Supply Chain Management: Case Study on the Garment Industry
Alessandro Spaventa Leonardo Business Consulting
OECD Investment Compact for South East Europe - Workshop III Prague 12-13 December 2006
• One side of the story • The other side of the story • Opportunities and strategies for SEE countries in the garments sector
One side of the story
high-tech and capital intensive sectors. and still is. when the other European main industrialised countries progressively moved to more sophisticated.
. a position conquered in the early 1980s. one of the European Union‟s (EU) main producers of low-technology products. • Italy has been one of the most active countries in this process both because of its geographical proximity and because it was.Going East/1
• It is since the first half of the 1990‟s that the European manufacturing industry has started to exploit the opportunities offered by the opening of the former socialist Centre-east European countries and progressively internationalised growing parts of its production.
To this aim. furniture and other manufactured products (dn). reporting imports and exports from and towards Romania in the traditional Made in Italy sectors: textile and clothing (CPATECO code db). importing then back the semi-finished or finished products.Going East/2
• Since the second half of the 90‟s Italy‟s manufacturing firms have progressively substituted in-house production or supply relationships with local firms with supplies from SEE. Italian manufacturing firms directly acquire raw or processed materials and then export them to Romania or other SEE countries. firms developing a buyer-driven value chain.
. one of Italy‟s most active regions in this process. leather and leather products (dc). wood and wood products (dd). • To give and indication of the phenomenon we consider here Veneto. particularly Romanian.
000. 1994-2003 (euros)
0 1994 Source : Istat Exports Imports 1995 1996 1997 1998 1999 2000 2001 2002 2003
400. DD. DN).000
600.The case of Veneto and Romania/1
Veneto: Imports and exports from and towards Romania in the Made in Italy sectors (DB.000.000.000. DC.000.
100.000.The case of Veneto and Romania/2
Veneto: imports and exports from and towards Romania broken down by sector.000
0 DB-Textiles and clothing Source : Istat DC-Leather and leather products DD-Wood and wood products Exports Imports DK-Machinery DN-Furniture and other manufactured products
400.000.000. 2003 (euros)
Gianelle. 2005. buyers with core competencies in branding and marketing act as the driving actors in setting up the value chain. while convenient for the single firm. industrial districts suffer/1
• Italy‟s manufacturing firms. • This process. increasingly organizing. and garments firms in particular.
. • They have developed what in the literature is referred to as buyer-driven value chain. 2005). In these type of global value-chain.Leading firms thrive. are increasingly transferring their production in SEE both through FDI (mainly greenfield) and through subcontracting with the latter form still prevailing on the former. designing and marketing activities to target consumer markets (Unido 2005). coordinating and controlling the production. might involve some concrete risks for Italy’s industrial districts (Crestanello and Tattara.
as the district evolves. developing their product. • Growing in size they strengthen and multiply their backward and forward linkages. • They become a pivotal element for other smaller firms. some companies grow more than others acquiring a leading role. industrial districts suffer/2
• In a typical industrial district firms are not all at the same level. • They grow in dimension. They buy raw materials or semimanufactured goods and outsource through subcontracting some of the lower stages of productions. creating a brand and adding value to their product through immaterial factors such as design. Usually.Leading firms thrive. sometimes passing from small to medium-sized enterprises.
• Small firms progressively loose their local clients and have to face the choice between downsizing their activity. and eventually go out of business. however.
.Leading firms thrive. they weaken the web of linkages that are essential for the industrial district to thrive. industrial districts suffer/3
• These leader firms are the ones that go international both to sell and to buy or produce. They are the ones that have first gone abroad looking for cheaper workforce. • As they transfer stages of production outside the district. • In both cases what happens is that more and more backward and forward linkages inside the districts are weakened or disappear. or look outside the district for new clients.
000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 200.000.000 7. DC).000.000.000 140.000.000.Leading firms thrive.000 6.000.000 5.000.000 0
Employees Total export Total export minus Romania
.000.000 1.000.000. industrial districts suffer/4
Veneto: exports and employees in the textiles.000 80.000.000 9. clothing and leather sectors (CPATECO DB.000.000 180.000 60.000 160. 1991-2004
10.000.000 8.000 20.000 2.000.000.000.000 120.000 100.000 3.000.000.000 4.000 40.000.000.
