Third Way Supply Chain Strategy VF Supply Chain Strategy

This paper examines VF Brands global supply chain strategy as it transitioned to its "Third Way" sourcing strategy. Until 2009, VF's sourcing had followed the more traditional model that was typical of the industry. As with many other apparel companies, VF's supply chain strategy was focused on chasing low cost labor from one country to the next. The industry had evolved to the point that apparel was produced just about "everywhere on Earth," and they, like many of their competitors, had run out of new "low cost" places to source production. This situation led to the conclusion by Chris Fraser, the president of Supply Chain International for VF Brands, that it was time that start finding cost savings by managing their supply chain more efficiently.

Rockford Consulting Group (2009) defines a supply chain as a stream of processes of moving goods from the customer order through the raw materials stage, supply, production, and distribution of products to the customer. Managing this chain of events in this process is what is known as supply chain management. VF faced the challenges or updating its supply chain management (SCM) to meet current challenges.

The benefits of SCM include:

Strengthening vendor-customer relations

Facilitating planning at all levels

Minimizing bottlenecks

Enabling all parties to participate in process improvements

Eliminating duplicate efforts

Enhancing supply chain security

VF's reworking of their sourcing strategy allows them to fully benefit from SCM. (Freese, 2006).

Supply Chain Management Software (2011) defines the main goal of any business concern "is to meet the two broad objectives of reducing cost, and obtaining the maximum customer satisfaction." VF's Chris Fraser has a similar perspective, as shown by the strategy VF developed to manage their supply chain challenges.

Based on industry experts, Chris Fraser did a number of things correctly in putting together his Third Way strategy. DeAngilis (2011) discusses another IBM report, IBM's Top Five Supply Chain Challenges, commenting on how analysts recommend building the supply chain of the future from the "outside in," that is, starting with the requirements of the customer's customer and working backwards translating the requirements to the supplier's supplier DeAngilis (2011). VF took this approach by reinventing their sourcing solution beginning with the customer's requirements, that is demand, and working backwards from there to shorten lead time for order placement, and provide more flexibility in sourcing.

Fraser was not the only supply chain management executive to come to this conclusion. According to Blanchard (2009) in his discussion of the top nine supply chain challenges for 2009, the need for supply chain risk mitigation tops the list. Moreso than even in past downturns, risk mitigation will receive increased focus because of the following factors:

Supplier financial risk

Volatility in energy, commodity, currency exchange and labor rates

Unpredictability in economic recoveries

Blanchard also mentions the need to shorten the supply chain, pointing out that U.S. manufacturers will continue reconfiguring their supply chains by moving plant operations and sourcing vendors closer to home and away from Asia. He offers several reasons as justification for supply chain reconfiguration, including limited free trade agreements, high energy costs, and rising labor and production costs; all these factors lead to companies re-evaluating their extended supply chains (Blanchard, 2009).

Blanchard's analysis confirms VF's strategy, given that VF is facing similar challenges to those that Blanchard identified. In one instance, a VF suppliers had moved its operation to Vietnam, a much less favorable location due to quota, tariffs and logistics, giving VF only three months notice to find an alternate supplier. And, in 2008-2009 in China alone, it was reported that over 60,000 small production shops had closed their doors.

Another industry expert discussed supply chain management challenges. In his opening speech for the 2011 OpsInsight Leadership Forum, Bob Ferrari (2011) commented on eth continual challenges facing productions and operations management: more demanding customers, complex, globally stretched supply chains, rising labor costs and dramatic increases in disruption and risk events, all of which can significantly impact the ability of an organization like VF to compete.

Dittman (2009), a former supply chain executive at Whirlpool Corp., offers similar conclusions in his analysis of supply chain management issues. His insights include what he considers to be timeless challenges to reaching supply chain excellence. The number one concern that Dittman cites is too much product complexity, saying that virtually all firms know they carry too many SKUs. As the case study mentions, VF had over 600,000 SKUs, making complexity of the product line one of the biggest challenges of running such a large apparel supply chain.

