{"56528":{"#nid":"56528","#data":{"type":"news","title":"Offshoring: Bringing Retailing Back into Balance","body":[{"value":"\u003Cp\u003E\n\u003C\/p\u003E\u003Cp\u003EThe Chinese have a saying, \u0022wu j\u0026iacute; b\u0026igrave; f?n,\u0022 which translates roughly to \u0022When the pendulum reaches one extreme, it must swing back the other way.\u0022 Recently, the pendulum appears to be reaching an extreme on the issue of offshoring,\u003Cbr \/\u003E\n  the practice of moving work to countries with low wage rates. And it will continue\u003Cbr \/\u003E\n  as long as savings from lower wage rates outweigh the additional supply chain\u003Cbr \/\u003E\n  costs engendered by the added time and distance to market. In many cases, companies\u003Cbr \/\u003E\n  seem to be using offshoring beyond the point that makes economic sense.\u003C\/p\u003E\n\u003Cp\u003EEvidence of these excesses is most apparent in retailing, an industry that\u003Cbr \/\u003E\n  represents 40% of the U.S. economy and is the nation\u0027s largest employer. For\u003Cbr \/\u003E\n  example, Wal-Mart\u0027s \u0022everyday low prices\u0022 have squeezed other retailers\u0027 margins\u003Cbr \/\u003E\n  and driven them to seek lower initial costs, or first costs, from their suppliers.\u003Cbr \/\u003E\n  As a result, over the past three decades the numbers of consumer goods imported\u003Cbr \/\u003E\n  from distant, low-cost sources have grown substantially, which has helped to\u003Cbr \/\u003E\n  drive the trade balance from around a $1 billion surplus in 1973 to a deficit\u003Cbr \/\u003E\n  of $500 billion in 2003. Over the same period, markdowns at general merchandise\u003Cbr \/\u003E\n  retail department stores have grown from single digits to over 30% of sales\u003Cbr \/\u003E\n  today. Although lost sales from out-of-stock merchandise are harder to quantify,\u003Cbr \/\u003E\nit\u0027s reasonable to assume that such losses have grown similarly.\u003C\/p\u003E\n\u003Cp\u003E These numbers suggest that U.S. retailers and their suppliers have not adequately\u003Cbr \/\u003E\n  balanced labor costs against other supply chain costs. Rather, they are concentrating\u003Cbr \/\u003E\n  on trying to lower the first costs they pay for goods-an effort that is indirectly\u003Cbr \/\u003E\n  hurting their profit margins. \u003C\/p\u003E\n\u003Cp\u003E The real question for retailers is not whether offshoring is ethically or\u003Cbr \/\u003E\n  politically correct. Instead, they need to ask whether they are correctly balancing\u003Cbr \/\u003E\n  the impact of offshoring on cost and revenue in making sourcing decisions \u003C\/p\u003E\n\u003Cp\u003E  The Notion of Total Delivered Cost\u003Cbr \/\u003E By\u003Cbr \/\u003E\n  relying on traditional notions of total delivered cost, retailers sometimes\u003Cbr \/\u003E\n  fail to account for the impact that off-shore manufacturing has on revenues,\u003Cbr \/\u003E\n  given extended time and distance to market. This impact is further magnified\u003Cbr \/\u003E\n  by the phenomenon of SKU proliferation resulting from consumer demand for greater\u003Cbr \/\u003E\nproduct variety.\u003C\/p\u003E\n\u003Cp\u003E In its 1998 annual report, the Federal Reserve of Dallas estimated that the\u003Cbr \/\u003E\n  number of running-shoe styles rose from about five in the early 1970s to about\u003Cbr \/\u003E\n  285 in the late 1990s. The most astounding examples of SKU proliferation come\u003Cbr \/\u003E\n  from manufacturers who use mass customization as a key market strategy. The\u003Cbr \/\u003E\n  same Federal Reserve report estimated that Dell offered consumers more than\u003Cbr \/\u003E\n  16 million combinations of computers, and BMW claims that it produces more\u003Cbr \/\u003E\n  than 1017 variations of its 7 Series automobile. \u003C\/p\u003E\n\u003Cp\u003E The increased product variety makes forecasting more complex, if not impossible,\u003Cbr \/\u003E\n  and also makes offshore manufacturing even more difficult to manage. BMW, for\u003Cbr \/\u003E\n  example, is adept at forecasting overall demand for its 7 Series but could\u003Cbr \/\u003E\n  not estimate sales for each of the 1017 different combinations. Instead, manufacturers\u003Cbr \/\u003E\n  like Dell and BMW understand the cost implication of time to market and work\u003Cbr \/\u003E\n  hard to shorten the order-to-delivery cycle through such strategies ad postponement. \u003C\/p\u003E\n\u003Cp\u003E Knowing When to Stay Home\u003Cbr \/\u003E\n\u003Cbr \/\u003E\nThe key to effective sourcing decisions relies on the manufacturer\u0027s ability\u003Cbr \/\u003E\nto balance longer lead time against lower first costs. Savvy supply chain management\u003Cbr \/\u003E\ncan help retailers deal with margin squeeze and the demand for product variety\u003Cbr \/\u003E\nthrough a combination of strategies that may include, but is not limited to,\u003Cbr \/\u003E\noffshoring.\u003C\/p\u003E\n\u003Cp\u003E Two retailers are frequently cited for their success in sourcing for maximum\u003Cbr \/\u003E\n  profitability: World Co. Ltd. of Japan and Zara, owned by Inditex and headquartered\u003Cbr \/\u003E\n  in Spain. Both have maintained margins by developing their supply chains to\u003Cbr \/\u003E\n  reduce lead times and trim the product cycle time from the six-months-out approach\u003Cbr \/\u003E\n  of traditional fashion retailers to as short as six weeks. \u003C\/p\u003E\n\u003Cp\u003EAt World Co., supply chain speed comes\u003Cbr \/\u003E\n    from careful planning, information systems that permit continuous forecast\u003Cbr \/\u003E\n    updating, and production processes that can respond rapidly to change. One\u003Cbr \/\u003E\n    factor in the speed of this supply chain is the company\u0027s decision to maintain\u003Cbr \/\u003E\n    domestic production. Although the cost of labor in domestic factories is\u003Cbr \/\u003E\n    significantly higher than that of overseas counterparts, World Co. can respond\u003Cbr \/\u003E\nmore quickly to the frequent changes of the fashion world.\u003C\/p\u003E\n\u003Cp\u003EIn Europe, Zara has achieved similar success\u003Cbr \/\u003E\n    by continuously tracking customer preferences so that it can revise products\u003Cbr \/\u003E\n    throughout their life cycles. Zara offers considerably more products than\u003Cbr \/\u003E\n    similar companies. It produces about 11,000 distinct items annually compared\u003Cbr \/\u003E\n    with 2,000 to 4,000 items for its key competitors. The company can design\u003Cbr \/\u003E\n    a new product and have finished goods in its stores in four to five weeks;\u003Cbr \/\u003E\n    it can modify existing items in as little as two weeks. Shortening the product\u003Cbr \/\u003E\n    life cycle means greater success in meeting consumer preferences.\u003C\/p\u003E\n\u003Cp\u003EZara\u0027s speed is the result of a combination\u003Cbr \/\u003E\n    of elements, including manufacturing its more fashion-sensitive items locally.\u003Cbr \/\u003E\n    Because these are the riskiest items, they are also produced in smaller quantities\u003Cbr \/\u003E\n    so that they can be reordered more frequently on the basis of sales. A full\u003Cbr \/\u003E\n    40% of Zara\u0027s finished garments are manufactured in Spain, and two-thirds\u003Cbr \/\u003E\n    of the remaining items are sourced from nearby European countries and North\u003Cbr \/\u003E\n    Africa.\u003C\/p\u003E\n\u003Cp\u003EIn the case of World and Zara, proximity\u003Cbr \/\u003E\n    between manufacturing and retail outlets is important in achieving a competitive\u003Cbr \/\u003E\n    advantage that translates into stronger profits. Still, outsourcing to a\u003Cbr \/\u003E\n    more distant location can and does have a place in retailing, even in the\u003Cbr \/\u003E\n    rarified world of high fashion.\u003C\/p\u003E\n\u003Cp\u003E  Deciding by Demand\u003Cbr \/\u003E\n\u003Cbr \/\u003E\n  Sourcing decisions should reflect the uncertainty\u003Cbr \/\u003E\n  in demand for the product. Higher volume items with predictable demand can be\u003Cbr \/\u003E\n  sourced further from their outlets than lower volume, high-risk products.