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Internati onal Sourcing: Advantages, Motivations, and Obstacleswithin the U.S. Apparel Industry.

A Case Study on Destination Maternity

Krystn Davis, BS International Business and Marketing, School of BusinessAdministration, Philadelphia University, School House Lane and Henry Ave,Philadelphia, PA 19144Email:[email protected];Phone: 803-517-7794

Abstract

Since the turn of the 21st Century, international sourcing (IS) has become a businessand global phenomenon. IS has reached a variety of industries and many countries,thus showing the diversity of the phenomenon. Studies have been devoted to analyzingaspects of IS however many seem to overlook important factors, especially in the

apparel industry. The case study will identify the advantages, motivations and obstaclesthat the apparel industry; specically Destination Maternity, face when participating inIS.

Advisor: Dr. Anusua Datta , Associate Professor of Economics, School of BusinessAdministration, Philadelphia University, School House Lane and Henry Ave,Philadelphia, PA 19144; Email:[email protected]: Phone: 215-951-2810; Fax:215-951-2652

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1. Introduction

! Since the 21st century international sourcing (IS) has become a business

phenomenon that is being used throughout a variety of industries. IS is typically denedas contracting with another company (non domestic) to perform non core operations

(www.sourcingmag.com). Domestic companies then create relations with foreign

companies, whether that be production facilities, call centers, or marketing rms to

ensure product success. Why would companies what to include IS has been a focus of

research since the IS phenomenon started. A variety of reasons have came out of this

research and are identied as, a way to reduce cost, specialization of labor, and control

of budget (www.theoutsourcezone.com). Each industry has certain reasons for IS as

well as obstacles they face.! With the positives of IS, there are also negatives, and some that are

uncontrollable. Companies are faced with many problems that are not domestic.

Foreign companies may not reach quota of production or they may be late with ashipment. The domestic company, most of the time, is not there in the foreign facility to

handle these problems directly. This is just one example of how IS can be risky to a

company.! IS has also seen public backlash in the US by supposedly giving domestic jobs to

foreigners. This being a controversial argument, mostly fails to recognize how IS

actually does the inverse. IS ripples through the economy and in 2003 created

approximately 90,000 jobs in the US. Furthermore, in 2003 IS added $33.6 billion to the

US economy and is approximated to add a total of $124.2 billion through 2008

(CNNMoney).

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2. Review of Literature

! Although IS has taken the business world by storm there has yet to be vast

amounts of works devoted to examining this phenomenon further and explaining the

intricate details of IS. During the 1990s when IS started to gain popularity there was an

increase of studies that reected the same growth of IS. A study on Italian apparel rms

(Nassimbeni 2006) addresses the motivations, obstacles, and advantages of sourcing.

A survey was created and sent to large apparel companies in Italy, the answers were

then graphed and interpreted. This study by Nassimbeni has been used as a model for

this study.! Other studies that have been written addressing other issues and can be

categorized based on the issues and factors of IS they each address.

Company Involvement in Manufacturing Facilities

! The factors here that are examined (Geref 2001) are how a domestic company

is involved in the processes in their abroad companies. Specically this refers to brands

that have been using IS since the beginning of their company. Examples such as Nike

have changed their IS company involvement by using fewer, but more capable

manufacturers, and informing the contractors where to nd the components.

Furthermore, still using the Nike example, they have stopped producing domestic

samples. Sample production is made from the factories and manufacturing facilities

abroad. In order for Nike to ensure these samples, and the product as a whole is

produced properly they have employed a more stringent vender certication system to

ensure highest proper performance.

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Strategies Behind Selecting a Global Supplier

! Multinational Corporations (MNC) have devised certain strategies they use when

deciding to use a foreign country for production. Studies (Loppacher, Cagliano, Spina

2007) have shown that MNC that have been using IS for a long time, for example the

car companies, use centralized purchasing in order to reduce duplication of purchases

and to ease the purchasing burden of other departments, for example. Strategically this

allows the foreign companies to focus on production. Other strategies focus on the

specics of what MNC look for in a supplier. The foreign economy is examined todetermine nancial stability and ination rate as well as price indexes and taxes. Cost

is examined in many dimensions. Logistic cost is the key cost factor involved and is

investigated thoroughly. These factors fall under the economic convenience criteria.

The other main criteria is specialization level. This refers to labor and technology and if

those elements are focused enough to produce the type of product desired.

