SUPPLY CHAIN MANAGEMENT

VF BRANDS: CASE ANALYSIS

Date: 05/07/2023
 1. What is your evaluation of the “Third Way” sourcing strategy proposed in the
case? What are its similarities and differences with the VF owned and operated
and packaged sourced models?

In this case, third-way sourcing was used to reduce costs by shifting focus from finding low-
cost suppliers to better managing the supplier base. It can be considered as a halfway point
between full integration and traditional outsourcing.
Advantages:
 Lesser lead time than outsourcing
 Better machine and material utilization
 Lesser inventories due to information transparency
 Lower cost to Quality
 Better forecasting and production planning
 Risk mitigation
Challenges:
 Higher complexity
 Reduced control over the production process as compared to internal manufacturing.
 Inefficiency due to a lack of coordination and trust
 Risk of sharing proprietary expertise with suppliers
 Staffing issues
Third Way sourcing can be used for products where metrics other than just cost can be vital
such as speed to market, material utilization, lower inventories, less work in process, and lower
cost to quality. Third-Way can be involved where sharing of resources/capabilities with risk is
an additional benefit for the organization while increasing the efficiency of the suppliers
Comparison of “Third Way” with VF owned and operated and packaged sourced
models
Third Way VF owned and Packaged sourced
operated
Respond to market Moderate Very quick Slow
Capital Moderate High Low
requirement
Supplier High Low Moderate
relationship
The segment that Heritage and Heritage Lifestyle
will benefit lifestyle
Competitive Moderate Manufacturing No competitive
advantage competitive capabilities provided advantage
advantage (improved a significant
lead time and less competitive
cost) advantage
Defect rates Can be controlled Lowest High
 Inventory and Under supplier and Under VF Under supplier
process ownership VF
during production
Risk of excess Low Low High
inventory
Total Leadtime (In 50 17 73
days)
Total COGS ($) 4.96 5.65 4.96
Landed cost ($) 6.31 6.33 6.41
Inventory carrying 0.42 0.19 0.50
cost ($)
Charge for capital 0.12 0.93 0
per unit ($)
Total cost ($) 7.01 7.48 7.10
The above values were taken from Exhibit 4. Average values were used wherever required. For packaged
sourced and Third way, only regions of India/Bangladesh and India/Morocco are considered

Considering the mentioned advantages and reduction in total cost the “third way” strategy
seems to be beneficial for the company.

Q2. In Exhibit 4, what do you think explains the differences in lead time and various costs
between the Third Way, VF Owned and Operated and Packed Sourced models? What
are the implications of these differences for the attractiveness of the Third Way?
In Exhibit 4, the differences in lead time and various costs between the Third Way, VF Owned
and Operated, and Packaged Sourced models can be attributed to several factors. Here are some
possible explanations:

Lead Time Differences:

1. Third Way Sourcing: The lead time for the Third Way sourcing model is relatively
shorter compared to the Packaged Sourced models. This could be due to improved
coordination and collaboration between VF and the supplier, facilitating efficient
production planning, order forecasting, and joint process improvements.
2. VF Owned & Operated: VF's ownership and operation of the production facilities in
this model enable greater control over the production process, resulting in a shorter lead
time. VF can streamline operations, minimize handoffs between different suppliers, and
directly oversee production stages.
3. Packaged Sourced: The longer lead times in the Packaged Sourced models, particularly
in China, India, Bangladesh, and Morocco, could be attributed to factors such as
sourcing complexities, coordination challenges, longer transportation times, and
potentially higher production volumes involving multiple suppliers.
Cost Differences:
1. Total Costs: The Third Way sourcing model demonstrates relatively lower total costs
per unit compared to the Packaged Sourced models. This cost reduction can be
attributed to several factors:
a. VF Overhead: The Third Way model may have lower VF overhead costs compared to
the Packaged Sourced models. This can be attributed to the establishment of long-term
contracts with suppliers in the Third Way model, which allows for a more stable
supplier relationship. With long-term contracts, there is less need for frequent
assessment of new suppliers, resulting in reduced overhead costs associated with
supplier evaluation and selection. Additionally, long-term contracts provide a level of
commitment and stability that reduces the risk of frequent switching between suppliers.
This helps to minimize the associated switching costs, such as renegotiating terms,
establishing new production processes, and transitioning between suppliers, leading to
lower VF overhead costs in the long run.
b. Inventory Carrying Costs: The Third Way model may involve more efficient inventory
management practices, leading to reduced carrying costs. By aligning production
schedules and improving forecasting accuracy, excess inventory can be minimized.
c. Markdown Provision: The Third Way model may experience lower markdown
provisions due to improved collaboration with suppliers and more accurate demand
forecasting. This can result in reduced markdown costs.
d. Charge for Capital per Unit: The Third Way model may incur additional costs
associated with the charge for capital per unit. This charge can be attributed to the
transfer of engineering expertise and training of junior engineers hired locally. While
this adds to the overall costs, it also reflects the investment in process improvements
and skill development.