\u003C\/p\u003E\n\u003Cp\u003EIn short, a pair of standard work boots\u003Cbr \/\u003E\n    does not require the same design flexibility as a pair of Manolo Blahnik\u003Cbr \/\u003E\n    sandals, nor does it command the same price point. It\u0027s the kind of item\u003Cbr \/\u003E\n    that can be off-shored for maximum cost efficiency because style is not likely\u003Cbr \/\u003E\n    to change markedly over time.\u003C\/p\u003E\n\u003Cp\u003ESplitting the Difference\u003Cbr \/\u003E\n\u003Cbr \/\u003E\nAnother approach to economic sourcing is to\u003Cbr \/\u003E\nsegment the manufacturing process, sourcing basic production processes further\u003Cbr \/\u003E\nfrom the retailer and putting the finishing touches on products at locations\u003Cbr \/\u003E\ncloser to their outlets.\n\u003C\/p\u003E\n\u003Cp\u003EFor example, Li \u0026amp; Fung (which derives\u003Cbr \/\u003E\n    75% of its turnover from the apparel industry) sets up and manages supply\u003Cbr \/\u003E\n    chains for such clients as Kohl\u0027s, Reebok, Disney, and Meijer, in which a\u003Cbr \/\u003E\n    single product is assembled from components sourced from several locations.\u003Cbr \/\u003E\n    By creating flexible supply networks, these organizations can allow for this\u003Cbr \/\u003E\n    kind of integrated sourcing, including the ability to redeploy raw materials\u003Cbr \/\u003E\n    as needed and reduce lead times in response to market changes.\u003C\/p\u003E\n\u003Cp\u003E The Bottom Line\u003Cbr \/\u003E\n\u003Cbr \/\u003E\nNo one solution works in every situation.\u003Cbr \/\u003E\nCutting first costs may look like a sure way to bolster margins, but the added\u003Cbr \/\u003E\nlead time often leaves too much or too little inventory, sacrificing profits\u003Cbr \/\u003E\nto markdowns or lost sales. As retailers increasingly share the cost of discounting\u003Cbr \/\u003E\nand overstocking, there is some hope that suppliers will do a better job of balancing\u003Cbr \/\u003E\nthe cost\/revenue tradeoff. But until retailers incorporate the value of speed\u003Cbr \/\u003E\nand proximity into their commercial terms, suppliers\u0027 options will remain limited.\u003Cbr \/\u003E\nFor now, offshoring is but one in a portfolio of strategies for maintaining margin\u003Cbr \/\u003E\nand profitability. Perhaps as suppliers start to shoulder more of the costs of\u003Cbr \/\u003E\ndiscounting and overstocking, they will find ways to negotiate commercial terms\u003Cbr \/\u003E\nthat better reflect the impact of time to market and help drive the pendulum\u003Cbr \/\u003E\nback toward balance.\u003C\/p\u003E","summary":null,"format":"limited_html"}],"field_subtitle":"","field_summary":"","field_summary_sentence":"","uid":"27279","created_gmt":"2004-07-01 00:00:00","changed_gmt":"2016-10-08 03:06:15","author":"Barbara Christopher","boilerplate_text":"","field_publication":"","field_article_url":"","dateline":{"date":"2004-07-01T00:00:00-04:00","iso_date":"2004-07-01T00:00:00-04:00","tz":"America\/New_York"},"extras":[],"groups":[{"id":"1242","name":"School of Industrial and Systems Engineering (ISYE)"}],"categories":[{"id":"145","name":"Engineering"},{"id":"135","name":"Research"}],"keywords":[],"core_research_areas":[],"news_room_topics":[],"event_categories":[],"invited_audience":[],"affiliations":[],"classification":[],"areas_of_expertise":[],"news_and_recent_appearances":[],"phone":[],"contact":[{"value":"\u003Cstrong\u003EBarbara Christopher\u003C\/strong\u003E\u003Cbr \/\u003EIndustrial and Systems Engineering\u003Cbr \/\u003E\u003Ca href=\u0022http:\/\/www.gatech.edu\/contact\/index.html?id=bt3\u0022\u003EContact Barbara Christopher\u003C\/a\u003E\u003Cbr \/\u003E\u003Cstrong\u003E404.385.3102\u003C\/strong\u003E","format":"limited_html"}],"email":["bchristopher@isye.gatech.edu"],"slides":[],"orientation":[],"userdata":""}}}