Supply chain threats fray fragile threads: making garments abroad slashes the price of labor, to the delight of shareholders. But the gains are sometimes easily erased with a snafu or two in the supply chain, leaving managers entangled in big headaches

Risk & Insurance, March, 2005 by John Williams

Every day, managers in the U.S. apparel industry take a leap of faith. They order thousands of garments and accessories worth millions of dollars from factories in Asia and Central America, with the hope that the items will arrive in the United States on time, under budget and undamaged.

How well they sleep at night is another question. Take Ralph Shank, corporate risk manager for VF Corp., one of the largest apparel distributors in the world. When the U.S. apparel industry made its clothes on U.S. soil, it was easier for risk managers to control the supply chain, and intervene before problems degenerated into a crisis.

"We had a lot more control in terms of safety, property management, and so on when we were doing our own manufacturing," says Shank. "For example, we would never set up a plant in a hurricane or earthquake-prone area. However, as we develop hundreds of contractors around the world, we are dependent on their ability to protect our products."

"Moving offshore into less-than-highly protected facilities plays havoc with insurance coverage," says Larry Workman, controller for Alexander City, Ala.-based Russell Corp. "One reason is that, when you move offshore, you have to keep more inventory on hand than you would like. You can't keep it as lean as you can domestically."

Broadly speaking, supply chain risks faced by the apparel industry come from three sources: management of overseas contractors, delays in the delivery of products from overseas, and missing the all-important "fashion window."

"While some manufacturers own their own overseas facilities, most use contractors," says John E. Caldwell, a partner with the Context Group, an apparel industry consulting firm. "The result is that they have to rely on management that is thousands of miles away."

WEST COAST BOTTLENECKS

Of greater concern is trying to manage delays of shipments from foreign countries into the United States, especially since Sept. 11, 2001, after which regulators cracked down on cargo inspections.

"The main problem is getting the goods in a timely manner from the source factories to the United States and into the warehouses that the manufacturers themselves still own," says Caldwell.

Port delays on the West Coast are a sore spot for many risk managers After traveling thousands of miles only to have inventory stacked up in a Long Beach, Calif. warehouse eats away at many a manager's psyche, not to mention profit margins.

"There is a lot of concern about the amount of product piling up in West Coast ports," says Alison Scholin, director of risk management for Chesterfield, Mo.-based Kellwood Co. "You may have to wait weeks for products to get through."

"As more goods are sourced from China, there is a big backlog on West Coast ports, especially Long Beach," says Bob Copeland, a principal with Kurt Salmon Associates, an Atlanta consulting firm to the retail and apparel industries. "This can play havoc with your lead times and inventory levels."

While Long Beach is the prime culprit, the West Coast ports of Oakland and Seattle are also seeing significant delays.

Regulators and inspectors are opening up more containers and spending more time filling out paperwork, says Kathy DesMarteau, editor-in-chief of "Apparel Magazine." "In addition, if they see anything suspicious, they may hold it up longer than normal," she says.

Another huge risk in the apparel industry is the fashion component--getting the right number of garments to the right people well before deadline.

"Compounding the problem are long lead times to react to what is happening in the marketplace," says Copeland. "You have to place your bets up front on what you expect to sell, and if you don't manage that risk well, you will end up having to discount or try to get back into the product much later."

While threading the so-called "fashion window" has always been a challenge, even when the product was manufactured in the United States, it has become an even bigger problem now that the majority of apparel products are manufactured overseas.

China has continued to pose a huge question mark for most U.S. apparel companies in the last two to three years. Is China a competitive nightmare, or is it a solution in the form of cheap labor?

In truth, it is both. As of Jan. 1, 2005, though, it stands to become more of a problem than a solution for a lot of U.S. apparel companies, according to some experts.

The reason is the following. On Jan. 1, quotas related to the importation of a number of different types of apparel goods into the United States were removed for countries around the world. The fear is that China, with its incredibly inexpensive labor pool, will flood the domestic market.

"As of January 2005, most categories of apparel that have had quotas for a number of years will no longer have limitations on how much can be sourced from where," says Copeland. "This will likely result in a rush to China for lower-cost goods."

This places U.S. manufacturers in a dilemma. "On the one hand, if you don't take advantage of this, you could suffer from competitors that end up with better pricing," says Copeland. "However, if you place all of your business in China, but the U.S. government imposes a continuation of the quotas, you will have availability problems."