80. 1991. industrial districts suffer/5
Veneto: N° of employees in various sectors.2001
Textiles Clothing Leather and leather products 1991 1996 2001 Machinery Wholesale (except motor vehicles)
.Leading firms thrive.
000 5.000 45.Leading firms thrive.000 15.000 25.000 35.1996.000 10. 1991.000 30.000 Textiles Clothing Leather and leather products 1991 1996 2001 Machinery Wholesale (except motor vehicles)
50.000 40. industrial districts suffer/6
Veneto: N° of productive units in various sectors.000 20.
The other side of the story
As a result local firms gradually grow and acquire know-how while the local workforce acquires specific skills. • Let us consider the case that the internationalisation process of the larger district firms is not dispersed in different regions or countries. • These firms establish links with local firms through subcontracting. joint-ventures or partnerships.
. as it is the case of Veneto‟s firms internationalising in the Timis province in Romania.Beyond the immediate advantages
• The increasing internationalisation process of the Italian manufacturing industry. in the long term might have some substantial positive effects for recipient SEE countries that go well beyond the immediate economic advantages for local firms and the consequent creation of jobs. or create new companies through direct investment. but is directed to a specific area. and all the more of the garments sector.
foreign firms may found convenient to subcontract other and more complex stages of production. Linkages between local firms may then develop and strengthen. • Following this process local firms could develop from being subcontractors to producing their own products and finally to creating brands for the lower segments of the consumer market. local firms grow in dimension and know-how inducing foreign firms to outsource other stages of production leading to further growth of local firms and so on. • This could prime a virtuous process in which.
. thanks to their linkages with foreign companies. moving them from their original district.A possible virtuous process
• As time goes by and linkages between foreign firms and local firms become stronger and stable.
that have managed to evolve from mere subcontracting to manufacturing and selling their own products on the market and eventually to creating their own brands.As in the Centre and South of Italy
• The process would be analogue to the path followed by many firms operating in the Italian Adriatic districts and. • For this to happen. in the South of Italy industrial districts.
. however. but has lower labour costs and similar product quality. a crucial condition has to be realised: local firms have to be successful in acquiring and mastering the necessary knowledge to climb higher in the production process. in some cases. A district that is in direct competition with the district of origin of the first internationalising companies. • As a result of this process in the medium term a new industrial district may develop.
• These firms are used to operate in a cooperative/competitive environment. the industrial district. • These firms are prone to create linkages with local firms through partnerships and subcontracting and might be tempted to replicate in the new environment the kind of backward linkages they had in their original district.Acquiring knowledge: the role of foreign firms/1
• We are considering the case of SMEs that have chosen an internationalisation process that tends by its nature to create linkages with local firms and that have little incentive in keeping their environment close to the outside.
. A trend that has indeed been reported by Majocchi (2004) in his paper on the experience of Italian firms in Timisoara. where the ability to create efficient and stable backward and forward linkages constitutes an essential characteristic of the firm and of its modus operandi.
not only the characteristics of the foreign companies pose few obstacles to the transfer of technology.
.Acquiring knowledge: the role of foreign firms/2
• Thus. and more in general of knowledge. adding to that there is the fact that facilitating a certain degree of knowledge and technological capabilities transfer might be in the interest of the foreign firm if not part of its strategy. to local firms.
.a.The case of Montebelluna
Montebelluna Industrial District: Production stages that have been delocalised (N° fof stages of production). 20002004
80 70 60 50 40 30 20 10 0 Concept/design Project making
Source : OSEM
Cutting 2000 2001
Assembling 2002 2003
Opportunities and strategies for SEE countries in the garments sector
promoting the evolution from mere sub-contractors to real and proper garments producers. but also in knowledge and technical capabilities. in general a more difficult task. able to manage the whole production process. a more popular and widely used practice among Italian garments firms. it might lead to the evolution of embryos of industrial districts that might then further develop. from cutting to packaging. but through sub-contracting. and eventually produce their own brands. partnerships might in any case help local firms to grow. not only in production capacity. this goal might be pursued not by attracting foreign direct investments.
