Supply Chain Metrics That Matter:

A Focus on Apparel

Using Financial Data from Corporate Annual Reports to

Better Understand the Apparel Supply Chain

5/9/2013

By Abby Mayer Research Associate

Supply Chain Insights LLC

Copyright © 2013 Supply Chain Insights LLC Page 1

Contents Research ................................................................................................................................... 2

Disclosure .................................................................................................................................. 2

Research Methodology .............................................................................................................. 2

Executive Overview ................................................................................................................... 4

Setting the Stage ....................................................................................................................... 5

Where and How to Operate? ...................................................................................................... 6

Growth: Bumpy Ride .................................................................................................................. 7

Profitability: On the Rise ............................................................................................................. 9

Cycle: Stuck on Inventory .......................................................................................................... 9

Complexity: Manage, Don’t Simplify ..........................................................................................10

Recommendations .................................................................................................................... 11

Conclusion ................................................................................................................................13

Company Profiles ..................................................................................................................13

Appendix ...................................................................................................................................14

Other Reports in This Series:.................................................................................................14

About Supply Chain Insights LLC ..............................................................................................15

About Abby Mayer .....................................................................................................................15

Copyright © 2013 Supply Chain Insights LLC Page 2

Research Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply

Chain Insights LLC. They are a deep focus on a specific industry.

These reports are based on data collected from financial balance sheets and income

statements over the period of 2000-2011. In these reports, we analyze how companies made

trade-offs over the course of the last decade in balancing growth, profitability, cycles and

complexity.

Within the world of Supply Chain Management (SCM), each industry is unique. We believe that

it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,

we believe that we have to evaluate change over time by peer group. In this series of reports,

we analyze the potential of each supply chain peer group, share insights from industry leaders

from each industry, and give recommendations based on general market trends.

Disclosure Your trust is important to us. As such, we are open and transparent about our financial

relationships and our research process. This independent research is 100% funded by Supply

Chain Insights.

These reports are intended for you to read, share and use to improve your supply chain

decisions. Please share this data freely within your company and across your industry. All we

ask for in return is attribution when you use the materials in this report. We publish under the

Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you

will find our citation policy here.

Research Methodology The basis of this report is publicly available information from corporate annual reports from the

period of 2000-2011 for publicly-owned companies involved in apparel manufacturing activities.

In picking companies for the Supply Chain Metrics That Matter report, we traditionally rely on

companies recently listed in the Fortune Global 500. However, due to the smaller size of

companies operating in the apparel industry, we have taken our peer group from the U.S.-

focused Fortune 500. In choosing our peer group we identified three companies, ranked in the

2012 Fortune 500, operating within the industry of focus. We augmented them with three hand-

selected companies that we believe provide a meaningful comparison.

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In addition, in our ongoing effort to provide the latest research for our clients and readers, we

are now linking all Supply Chain Metrics That Matter reports to Morningstar industry sectors. We

utilize Morningstar industry sectors in creating the Supply Chain Index; a formulaic

representation of supply chain excellence, and the relationship between corporate financial

performance (market capitalization) and supply chain financial ratio metrics. Thus, all

companies included in future Supply Chain Metrics That Matter reports will be aligned within

Morningstar sectors.

The financial ratios used will enable supply chain leaders to better understand where the

industry is on the Supply Chain Effective Frontier. In this report, we share a framework for

supply chain excellence that balances growth, profitability, cycles and complexity metrics. In

each Supply Chain Metrics That Matter report, we share insights from each of these metrics

categories. Due to the fact that the supply chain is a complex system that must be managed

holistically, we share the trends on each of these dimensions over the course of the last decade.

We use the financial data to help readers learn from past trends, to better understand current

operating environments, and we provide recommendations for the future. We augment the

financial data analysis with information from our quantitative and qualitative research studies as

well as our work with clients operating within the industry.

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Executive Overview Different industries are making progress on supply chain excellence at different rates. In the

writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer

electronics industry is one of the only sectors making consistent and sustainable progress in

balancing growth, profitability, cycles and complexity. We also see that many other industries—

chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal

plateau. They are treading water with no company able to move forward. In contrast, we see

that the apparel industry is trending backwards.