How and why companies decided to use IS and challenges within IS

! How companies use IS is usually by contracting with a factory abroad or by

creating their own factory in a foreign country (Babbar and Prasad 1998). Countries are

chosen based on many factors such as stability in the government and materials abroad

(i.e. Labor, natural resources, etc.) but how they gain the information is from readingtrade journals, other professional contacts, using trading companies as references and

by contacting an agent of an import broker. Companies decide to go through this

trouble for a variety of reasons. By using IS, these companies gain access to lower

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prices on production, access to raw materials, higher quality goods, worldwide

technology, better delivery, and increases their suppliers. While there are positives

there are also negatives. When using a foreign rm it is hard to nd a qualied supplier,

there is usually a large language and/or cultural difference, duty and custom fees,

volatility of currency and ination and understanding foreign business rms.

Organizational Approaches and Managerial Issues in IS

! Centralized and decentralized purchasing are managerial decisions as well as

strategic moves in IS (Giunipero and Monczka 1990). Certain studies are devoted tothe more strategic side and other studies are devoted to more of the managerial rolls in

regards to these two purchasing strategies. When surveying MNC it was found that

managers in the computer industry used decentralized purchasing more then

centralized. The reasons were unlisted. However, the chemical industry stated there

managers employed centralized purchasing techniques. It is also seen that managers

want to create a relationship in other countries with their suppliers. This will ensure

proper production and possibly allow for foreign market penetration (Handeld 1994).

3. Method

Structured Questionnaire !

!

The questionnaire was developed after reviewing the model study (Nassimbeni

2006) addressing aspects that were overlooked in the previously mentioned studies.

Sourcing motivations, obstacles, and advantages are all addressed in the questionnaire

that can be reviewed in the appendix.

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One on One interview

! After creating a survey, longer open ended questions were derived. These open

ended questions address the motivations, obstacles, and advantages of sourcing just asthe survey did. An interview was conducted with a sourcing director at Destination

Maternity and these questions were asked. The benet of this was that the director

could answer the questions and address other issues that would possibly be

overlooked.

4. Analysis of Case Study

Case Study: Destination Maternity!

! Destination Maternity was founded in 1982 as a catalogue company to ll the

need of the fashion conscience expecting mother. Rebecca Matthias, founder, found

herself in 1993 creating her initial public offering. Clearly Destination Maternity was

growing very quickly (Destination Maternity). Currently there are between 2400-2700

retails stores domestically. The amount of stores uctuates based on performance.

Under performing stores are closed. In addition to stand alone retail stores, Destination

Maternity (DM), has expanded to retail stores such as Kohl s, Macy s, and Sear s. DM

has created a variety of lines; A Pea in the Pod, A Pea in the Pod Collection,

Motherhood Maternity, Destination Maternity, and Oh Baby! By Motherhood are all lines

that are sold in DM retail stores. Also, in addition to these lines just for DM, DM has

created exclusive lines for department stores. Macy s has A Pea in a Pod, Kohl s has

Motherhood, and Sear s has the Two Hearts Collection. DM has diversied itself so it

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can be affordable to any expecting mother s budget. As of 2010, DM has paired with

Heidi Klum to create an exclusive luxury line. With all these lines DM employes

approximately 2500 people nationwide grossing, give or take, $580 million as of 2009.! The graph below shows how DM has continuously been protable, though seeing

a slight decline in 2007 due to the economic conditions, they have continuously been

successful (DM).

Source: http://www.destinationmaternitycorp.com/WhoAreWe.asp

! Once an IPO was given and DM began to be traded on the stock exchange, it

also began to incorporate IS. Originally using Mexico as a sourcing facility, DM started

sending production to other countries. After the turn of the century, DM started focusing

their sourcing on the Mid and Far East, currently making up 80% of their sourcing

locations. Locations include India, China, Cambodia, Peru, Bangladesh, and Egypt.

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! While researching DM, it became apparent to investigate the advantages,

motivations, and obstacles they encountered when IS was introduced into their

business strategy.

Motivations and Advantages !

! Based on the answers received during the interview it became clear that access

to lo cost materials and low cost on man power are the key inuencing factors of IS.

The low cost on raw materials depends on what lines DM is sourcing for. China is used

since production is done in bulk at a low cost there. Therefore DM is not paying a high

over head price for electricity for example. The items produced here are the lower end

lines that are produced in bulk. The economies of scales principle is key when including

China as a sourcing country. The more luxurious brands source the raw material of

cotton from Peru and Egypt. The cotton from these two areas is of a higher quality the

found elsewhere.!

As for mid-price lines, India is used because of the specialized labor. Handmadebeading is a technique that is found in India and is found at a lower price then from

other countries. DM uses India for its mid-price lines such as A Pea in the Pod and

Motherhood. This specialized labor is accounted for under the motivations/advantages

section as low cost on man power. An interesting point stated by the director of import

sourcing, James Pierce, was the evolution of the vender matrix and how that has

effected the motivations and advantages of sourcing.! When IS rst started becoming a global business strategy, factories were

qualied based on cheap labor and quality. Now, since September 11th 2001, security

has taken place as the number one qualifying factor by introducing the CT Pat. In

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addition to security, social compliance has taken the number two spot on the matrix.

