding of sourcing issues in the fashion industry. This method was chosen because the data will be rich and this method provides the ability to identify and understand the full range of issues and factors behind sourcing
decisions in the fashion industry. Interviews are conducted with selected people from the fashion industry like CEO’s, and owners of fashion companies, sourcing or buying managers and decision makers, strategic managers and supply chain managers. The respondents have in common that they are in high and crucial positions of the fashion companies and involved with a decision making process.
The new ways practiced by Dutch based fashion companies to deal with the changes in the fashion industry are investigated through interviews with managers from the fashion and apparel industry based in The Netherlands, but working around the world. Since
quantitative data are hard to find and disturbed, interviews will be conducted within the field to collect data. Semi-structured interviews will be conducted to leave space for new insights. Because it is exploratory research, a broad interview group with possibly different views is used. A part of the interview is structured for easier coding and comparison.
The qualitative interview and the semi-structured open-ended question interview is more structured than an informal conversational interview although there is still quite a bit of flexibility in its composition (Turner, 2010). On the other hand it is not that strict as
Henne Tap Universiteit van Amsterdam 2015 36 upon the researcher who is conducting the interview. Therefore, one of the obvious issues with this type of interview is the lack of consistency in the way research questions are posed because researchers can interchange the way he or she poses them. With that in mind, the respondents may not consistently answer the same questions based on how they were posed by the interviewer (McNamara, 2008). This is something to keep in mind when conducting the interviews and the researcher should be focused on the fact that in the end all questions are posed. According to McNamara (2009), the strength of the qualitative semi-structured interview approach is the ability of the researcher to ensure that the same general areas of information are collected from each interviewee which provides more focus than the conversational approach, but still allows a degree of freedom and adaptability in getting information from the interviewee. The researcher remains in the driver’s seat with this type of interview approach, but flexibility is possible through another sequence of questions and prompts.
Interviews were conducted with 18 selected people from the Dutch fashion industry. All respondents were people with knowledge about the industry in terms of strategy,
logistics, international trade, sourcing and retail. The respondents have experience and a relation to sourcing or supply chain management in the fashion and apparel industry. To check whether the respondents are suitable for the interview sample, a short pilot interview is conducted. The pilot test will assist the research in determining if there are flaws, limitations, or other weaknesses within the interview design and will allow him or her to make necessary revisions prior to the implementation of the study (Kvale, 2007).
Interviews were conducted with 18 respondents, people with experience in the industry and in making sourcing decisions. Interviews were recorded and transcribed in Dutch, as well as the coding with transcripts using the program NVivo. The parts or quotes that reached my final thesis are translated to English. Most interviews were conducted in