When we analyze progress in the apparel industry over the last decade, we see a degradation

of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and

three of the six companies show flat or decreasing performance on operating margin. This is the

sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain

Metrics That Matter series (for a complete series listing see the Appendix).

Figure 1 illustrates the intersection of inventory turns and revenue per employee over the

preceding decade. Ideally, companies would be moving consistently from the lower left to the

upper right as they increased both inventory turns and revenue per employee performance.

Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.

Figure 1. Inventory Turns vs. Revenue per Employee (2002-2011)

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Setting the Stage Apparel manufacturing companies face a variety of challenges. Products rely heavily on

commodities and thus fluctuations in commodity prices are a constant concern. Changing

seasons and trends, and the birth of fast-fashion, create an environment where speed is of the

utmost importance in bringing a product from concept to shelf as quickly as possible. In addition,

the role of outsourced manufacturing has created supply chains spanning countries and

continents and the inherent challenges of management and oversight. Finally, corporate social

responsibility and a responsibility to society, the environment, customers and employees

remains a difficult balancing act.

Unlike other industries, when we examine the sector’s numbers from the last decade, as

outlined in table one, there is no clear winner. The average results, for the period of 2000 to

2001, for the apparel industry across the four categories of growth, profitability, and cycle and

complexity metrics are outlined in table 1.

Table 1. Apparel Industry Average Financial Metrics (2000-2011)

In short, as the industry grew over the past decade, discipline on many supply chain metrics

stagnated or degraded.

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Where and How to Operate? Over the course of the last decade, apparel manufacturers have chased a lower cost of labor

around the world. We have seen manufacturing move from in-country production to China, India

and Bangladesh as companies chased lower production costs. The expiration of a quota system

in 2005—limiting fabric and cloth imports to large Western markets—as well as ongoing WTO

regulations and negotiations has gradually shifted the apparel landscape, but not stymied the

trend of offshoring and outsourcing the labor intensive portions of the apparel industry.1

American Apparel, Inc., however, has continued to source and manufacture in-country, while

others in the peer group built longer supply chains overseas to reduce cost structures. Selected

quotations from recent American Apparel, Inc. annual reports indicate some of the advantages

enjoyed due to the unique structure of the business.

The industry has to face the fact that not only have they been unable to improve operating

margin, they have also not been able to meet their own commitments on “Fair Labor” as

outlined in their Corporate Social Responsibility (CSR) documents. Recent news fills the papers.

For example, on April 24, 2013 a garment factory in Savar, Bangladesh collapsed. As of May 1,

the death toll had topped 400 people and is projected to climb over 1,000.2 Multiple factories

were housed in the eight-story Rana Plaza where over 3,000 individuals were at work at the

time of the incident. Despite the orders of factory inspectors who ordered immediate evacuation

after discovering significant cracks in the building’s structure, factory workers were expected to

report to work on the fateful day. Clothes labels found in the rubble include Benneton, Mango,

Joe Fresh, Primark & C&A.3 Now, two weeks after the building’s collapse, the toll sits at 900.

1 The Washington Post. “China to Raise Tariffs on Clothing Exports.” http://www.washingtonpost.com/wp-dyn/content/article/2005/05/20/AR2005052001519.html 2 The Sydney Morning Herald. “What price $10 dresses and T-shirts now?” http://www.smh.com.au/comment/what-price-10-dresses-and-tshirts-now-20130430-2iqwa.html 3 Fox News. “Death toll from Bangladesh factory collapse tops 400, officials say.” http://www.foxnews.com/world/2013/05/01/death-toll-from-bangladesh-factory-collapse-tops-400-officials-say/

“Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and to changing fashion trends and to closely monitor product quality.”

•American Apparel, Inc. 2011 annual report (10K), page 6

“We believe that bringing certain elements of our production process in-house affords us the opportunity to exert higher quality control while simultaneously lowering production costs.”

•American Apparel, Inc. 2011 annual report (10K), page 8

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This happened less than six months after a fire occurred in another Bangladesh factory killing

112 and leaving companies, including Wal-Mart Stores, Inc. and Sears, answering tough

questions as to lax oversight and insufficient supplier management.4 The occurrence of another

tragedy will only increase the scrutiny of apparel manufacturers and their extended supply

chains. While the industry enjoys a hearty debate on when and where to source and

manufacture, when it comes to financial results, there is no clear winner.

