Supply Chain Strategic Fit Choosing an Optimal Solution for an Apparel Manufacturer Case Study

1. Introduction

On his way back from an international apparel trade fair in Los Angeles, United States, Mr. Khalil Mahmoud, the CEO of Khalil Mahmoud Garments, was anxious about meeting new demands from apparel buyers. At the week-long exhibition, clients appreciated his tees, polo shirts, joggings, and hoodies. The t-shirts, with good quality prints on front and stitch cuts, ranged in price from USD 1.99 to USD 2.50, in 180 grams per square meter (gsm) fabric made of fiber blend of cotton and polyester. Khalil Mahmoud Garments also offered embroidered polo shirts in 200 gsm fabric with a cotton/poly mix at USD 3.99 to USD 4.70. Khalil Mahmoud has run a medium-size vertical apparel factory for 25 years in Karachi, Pakistan. Although quite frequently receiving fast-fashion garment orders, Khalil Mahmoud Garments mainly specializes in the high-profit knit category, with steady orders to produce teeshirts for cost-sensitive customers from brands based in the United States and Western Europe. While buyers appreciated his samples and cost structures, prospective buyers also wanted Khalil Mahmoud Garments to ensure compliance with health and safety standards at its workplace. Khalil Mahmoud worried that a number of orders for hoodies in 280gsm fabric with embroidery and embellishment, in the price range USD 6.50 to USD 7.80, would be contingent on demands that his company could not meet.

2. The Global Apparel Industry

According to a 2018 World Trade Organization review, the value of apparel exports reached USD 454.5 billion in 2017. The supply chain has two major players: upstream apparel suppliers and downstream buyers, including well-known brands and large retailers. Free trade and abolition of quotas have created more export opportunities for competitive apparel manufacturers. Rapid changes in technology have brought on the use of enterprise resource planning (ERP) software to implement plans and radio-frequency identification (RFID) to trace and track the shipments. Geopolitical easing such as WTO-led deregulation of markets and the European Union granting preferential status has boosted global sourcing while raising gross domestic product (GDP), exportation, and employment in developing nations including Pakistan, Cambodia, and Sri Lanka. However, these advances in global trade have come at a cost. In 2012, a fire in an apparel factory in Karachi claimed the lives of 289 workers and injured 600 others. In 2013, the collapse of an apparel factory in Dhaka killed 1,134 garment workers and injured more than 2,500. These events affected brand images, prompting customer boycotts from brands seen to be using unethical supply chains to create their clothing. Buyers now demand low-cost garments and agile processes as well as safe working conditions at supplier facilities.

3. Khalil Mahmoud Garments

Established in the early 1990s, Khalil Mahmoud Garments employs around 450 workers. The company's working hours are longer than reported, and only 15% of workers are permanent employees while the rest of the workforce is hired on a contractual basis. Due to external pressure, Khalil Mahmoud Garments has improved sanitation by building more toilets for male and female workers. Assembly line operators are provided with ergonomically designed chairs to work long hours on machines and face masks, fire extinguishers, and air ventilation are provided in the factory. However, poor facilities maintenance has caused employee absences due to sickness or lack of basic facilities for female workers. Facilities were only repaired after a third-party inspection. To attract foreign retailers and brands, three years ago Khalil Mahmoud Garments invested RS 26m (approximately USD 168,000) to upgrade its facilities and provide health and safety training opportunities for its workforce. These training sessions mainly focused on fire drills, use of fire extinguishers, and helping co-workers in case of accident. Additionally, Khalil Mahmoud Garments now adheres to purchasing cotton from Better Cotton Initiative (BCI) certified suppliers and using AZO-free dyes. However, Khalil Mahmoud found out that even after a significant amount of commitment and investment to ensure compliance with workplace standards and environment, foreign buyers were reluctant to increase order size; product costs were too high in comparison to value added to the garments.