Ditmann...

According to Ditmann, this situation exists because of the mismatch between sales, which is driven by revenue, and manufacturing, which is driven by cost management, which goals can often conflict. Other problems result from global issues and outsourcing problems; he claims that globalization holds many promises, but also presents many challenges, including long supply lines, volatile fuel costs, and exchange rates. Just as Ditmann points out, VF was experiencing the same challenges with long supply lines and the unpredictability that they introduced into the apparel production process (Ditmann, 2009).
In a research study by CAPS Research (2009), they identified similar challenges to supply chain integration. Among their 14 key challenges, they list the following that apply to VF operations:

Establishing a vision of how financial and non-financial results will improve with supply chain integration; VF proposed its Third Way strategy

Developing people, culture, and an organization that supports the supply chain vision; VF had its own internal manufacturing operation that was highly successful

Developing multiple supply chains to meet the needs of different customer and market segments; each of the VF coalitions maintained their separate brand identities and decentralized management

Finding ways to share risks and rewards equitably among supply chain partners; the Third way strategy proposed to do just this

Building trust within and across organizations in the supply chain; one of the key components of the Third Way strategy (Carter, Monczka, Ragatz, & Jennings, 2009).

Because VF had taken into account these challenges in formulating their Third Way strategy, they put themselves in a position to take advantage of supply chain integration best practices.

In commenting on recent developments in supply chain management, Ferrari (2011) offers additional insights into needed improvements. Concerned about recent exploding material costs, Ferrari highlights the need for closer communication and coordinated strategy among procurement and broader supply chain management teams as a fundamental challenge in 2011. VF's decision to implement its Third Way strategy now comes with a sense of urgency.

Alastair offers convincing arguments in support of implementing supply chain best practices. He points out that companies with best-in-class supply chain operations typically enjoy supply chain costs 40% less than average companies. He goes on to quote a Deloitte & Touche study that showed profit margins as much as 73% higher for manufacturers who excel in supply chain management, as compared to companies with poor SCM performance. In Alastair's words, " Excellence in Supply Chain comes from a well-defined strategy, which aligns with the business needs, and is well executed to deliver the required supply chain capabilities, through enabling business processes, organization, technology and metrics" (Alastair, n.d.) VF's experience validated Alastair's observations. The VF team in their partial implementation of the Third Way strategy had already produced impressive results, as shown in Exhibit 4. The exhibit shows impressive reductions in days lead tome for Third Way, as well as reductions in COGS, FOB price, landed cost, net cost and total costs for either one or both Third Way sourcing solutions.

Additional industry experts argue the need to meet supply chain challenges. As Sillett (2006) points out, "To support a demand-driven supply chain, consumer goods companies must employ performance-driven supply chain practices."

A recent IBM report also confirms supply chain challenges to be dealt with. IBM Global Services issued a report observing that the current economic environment is increasingly more volatile, complex and structurally different than in past years. The report "New Rules for a New Decade" surveyed 664 SCM executives in 29 countries around the world. According to the report, global economic turmoil and uncertainty underlie the most significant challenges that SCM executives identified in the study. Chief among those challenges were fluctuation in customer demand and variances in customer requirements (SCMR Staff, 2010). The report indicates that VF was correct to be concerned about long lead times and inflexibility of their existing sourcing.

Butner, the reports editor, offers advice for dealing with complexity and uncertainty of the relentless challenges of managing the supply chain. She advises companies to predict demand, and be in position to react to demand variability with rapid response and allocation of global resources; this is what the Third Way strategy seeks to do. Butner further advises companies to exploit global efficiencies by enhancing value with dynamic optimization; again VF plans to take advantage of their internal manufacturing expertise for export to their other sourcing solutions. Butner also recommends that companies create cost-efficient sustainable products and practices while hedging risks with partners; another key aspect of Third Way is VF's…