Growth: Bumpy Ride Growth has been the number one priority for the industry. It has been a bumpy ride. The

industry experienced wild gyrations in volume and was continuously forced into reactive mode

with changing demand levels.

When it comes to supply chain planning, the apparel industry has a low level of capabilities for

demand management and network design. They are unequal to their consumer electronics or

consumer packaged goods peers. As a result, they were unable to stay balanced and manage

growth through the period’s dynamic market changes.

Table 2. Year-over-Year Sales Growth (2000-2011)

The growth levels over the years are wildly divergent, from a high of 39% demonstrated by

American Apparel, Inc. during 2004-2007, to a low of -3% for VF Corp. from 2000-2003.

4 ABC News. “Fire kills 112 workers making clothes for US brands.” http://abcnews.go.com/Blotter/fire-kills-112-workers-making-clothes-us-brands/story?id=17807229#.UYFb7LVQF30

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However, five of the six companies demonstrate slowing growth in 2008-2011; likely a result of

the economic climate, and a decrease in consumers’ discretionary budgets.

While economic volatility affects all companies, regardless of industry, some apparel companies

demonstrated greater levels of resilience and more stability. While American Apparel, Inc.’s

sales dropped from 39% to 10%, other companies such as Columbia Sportswear Co. and

Hanesbrands, Inc. showed smaller shifts. A quote from the 2011 Hanesbrands, Inc. annual

report indicates one of the reasons for this stability.

It seems rather obvious, but the demand for socks is less elastic than the demand for designer

jeans. This is reflected in the above information, both financial metrics and annual report quotes,

and highlights the importance of understanding one’s products and the demand signals from

consumers.

Table 3. Operating Margin (2000-2011)

“We believe that our status as a high-volume seller of core basic apparel products creates a more stable and predictable revenue base and reduces our exposure to dramatic fashion shifts often observed in the general apparel industry.”

• Hanesbrands, Inc. 2011 annual report (10K), page 11

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Profitability: On the Rise When it came to margin management, fashion goods fared better than basics. Three of the six

companies profiled were able to improve operating margin. The results are shown in table 3.

Companies with desirable brand names have been able to improve margin and create an

environment of greater profitability. This is demonstrated through the performance of PV Corp., Ralph Lauren Corp. and VF Corp. On the other hand, more commoditized products and

brands have struggled with shrinking margin. Columbia Sportswear Co. demonstrates a case

study of falling margin from 0.19 at the beginning of the decade to 0.08 at the close. This

divergence of margin creates a two-tiered apparel industry.

Cycle: Stuck on Inventory Over the past decade, many companies have invested in technologies and processes to

improve cash-to-cash cycles and reduce inventories. While many would argue that apparel

companies grew bloated inventories, as they outsourced manufacturing and built a longer

supply chain, not only did apparel companies not improve margins, but they also did not

improve inventory management. The results are shown in table 4.

Table 4. Days of Inventory (2000-2011)

Once again, we see that American Apparel’s significantly different operating structure sets it

apart from its peers. It also illuminates the fact that companies that have chosen to outsource

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production to third parties actually have reduced their inventory stores and helps to negate the

hypothesis that outsourced manufacturing has created a need for longer apparel supply chains.

PVH Corp, Ralph Lauren Corp., and VF Corp are the three companies that demonstrate

falling inventory stores. These companies experience a stronger business requirement to

maintain small inventory levels and create flexible supply chains that can react to the latest

fashion trends.

Complexity: Manage, Don’t Simplify Complexity is rising across all industries in regards to their supply chain processes and one of

our preferred measures is revenue per employee. In general, all industries have shown

improved performance over the past decade, with the exception of apparel companies, as

shown in table 5. While most industries have seen exceptional growth in revenue per employee

since the 1990s, apparel companies are moving backwards in terms of employee productivity.