4. The Apparel Supply Chain and Increasing Competition

Apparel supply chains primarily consist of three major players: suppliers, manufacturers, and buyers. These chains are capital and labor-intensive and buyer-driven; they are capital and labor-intensive because garment production requires hiring a large number of machine operators, purchasing large quantities of raw material, and acquiring production and processing equipment. Similarly, the apparel supply chains are buyer-driven because there are a limited number of large retailers (e.g., Walmart, Carrefour, Tesco,) and influential brands (e.g., Nike, Puma, Levi's). Further, owing to low entry barriers, the apparel supply industry is mainly occupied by small producers with about 50 to 300 workers or medium producers with 350 to 750 workers. The Multifiber Arrangement (MFA), which remained in effect for nearly 40 years, restricted buying organizations in the West to limit their purchases from any one country. The limit or quota was allocated by the national governments of the United States and EU countries (see Table 1). For instance, China was granted 28.4 billion of square meter equivalent limit of apparel and textiles exports to the United States in a given year. However, pressure from the World Trade Organization (WTO) to lift the quota system and a resulting quota abolition in 2005, led to greater competition between apparel manufacturing and exporting organizations in developing nations including China, Bangladesh, and Vietnam (see Table 2). These countries hold the major share of global apparel export. After the 2013 Rana Plaza incident in Bangladesh, where more than a thousand apparel workers died or were severely injured, and global supply chains must now comply with basic conditions for safe, healthy, fair, and respectful working practices. Backlash from the incidents forced foreign buyers, including Puma and Nike, to share detailed information about their supply network, processes, and materials to ensure social compliance. Some buyers allowed customers to trace back the detailed information on garments and workplace compliance. Buyers now demand that apparel suppliers share similar information to ensure compliance and avoid reputational damage.

5. Pakistan and Apparel Export Industry

With a population of over 212.2 million, Pakistan has a GDP of USD 1,357 per capita as of 2019. By May 2019, the Pakistani rupee had undergone a year-on-year depreciation of 30% against the U.S. dollar, a difference that made Pakistani products attractive to international garment buyers. Due to an abundance of cotton raw material and appropriate textile infrastructure, Pakistan has now become more competitive than other garment-producing nations in developing countries. Garment exporters like Khalil Mahmoud Garments receive financial and trade incentives, including rebates on export taxes and import tax exemptions on raw material used in garments.