. • Leading to the development of an embryo of an industrial district or not. Moreover.Districts or not internationalisation is positive
• If the internationalisation process gains a relevant dimension and is protracted through the years.
as. ultimately. but because most of the Italian firms that had the capabilities to invest have already done so.FDI vs. but costs would be high and it is hard to think that they could be repaid in the short to medium term. These could be switched easily enough. Sub-contracting/1
• FDI in the garments sector will hardly play a relevant role in the near future. • The firms that have not yet invested have mostly established partnerships. This not because of particular problems regarding the “country products”. an Italian leading underwear producer that is transferring all its production from Romania to Albania. has been for the case of Cotonella. They could disinvest and then invest in other areas. More than a productive investment. if the latter prove to be particularly convenient.
. Cotonella has made an investment in logistics so as to be able to efficiently and effectively manage the partnerships with a series of small Albanian producers. in fact. at least for what concerns the Italian garments sector.
3. However. the kind of partnerships Italian firms are looking for seems to be more sophisticated and integrated in respect to the one that have been put in place in the „90s. Italian entrepreneurs seem still to be mainly interested in subcontracting instead than investing directly. certainty regarding bureaucratic procedures and timing. ensured rapidity. Sub-contracting/2
• • • Thus. low labour cost and taxes. flexibility and programmability of production and transport. but to take the responsibility for the whole production process. Italian garments companies are looking for reliable and stable partners. In particular Italian firms appear to be looking for: 1. from cutting to labeling and packaging. able not just to confection the product.
. reliable and stable partners 2. 4.FDI vs.
. styling and distribution while delocalising the entire production process to sub-contractors. eventually. with foreign SMEs focusing on marketing.Beyond the standard productive partnerships/1
• Traditionally. realize part of the production process and then reexport the semi-finished product to the foreign firm that would realize the final stages of production and packaging. more advanced partnerships are now increasingly taking place. An evolution that helps SEE local firms in developing their capabilities of managing a complete production process and thus. However. the subcontractor would receive from its foreign client a semi-processed product or the processed raw material (cut textiles). to start producing their own products with their own brands.
.e. the number of wholesalers able to evolve in such direction were not many form the start. i. and many of them have already done this sort of “jump”. labeled or not. the smallest and the less reactive. another and more sophisticated type of partnership might be possible: a partnership with a foreign garments wholesaler that has decided to evolve by producing its own products. recurring to subcontracting. This leaves a small number of companies. without however engaging in the effective production process. However.Beyond the standard productive partnerships/2
• Following this trend.
In this context a viable. In this kind of market a buyer for a large distribution company individuates a product that might be particularly suitable for the large distribution company and asks a panel of pre-selected production companies to realize a sample.Beyond the standard productive partnerships/3
• Finally. but feeble.
. that however might still be out of reach for most of SEE firms: the large distribution company. The company that produces the best sample will be selected to produce that particular product for that particular client. there is a last type of partner. option could be of entering the so called “sample and countersample” market.
but it might represent an option in the future.Beyond the standard productive partnerships/4
• At the moment this approach might still be too sophisticated for most SEE garments firms.
. In this market China represents the obvious and immediate competitor. but. SEE countries will have on their side a fundamental element: geographical proximity. Large distribution companies. but for producers that can ensure a continuous flow of small quantities of different products. once capabilities will have been developed. when they will have further evolved by acquiring the capability of developing their own models and of interpreting and re-inventing models of other companies. in fact. are looking mainly not for large producers.
spaventa@leonardobc. Spirito 3.Contact details
Alessandro Spaventa Head of the Research Unit .com Tel.Leonardo Business Consulting a. 00186 Rome Italy
. +39 06 68891578 – fax +39 06 68891146 Via del Banco di S.