Table 5. Revenue per Employee Across Industries (1990-2011)

Revenue per employee for the apparel industry indicates several striking conclusions which are

unique to this industry. There is a wide discrepancy of values, based primarily upon the use of

outsourced manufacturing partners, and also a pattern of falling revenue per employee metrics

for one company, Columbia Sportswear Co., which is rare both within and outside of the

industry.

The financial results shown in table 6 illustrate revenue per employee for each of the six

companies profiled in this report. .

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Table 6. Revenue per Employee (2000-2011)

Recommendations The financial metrics, news reports, annual report excerpts, and the commentary above present

a picture of an industry with different operating models and unique challenges. There are

several recommendations we would make to apparel manufacturers to improve their supply

chain processes based upon our analysis of their financial performance over the past decade.

• Understand and embrace CSR. Corporate social responsibility is here to stay.

Companies may have outsourced their supply chains, but they cannot outsource the risk

or responsibility. Consumers today expect not only the products they want at the price

they want when and where they want them, they also expect companies to actively

manage the supply chain and protect environmental and social interests. This is an

exceedingly difficult balancing act for apparel companies requiring a redesign of the

supply chain and active work in supplier development. In our work on corporate social

responsibility, we see that Patagonia, Inc. and Levi Strauss & Co. are two apparel

companies that have been successful in meeting the challenge as rated by their peers.

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Figure 2. Respondent Rankings from Corporate Social Responsibility Study

• Manage, but do not simplify. Complexity is the only constant in the 21st century’s

global supply chains. It is here to stay. Apparel can take lessons from the consumer

electronics industry on how to design and implement planning systems to improve

resiliency, and reduce the impact of complexity and market-to-market supply and

demand variation on the supply chain.

• Inventory management is still fertile ground. As discussed earlier, days of inventory

for the six companies profiled in this report demonstrates there is more work to be done.

Gaining proficiency at supply chain planning and the redefinition of the channel demand

signal are opportunities for apparel companies.

• Look outside the industry. The apparel industry has largely recruited for talent within

the sector. As supply chain processes have matured over the course of the last decade,

the gap has widened between this industry and others. The industry would be well

served to begin recruiting outside the industry and focus on closing the gap.

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Conclusion

Over the course of the last decade, the apparel industry had a bumpy growth ride with a

reversal of progress on supply chain performance. This gap will only worsen unless there is

serious attention paid to supply chain processes, with a focus on the fundamentals of supply

chain planning, network design and talent development. The financial metrics illustrate several

key areas requiring further work and refinement, and highlight the importance of supply chain as

a differentiator in today’s business world.

Company Profiles

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Appendix

Other Reports in This Series: Supply Chain Metrics That Matter: A Focus on Retail Published by Supply Chain Insights in August 2012. Supply Chain Metrics That Matter: A Focus on Consumer Products Published by Supply Chain Insights in September 2012. Supply Chain Metrics That Matter: A Focus on the Chemical Industry Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: The Cash-to-Cash Cycle Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry Published by Supply Chain Insights in December 2012. Supply Chain Metrics That Matter: Driving Reliability in Margins Published by Supply Chain Insights in January 2013. Supply Chain Metrics That Matter: A Focus on Hospitals Published by Supply Chain Insights in January 2013. Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Consumer Electronics Published by Supply Chain Insights in April 2013.

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About Supply Chain Insights LLC Supply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst

model. The services of the company are designed to help supply chain teams improve value-

based outcomes through research-based Advisory Services, a dedicated Supply Chain

Community and public/in-house training. Supply Chain Insights is focused on delivering

independent, actionable and objective advice for supply chain leaders. As a company

dedicated to research, turn to us when you want the latest insights on supply chain trends,

technologies to know, and Supply Chain Metrics That Matter.

About Abby Mayer

Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the

original members of the Supply Chain Insights LLC team. She is also the

author of the Supply Chain Index blog. Her supply chain interests include

connecting financial performance and supply chain excellence, as well as

talent management issues and emerging markets.

Abby has a B.A. in International Politics and Economics from Middlebury

College and a M.S. in International Supply Chain Management from

Plymouth University in the United Kingdom. She has also completed a

thru-hike of Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United

States. As part of the planning and food prep process, she became interested in supply chain

management when she was asked to predict hunger pangs for the entire three-week trip before

departure. If that isn’t advanced demand planning, what is?!?!