Implications for the Third Way Sourcing Strategy:

While the Third Way sourcing strategy offers certain advantages, there are potential risks and
challenges that need to be considered. These include:
Potential advantage of Third Way sourcing strategy:
1. Speed to Market: The shorter lead time of the Third Way model allows for faster
response to market demand, reducing the risk of inventory obsolescence and enabling
quicker adaptation to changing consumer preferences.
2. Cost Efficiency: The Third Way model offers potential cost savings through reduced
VF overhead costs, inventory carrying costs, and markdown provisions. Efficient
collaboration and improved process management contribute to overall cost reduction.
3. Supplier Partnership: The Third Way model fosters closer and long-term partnerships
with suppliers, promoting trust, information sharing, and joint problem-solving. This
can lead to enhanced supplier performance, improved product quality, and a more
reliable supply chain.
4. Flexibility and Control: The Third Way model provides a balance between control and
outsourcing flexibility, leveraging VF's technical expertise without heavy investments
in fixed plant and equipment. It allows VF to focus on its core competencies in brand
management and retail operations.
 5. Quality and Innovation: Close partnership with suppliers will make them actively
involved in product development and process improvement processes. Suppliers will
also be able to provide valuable insights and suggestions for enhancing product design,
quality and innovation. VF Brands can incorporate these suggestions leading to better
finished products
Potential Risk of Third Way sourcing strategy:
1. Potential Policy Changes: The Third Way sourcing model could be vulnerable to policy
changes, especially in regions where suppliers are located. For example, changes in
trade policies or tariffs implemented by the US government can impact the cost and
availability of raw materials, transportation, or labour in certain locations. These policy
shifts may lead to fluctuations in pricing and create uncertainty for suppliers, potentially
affecting their viability and the overall sourcing strategy.
2. Switching Costs and Lock-In: Implementing the Third Way strategy requires
establishing close partnerships with specific suppliers. This can result in higher
switching costs if VF needs to transition to alternative suppliers in the future. Lock-in
issues may arise if VF becomes heavily reliant on a particular supplier for its technical
expertise and processes. Overcoming the switching costs and lock-in issues can pose
challenges and limit VF's flexibility in responding to changing market conditions.
3. Leakage of Process Expertise: Sharing VF's proprietary engineering expertise and
process knowledge with third-party suppliers carries the risk of knowledge leakage.
There is a possibility that suppliers could gain insights into VF's practices and replicate
them for their own purposes, potentially eroding VF's competitive advantage.
Protecting intellectual property and trade secrets becomes crucial to prevent the
unauthorized use of VF's hard-earned process expertise by competitors.
In conclusion, the Third Way sourcing strategy presents advantages in terms of lead time and
cost compared to the Packaged Sourced models. However, it is crucial to consider the potential
risks associated with policy changes, switching costs, and leakage of process expertise. By
carefully evaluating these risks and implementing appropriate safeguards, VF can navigate
them effectively. A mixed sourcing approach may be beneficial, leveraging the advantages of
the Third Way strategy for new suppliers in China, India, Vietnam, and other suitable regions,
while utilizing VF Owned and Operated models for products with high uncertainty demand.
This approach allows VF to optimize its supply chain efficiency, mitigate risks, and maintain
a competitive edge in the global apparel industry.