Supply Chain Opportunities for Integrated Manufacturing and Distribution in El Salvador

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Supply Chain Opportunities for Integrated
Manufacturing and Distribution in El Salvador

• Jack Peck
• April 2006

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References Sources

• Harvard study The Future of the Textile and
  Apparel Industries
  
• www.hctar.org/pdfs/GS10.pdf
• China Competitiveness the Future of the Textile
  Sector in Latin America
  
• www.iadb.org/laeba/downloads/Annual20Conference2
  02004/PPT_ArturoCondo.pdf
  
• The post-MFA in El Salvador The Future is Now
  and It is not Pretty
  
• www.iadb.org/csramericas/doc/researchinelsalvador.
  pdf
  
• Numerous experiences conversations

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Overview of Presentation

• The Threat to El Salvador
• Current US supply chains
• Future supply chain model for store-direct
  replenishment without using a DC in the US
  
• Future supply chain model for consumer-direct
  order fulfillment
  
• Why this is important to El Salvador

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The Threat to El Salvador
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The Threat to El Salvador

• The textile/apparel industry employs 75,000
  people in El Salvador
  
• This represents 65 of all industrial jobs
• Maquilas represent 65 of all exports
• Maquila jobs are formal and generally provide for
  social security
  
• Most jobs are held by women - often single with
  children
  

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The Threat to El Salvador

• On January 1, 2005 quotas were removed on all
  textile and apparel products in WTO countries
  
• China other Asian countries began dumping
  low-labor produced products
  
• Chinas exports to the US grew by an average of
  85 during the first 8 months of 2005 (cotton
  shirts by as high as 250).
  
• The Maquila industry in El Salvador is being
  seriously threatened
  

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The Threat to El Salvador

• Chinas labor rates are much lower
• Chinas electricity rates are much lower
• China has government subsidies that are masked as
  loans
  
• China has invested in more technology
• The burdened cost of producing a mens shirt with
  20 standards minutes
  
• China 1.12 USD
• El Salvador 1.85 USD

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The Reality of the Threat

• The Multi-fiber Agreement (MFA) ended in January
  2005
  
• During 2004 exports from El Salvador fell by 5.2
  and 6,000 jobs were lost
  
• During the 1st quarter of 2005 exports fell by
  3.8
  
• During the 1st quarter of 2005 twelve Maquilas
  folded
  
• Edgar Moreno (Economic Assistant at the US
  Embassy in San Salvador) predicted 40,000
  50,000 jobs will be lost in 2005.

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What advantages does El Salvador have?

• Closer proximity to the US market
• China has a 17 average tariff while CAFTA drops
  this for El Salvador
  
• CAFTA allows fiber to originate from any CAFTA
  country, without tariffs
  
• Unfortunately, apparel products manufactured in
  El Salvador will still cost more than those from
  China
  

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So what is the answer?

• El Salvador must exploit its geographical
  advantage over China
  
• 29 of the cost of a mens shirt is unrelated to
  raw materials and labor i.e. in other parts of
  the supply chain
  
• El Salvador must help to reshape the supply
  chain, from fiber to retail, to reduce this 29
  
• El Salvador can help to reduce the total
  inventory in the supply chain by more than 50 -
  a huge savings
  
• The parts of the supply chain that cause
  companies to hold inventory are those of
  transportation and distribution

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Current Supply Chain Example
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Current Supply Chain Example

• Orders originate in the US
• Textiles are often cut and sent to El Salvador
• Products are manufactured in El Salvador
• Finished products are returned to the US and
  placed in a Distribution Center (DC)
  
• Products are pulled from the DC and embellished
  or prepared to customer needs
  
• Products are shipped to customers in the US

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Current Supply Chain Example 1
El Salvador
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Current Supply Chain Example 1

• Raw materials are cut and shipped from the USA to
  El Salvador
  
• Products are sewn, packed and shipped (3-5 days)
• Products are warehoused in the USA (120 DOS)
• Products are pulled from the primary warehouse to
  a secondary warehouse close to an embellishment
  facility (2 days)
  
• Embellishment is performed before shipping (3
  days)
  
• Shipping to the customer in the USA is made in
  small quantities via small package carrier (1-3
  days)
  

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Problems

• Cycle time from manufacturing to customer
• 3 days to make patterns, cut and pack raw
  materials
  
• 7 days to ship cut parts
• 5 days to sew
• 7 days to ship finished goods
• 4 days to embellish product
• 3 days to ship
• Minimum of 29 days for backordered products to
  reach the customer
  
• Most companies are more than 60 days!