Security and social compliance are rather interchangeable but it is undeniable that

those two have take over price and quality as the top two attributes on the matrix.

Below shows the difference of the two matrices.! ! Past (approximately 1990-2000)! !

Price Quality

Factory/Country 1

Factory/Country 2

Factory/Country 3

!

! ! Present (2001-Current)Security Social

CompliancePrice Quality

Factory/Country 1

Factory/Country 2

Factory/Country 3

! DM has also seen other advantages of IS by branching their products into other

countries such as India and other Middle East countries. Reaching a global market is

also an advantage of IS.

Obstacles ! When any company decides to participate in IS there are always many obstacles

that they will encounter. Cultural distance, timeliness, quality, efciency of nding

qualied suppliers, and reliability of factories are some of the obstacles that are usually

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found when branching out into other countries. The important issue is how a company

deals with these issues. DM has a website that informs all their potential and current

producing factories. In order to reduce the impact of these obstacles DM uses an agent

to communicate between the foreign factories and the DM headquarters. The agents

roll is key to success for DM. DM rst conducts research on potential factories in

foreign countries analyzing their production abilities of the factories, communication

abilities, workers conditions and other factory attributes. After the initial analysis, DM

contacts an agent to go into the factory and further inspect the factory and see if the

conditions and production abilities are suitable for DM. The nal step is to have DMemployees go to the facilities and inspect them themselves and nalize the relationship.

By using all these steps and the agent, DM can reduce the cultural distance, help

nding qualied suppliers, and nding reliable suppliers.! When the factor of timeliness and quality are examined, DM ensures only the

best by having numerous checks and audits of the factories both before shipment and

after the shipment reaches the US. If, by chance there is a defected item that makes it

to the DM headquarters, it is sent back to the factory at their cost. Also, if the shipment

is late and not going to arrive to DM on time then the factory but airship the product at

their own cost as well. Both of these are checks created to ensure high quality and

timeliness of delivery.

Other Externalities

! Factors outside of the factories inuence DM decision to go into foreign

countries. Political stability, bureaucratic problems, infrastructure, communication, and

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uctuation of exchange rate are all issues DM has encountered when entering another

country.! Political stability refers to government planning also. For example, in India, there

was a holiday that DM was not familiar with and their shipments were late. The

government and the factories did not work together to allow for proper shipment times to

be allowed even during the holiday time. Another example DM has experienced is labor

strikes in Bangladesh. !

! Bureaucratic Problems refers to government corruption. This was more of a

problem when DM was in Mexico at the beginning of their sourcing but they withdrewfrom Mexico. Currently this is not a huge problem for DM.! Reliable infrastructure is referring to the roads primarily. This was seen as a

problem in Bangladesh during the rainy seasons. Certain roads literally are washed

away thus leaving them useless.! Communication problems are generally avoided by using an agent. They

routinely go and investigate the factories to ensure social compliance and other aspects

are maintained. Then this is communicated to DM usually via email.! The exchange rate uctuations are monitored at DM and through the agent

however there is nothing either of them can do to reduce uctuations.! Each of these external obstacles are reduced by having an agent help with

familiarizing DM with the country and these certain factors. Also, DM diversies theirproduction facilities to reduce the impact of each of these obstacles.

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Insights

! From this interview it is important to realize that DM has created a very strong

procedure to ensure their products are taken care of. With the use of an agent and

diversication, the obstacles are vastly reduced thus maximizing the advantages. DM

receives the benet of economies of scale by producing bulk in China, they receive the

aesthetic and quality value from India by capitalizing on their specialized labor of hand

beadwork, and they receive high quality cotton from Peru and Egypt. All of these are

reasons why DM uses and continues to use IS.

Case Study: Bradlee International! Bradlee International is a sourcing agency that has production companies in

China, Korea, and Turkey. They pair up businesses and production facilities in other

countries.

Motivations !

Since Bradlee is an agency they face other situations then companies that wouldnot use and agency. However they seem to encounter some of the same motivations

as other businesses that want to outsource. Based on a questionnaire given to Bradlee,

it was discovered that low labor cost, lo cost on raw materials, global price competition,

and gaining larger market share are reasons Bradlee nds places to source from.

These seem to be similar to the reasons that DM uses IS.

Obstacles! Language and cultural distance are obstacles just as they are in DM. Ination,

nancial risk, government stability, and transportation are all problems also. Since

Bradlee is the agent they deal directly with the foreign countries in order to reduce this

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problem for companies that use IS and agencies. Therefore this is why culture is more

of an obstacle for Bradlee then a typical company that is not an agency.

