Speed, Connectivity and Value-Creating Intangibles: the New Rules of the International Apparel Sourcing


November 16, 2008

In 1998, Stan Davis and Christopher Meyer, two collaborators of the Ernst & Young Centre for Business Innovation, wrote a groundbreaking book under the title: ‘BLUR. The speed of change in the connected economy.’ The authors defined blur as ‘the accelerating pace of change of our post-modern economy’. They wrote: “Because we are so newly caught up in the whirlwind of this transition, we are experiencing it as a blur.” In the meantime, in some business circles, ‘BLUR’ has acquired the status of a cult book. Raving about this book may be exaggerated, but its main message is certainly worth to be pondered on: three forces, also called the ‘trinity’ of the blur -speed, connectivity and intangibles- are setting the new rules of doing business!

What could ‘speed, connectivity and intangibles’ mean for the garment sector and especially for the sourcing activity?

In their book, Davis and Meyer refer to Benetton, which gained fame for engineering a sourcing system so seamless it cut months out of the traditional supply chain. Speed was the driver. And because the company could tie its production to retail activity, it kept the hottest items in stock and was left with little to unload in end-of-season sales. Not mentioned in BLUR, but presently even more successful ‘speed performers’ than Benetton are the champions of ‘lean retailing’, such as Zara/Inditex and Hennes & Mauritz.

However, ‘lean retailing’, a business model that centres on quick response, low inventory costs, rapid-moving stock and transferring responsibility for inventory management to suppliers, is not only a question of speed, it’s as well a question of connectivity. In the broader sense of the word, connectivity is putting everybody and everything in connection in one way or another. (In a more narrow sense, connectivity is the ability to make products that link electronically to information bases, an ability that might be displayed at the next Avantex fair in Frankfurt).

Be connected
A company with a great record in terms of ‘connectivity’ is the Sri-Lanka based company MAS Holdings, whose ambition it is to become world leader in the intimate apparel sector. MAS is engaged in a number of enterprises in several countries, all of which are joint ventures with at least one other party. Over the years the company has devoted itself to a thoughtful supply chain architecture.

In the field of fabric and clothing sourcing, many sourcing operators (manufacturers, retailers, agents) are increasingly eager to be connected globally. Sourcing fairs which continue frustrating their visitors’ desire for global connection (e.g. by excluding the offer of non-European suppliers) are understandably losing interest. Not surprisingly, Texworld in Paris and Intertex in Milan, international sourcing events aimed at textile manufacturers from non-European countries, have grown rapidly. These fairs are complementing respectively Première Vision in Paris and Moda In Tessuto in Milan, thus creating temporarily in both cities the ‘global search machines’ the outsourcing companies want.

Another sourcing event that has grown rapidly by becoming global is Fatex in Paris. A few years ago, this annual clothing manufacture and sourcing trade fair was an exclusively French affair (with French exhibitors only). Then the organisers decided to open up onto the international area. In 2000, 103 foreign exhibitors moved in. In November 2001, foreign presence doubled to 207, or 42% of the total number of exhibitors (not even included the 47 French companies with delocalised units). From 2002 on, Fatex will adopt a seasonal rhythm, organising a spring and an autumn edition, simultaneously with the private label fashion fair Intersélection.

That especially the leading Western clothing companies want to be connected globally doesn’t mean they are playing around on the globe like young kittens. Devangshu Dutta, ex-KSA-consultant and co-founder and director of the supply chains solutions company Creatnet Services Ltd recently pointed out that in the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Devangshu Dutta thinks that the supply base consolidation has gone a step too far. He’s pleading a new deal. Outsourcing companies should acknowledge that the business of clothing retailing needs a healthy balance between predictability and innovation. Buyers should make a mental division between ‘largely predictable products’ and ‘fashion products’. For ‘largely predictable products’, supply base hopping is almost certainly the wrong strategy to follow. On the other hand, putting a long-term commitment on any significant proportion of the fashion segment to specific suppliers can be counter-productive. The competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. Therefore, buyers should keep their doors open for new suppliers to walk in and display their capability.

Focus on value-creating ‘intangibles’
The Ernst & Young fellows Davis and Meyer admit that ‘intangibles’, the third component of ‘blur’ is not a brand new element of the economy. The intangibles have, in fact, grown quietly as part of the economy, without calling too much attention to themselves. The authors mention four types of intangibles: services, information, the service component of products and emotions. They pretend that every offer has both tangible and intangible economic value. However, the intangible is growing faster. The outsourcing of the clothing manufacturing activities can be seen as an effort to move away from the tangibles in order to concentrate on the intangibles.

In 1997, Sara Lee Corporation (Wonderbra, Champion Sportswear, Hanes underwear,…) announced it was embarking on a massive ‘de-verticalisation’ program. Chairman and CEO John H. Bryan explained the decision this way: “Our de-verticalisation program is designed to enable us to focus our energies and talents on the greatest value-creating activities in our business, which is building and managing leadership brands.” The first de-verticalisation transaction to be completed by Sara Lee was the divestiture of nine yarn and textile operations related to its United States products business to newly-formed National Textiles, LLC.

About Nike, Davis and Meyer wrote: “Nike became the leader in its industry by keeping all kinds of traditional capital off its balance sheet, putting it in the hands of the suppliers instead. Nike’s own value-producing capacity is its design capabilities, marketing acumen, positioning, and distribution channels. Together, these accumulate into intangible strengths that yield much higher returns than would traditional capital investments.”

Also Naomi Klein, the author of ‘No Logo: Taking Aim at the Brand Bullies’ and her likes assert that in the new global economy, brands represent a huge portion of the value of a company and, increasingly, its biggest source of profits. Therefore, they say, companies are eager to switch from producing products to marketing aspirations, images and lifestyles. They are trying to become weightless, shedding physical assets by shifting production from their own factories in the first world to other people’s in the third. However, Naomi Klein’s outraged claim that consumers are being manipulated by big corporations and their brands appears to be a one-sided opinion. Surely, brands have influence on the behaviour of the consumer, but the contrary is also true. Often, consumers dictate to companies and ultimately decide their fate. As an example, Nike has had to revamp its whole supply chain after being accused of running sweatshops. Managing ‘intangibles’ such as brands is becoming increasingly difficult. Annual tables of the world’s top brands, which used to change little from year to year, now show that many brands are falling from grace and that newer, nimbler ones are replacing them. Not only companies, also countries have to carefully administer their ‘intangibles’. Outsourcing clothing retailers and manufacturers tend to favour sourcing from countries that they are already familiar with. However, if they fall out of love with a country, it’s extremely difficult to coax them again into new business. This has been the fate of Yugoslavia under president Milosevic. Though Yugoslavia can presently offer the former European customers of its once flourishing CMT-industry a pretty low salary level, a well educated workforce, rapid land and air connection, an improved human rights situation and a sufficient level of political and economic stability, very few traditional customers did yet return.