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Problems

• Costs
• US labor rates for
• Cutting fabric
• Handling Shipping Raw Materials
• Receiving of Finished Goods
• Inventory movement in DC prior to use
• Embellishment
• Handling Shipping Finished Products

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Problems

• Costs
• Excessive shipping costs to and from USA
• Excessive inventory costs to protect against
  stock outages
  
• And the biggest costs of all
• Mark downs on excess inventory at end of season
• Mark downs on excess inventory when styles change

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Future Supply Chain Model 1

• Store Direct Replenishment from
• Distribution Center in
• El Salvador

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Future Supply ChainsIntegrated Manufacturing
Distributionwith Store-direct Replenishment

• Orders originate in the US
• Textiles will be created and cut and in El
  Salvador
  
• Products are manufactured in El Salvador
• Finished products are stored in a Distribution
  Center in El Salvador
  
• Stores send Point-of-Sale (POS) data to El
  Salvador
  
• Products are pulled from the DC and embellished
• Products are shipped directly to stores in the
  US
  

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Future Supply Chains Integrated Manufacturing
Distribution
El Salvador
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Expected AdvantagesIntegrated Manufacturing
Distribution

• Raw materials are acquired locally
• Lower cost
• Faster deliver
• Lower raw materials inventory required
• Fabric will not be cut until the production order
  is obtained electronically from the USA
  
• Only small quantities of finished goods need be
  warehoused to eliminate delays in manufacturing
  
• Quick response manufacturing lines will address
  cases in which finished goods are out of stock
  

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Integrated Manufacturing Distribution

• Finished goods will be warehoused next to
  manufacturing
  
• Finished goods will be pulled from inventory for
  embellishment prior to packing
  
• Embellishment and packing will be performed with
  low-cost labor
  
• Transportation time to most customers is almost
  the same as within the USA thus backorder
  replenishment time can be less than 5 days (not
  60 days)
• Shipping costs to the US from El Salvador may be
  lower cost than cost within the US
  

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Advantages Summary

• Closer proximity of manufacturing to
  distribution
  
• Lower inventory levels
• Lower cost labor
• Greater availability of labor
• Extension of full package model

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Example 2 Incassa C.V. de S.A.El Salvador

• Contract sewing company with US ownership
• Manufactures knitted apparel products for
  multiple clients in the USA
  
• Highly skilled, low-cost labor force
• 2000 employees (mostly sewing operators)
• Traditionally did not integrate Mfg
  Distribution
  

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Future Supply Chain Model 2

• Customer Direct Distribution

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ExampleMyGarb, Inc.El Salvador

• Manufactures and distributes using the web to
  more than 300 Universities Organizations across
  the US and to sell directly for promotional
  events

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MyGarb, Inc.El Salvador

• Co-located with and uses Incassa for
  manufacturing
  
• Produces knitted garments
• Long/short sleeve tee shirts
• Golf shirts
• Long/short sleeve sweats
• Pants
• Baby bibs
• Mouse Pads
• Others

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MyGarb, Inc.El Salvador

• Manufacturing is at the extreme end of Lean
• Finished Goods inventory turn time can be less
  than 8 hours
  
• (inventory turns can be more than 350 per year!)
• Quick response manufacturing is used to replenish
  inventory during manufacturing

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MyGarb, Inc.El Salvador

• Orders accepted in quantities as small as one
  unit
  
• Garments can be embellished by
• customization (logos slogans chosen from
  predefined set) or
  
• personalization (using customer uploaded pictures
  slogans)
  
• Embellishment types
• Decals
• Embroidery
• Screen printing
• Sublimation printing

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Your Companys Logo
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Your Grandkids Pictures!
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Customer Direct
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Summary

• Integrating manufacturing and distribution can
  produce significant savings by
  
• Reducing supply chain participants (chain
  length)
  
• Reducing transit costs
• Reducing handling costs
• Reducing inventories
• Reducing stock-outages
• Increasing inventory turns
• Reducing labor costs (particularly if
  manufacturing is conducted in other countries)

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Why this is Important to El Salvador
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The Choices for El Salvador

• Lower labor rates
• El Salvador can offer something of value that
  Asia cannot offer to maintain current labor
  rates
  
• Asia will never get any closer to the US than it
  is today
  
• If this can be done then the movement of
  manufacturing from El Salvador to Asia can be
  stopped, and in fact, reversed

(NO!)
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How can the exodus of manufacturing be stopped?

• El Salvador must offer distribution to US
  companies to integrate with manufacturing
  
• Both store direct and customer direct
  distribution must be offered

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Why this is important to El Salvador

• Proximity to the US

• Asia will never get any closer to the US

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Why this is important to El Salvador

• There is a window of opportunity that may close
  if no action is taken
  
• Relationships with manufacturers in Asia are
  difficult to break once they have been made
  
• Once Asia invests in expensive factories, their
  governments will likely subsidize the companies
  to keep them