Insights

! In comparison to DM, one can see that cultural distance is a main obstacle for

Bradlee more so then DM since Bradlee deals directly with the foreign company. DM

has also been able to put in place a website that allows them to avoid many obstacles

that Bradlee has to deal with. The reason for these differences is that since Bradlee is

an agency, they have to deal directly with the company abroad while DM does not.They both deal with obstacles however the direct interaction with the foreign company

has a lot to do with the types and amount of obstacles a company faces when uses IS.

5. Country Analysis

!

Both DM and Bradlee use China as a place to source, however DM is morediversied branching heavily into India and Peru and Bradlee has branches heavily into

South Korea. A further analysis of these locations may show why they are used.

China India Peru South Korea

GDP $8.75 trillion $3.57 trillion $251.4 billion $1.36 trillion

Gov Style CommunistState

FederalRepublic

ConstitutionalRepublic

Republic

Ination -0.70% 10.90% 2.90% 2.80%

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China India Peru South Korea

Literacy Rate 90.92% 61% 87.70% N/A

ExchangeRate

6.6 yuen=$1US

44.9 rupees=$1

2.8 PeruvianNuevo Sol=$1

1135 won=$1

National Debt $347.1 billion $223.9 billion $30 billion $333.6 billion

Specialties Bulkproduction

Specializedlabor

High qualitycotton

Bulk production

!

While Bradlee and DM have been in these counties well before 2009, thesestatistics are from 2009 and show why both companies are still in these countries. As

for DM, Peru is expensive due to their close exchange rate with the US. However, DM

uses Peru for its higher line of clothing so the expenses are paid for due to mark up.

Also it is clear that these areas have specialized production which draws in both DM

and Bradlee. Bradlee does not like to diversify their production so it focuses on

producers that produce in bulk. China and Korea t that description. For DM, the

location depends on the type of product that needs to be produced. For the lower end

lines of clothes, they are produced in bulk and are done mainly in China. The exchange

rate also helps DM s relation with China since many items are being produced there.

India produces the mid priced clothing items that sale at a higher price then the low line.

These garments usually have beading and specialty designs, since India hasspecialized labor, they are the producers. As for Peru, the higher lines are produced

here because Peru is home to luxurious cotton. !

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6. Conclusion

! Based on the information gathered from the case study on Destination Maternity

and Bradlee Int., it is apparent why IS is important in business. In regards to theapparel industry, they benet from specialized labor from certain areas such as India.

Also, producing with the economies of scale principle, apparel companies can produce

mass amounts of garments at a low price by sending production to places such as

China and Korea. The quality of these garments is not affected.! However, when incorporating IS, companies are faced with obstacles. The

apparel industry is very sensitive to delivery times. Just in time, and reliable delivery

are very important and could cause an apparel company to lose prot by not having

their product. With this risk it is up to the company to establish certain measures that

reduce this risk. As for agencies, they reduce the amount of countries they rely on as to

reduce the cultural differences.!

Despite the industry there will always be externalities that will be a burden tocompanies. Government stability, economic stability, and ination rates are just a few of

the outside items that companies can not control. These will affect IS and how

companies participate however individual companies are responsible for creating

checks and balances as well as doing proper research to reduce the affect of the

externalities.! IS is a risky company investment but with proper research, educated personnel,

and well thought out procedures, a company in any industry can become even more

successful.

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References

Gerf, Gary. "Global Sourcing in the US Apparel Industry."Journal of Tex tile and

! Apparel, Technology and Management 2.1 (2001). Print.

Giunipero, Larry C., and Robert M. Monczka. "Organizational Approaches to Managing

! International Sourcing."Intern ational Journal of Physical Distribution & Logistics

! Management 27.5/6 (1997): 321-36. Print.

Handeld, Robert B. "US Global Sourcing: Patterns of Development."International

! Journal of Operations & Production Management 14.6 (1994): 40-51. Print.

Loppacher, Julio S., Raffaella Cagliano, and Gianluca Spina. "Global Sourcing and

! Purchasing Strategy as Decision Making Process." May 2007. Web. 2 Dec. 2010.

"Outsourcing Creates Jobs in U.S., Industry Study Finds - Mar. 30, 2004."CNNMoney .

!

30 Mar. 2004. Web. 02 Dec. 2010. .

"Outsourcing Management."Www.theoutsourcezone.com . Web. .

"Press Release | Investors | Destination Maternity Corporation (formerly Mothers

! Work, Inc.)."Destination Maternity . Web. 02 Dec. 2010. .

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Sunil Babbar, Sameer Prasad, (1998) "International purchasing, inventory management

! and logistics research: An assessment and agenda", International Journal of

! Physical Distribution & Logistics Management, Vol. 28 Iss: 6, pp.403 - 433

"What Is Outsourcing?"Www.sourcingmag.com . Web. 2 Dec. 2010.

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