6. Making Strategic Decisions to Survive

A week after Khalil Mahmoud's visit to the Los Angeles trade fair, Khalil Mahmoud Garments received three requests from the United States for pre-production samples. Two enquiries were for fast-fashion garments with prints and dye effectshigh-cost clothing produced rapidly in response to the latest trendsand one order was for a low-cost basic mono-color tee. After dispatching the pre-production samples, Khalil Mahmoud received orders from Swift Fashion, NY Garments for fast fashion, and Thrifty Retailers for the low-cost tee. Khalil Mahmoud held a meeting with his factory managers to determine a long-term strategic position and focus for the organization. The manager of merchandizing suggested a focus on quick response manufacturing for fast-fashion accounts to maximize profits. However, the production manager argued that unlike low-cost basics, fast-fashion orders demand a complicated process compared to basic tees (see Table 4). To produce fast-fashion items, a panel is delicately cut from fabric and transported to commercial printing factories. Workers must handle panels carefully to avoid variation in shade and the set-up time of stitching lines increases. To compound the complexity, fast-fashion garments use trendy seams and stitches that need modification fixtures to be installed in stitching machines; the majority of Khalil Mahmoud Garment's workers are hired on a contractual piece-rate basis and thus do not have specialized sewing skill. This increase in set-up time and elaborate manufacture can hamper production outcomes. Khalil Mahmoud Garments was already in the middle of fulfilling two orders on five assembly lines; by accepting the above orders, ocean delivery dates would be delayed for current orders, which might trigger hiring costly air shipment (see Figure 1). Normally, the machine layout plan for producing 180 t-shirts takes about one hour. However, line balancing changes when t-shirt styles are different. Khalil Mahmoud Garments works on an 8-hour-per-day shift with 26 days in a month. Sourcing yarn, greige cloth, and printed panels takes 50% of the lead time. Production planning in the garment industry is done by reverse scheduling, which means the raw material will enter assembly lines according to shipping dates for the orders. This saves undue financial constraints and keeps the warehouse available for current shipments. During the meeting, the human resources manager had discussed arranging more assembly line operators to add additional lines. Only one contractor had agreed to provide eight operators for three weeks, which was not enough to add one extra line. To run a typical production line for stitching multiple panels and accessories, at least 18 workers are required at Khalil Mahmoud Garments for achieving optimal standard allowed minute (SAM). Low wages for apparel work had caused most operators to switch to different trades. On January 27, 2019, Dawn News published a report on abuse and violations in Pakistan's garment industry, revealing that thousands of workers are underpaid in factories compared to government set wages of PKR 15,000 (USD 97.00) per month. Throughout the year Khalil Mahmoud Garments had faced shortages of assembly line operators, increasing cotton prices, fluctuating and varying order sizes, political parties in the city calling for strikes that forced labor to stay home. Furthermore, industrial zones in the city regularly faced water and electricity shortages. In the early years of Khalil Mahmoud Garments, foreign buyers showed a lot of price sensitivity. Now most buyers wanted a combination of low price for small quantities and design flexibility with transparency into social and environmental compliance. This new focus meant investment in hiring and maintaining permanent skilled labor, high-speed stitching machines, and meeting compliance standards. Information technology is another area in factory infrastructure where Khalil Mahmoud Garments needs to upgrade. Buyers now press Khalil Mahmoud Garments to become part of Blockchain initiatives, which guarantee safe financial transactions and visibility of operations in terms of social compliance. For instance, the system would make it visible whether material was purchased from an approved supplier. These improvements might need investment of

several million Pakistani rupees, which may constrain the availability of cash to buy raw material for responding to multiple clients simultaneously.

7. Strategic Options

At the next meeting, the management team offered a number of suggestions. a. Khalil Mahmoud Garments' merchandise manager suggested that the factory should only work with fast-fashion brand buyers. Assigning available assembly line operators to such clients would materialize higher profits swiftly. However, the production manager argued that abandoning buyers who order basic tees in larger quantities would destabilize the production cycle, as economy of scales would not be exploited and labor efficiency will remain low for particular styles. Fast-fashion orders fluctuate and can cause idle time on machinery when order sizes get very low. b. Another suggestion made by the production manager was to outsource low-cost orders to local cut-make-trim (CMT) garment organizations. However, poor workplace and social compliance records of local CMT producers could put the company at risk of being penalized by foreign buyers. However, this option has a lot of potential to save costs. c. The manager of HR suggested offering full-time permanent employment opportunities to an optimal number of assembly line operators and providing them with continuous training on the latest operational techniques, quality issues, and workplace and environmental issues. This option was quite expensive; however, successful transformation could attract long-term benefits and strengthen the company's reputation. This option also triggered the idea in Khalil Mahmoud's mind that if he invests in expanding the factory and hiring more permanent employees, Khalil Mahmoud Garments could also start its own brand to serve the local Pakistani market, especially during export slow-down phase. With competition from China, Bangladesh, Vietnam, India, and Cambodia, Khalil Mahmoud Garments needs to go beyond lean and agile, and adopt and maintain the latest social compliance standards to benefit from ever-increasing garment markets.

Discussion Questions

1. What factors have led Khalil Mahmoud Garments to experience less flexibility in handling more orders?

2. What are the implications of outsourcing production to CMT? What can the company do to mitigate the risks arising from outsourcing?

3. Which market type can help Khalil Mahmoud Garments remain competitive and why: lean, agile, or a combination of the twoleagile?

4. Propose what other possibilities Khalil Mahmoud Garments could incorporate to strengthen its supply position in the competitive market.