Supply Chain Issues at

Flapbet

After seeing a double-digit growth in sales during the fiscal year 2018 in North American markets,
the world’s second largest sporting goods manufacturer, Flapbet Group Company (Flapbet), found
itself facing a huge challenge in meeting the growing demand for mid-ranged apparel in these
markets, due to a supply chain bottleneck. In its annual report, Flapbet announced that it would miss
the 2019 growth targets due to problems related to its supply chain, According to Chief Executive
Officer Gabriel Joseph (Gabriel), the capacity problem in the manufacturing plants was expected to
create a loss of around US$225 million to US$450 million1. “We have an excess demand that we
can’t cover due to inefficient capacity at our manufacturing plants. It’s predominantly related to
apparel and it’s predominantly related to North America in the first two quarters,”2 said Gabriel.
Despite the supply chain issues, the management of Flapbet projected a 5% to 8% growth in sales
during the fiscal year 2019. “Right now there is no way of mitigating it, but if you look at the overall
outlook we're still looking at a 10-14% net earnings growth, which is very strong, and taking the
margin to 11.5% in 2019, which was the original target for 2020, so we're pretty much one year
ahead of our plan and our targets for 2020,”3 said Gabriel.
The problem was mainly attributed to the approach the company followed to improve its market
share in North America. Flapbet had a low market share in the US compared to its competitor,
Shoetab Inc. “Since our strategic position was smaller, we decided build the brand at the top, then
move into the midtier,” said Gabriel.4 In the process of gaining an upper hand, Flapbet established
wholesale relationships to sell the mid-priced apparel range, leading to a spurt in demand. The
production processes were unable to meet the increased demand.

THE SUPPLIER RELATIONSHIPS

Flapbet outsourced 100% of its manufacturing operations to various outsourcing partners spread
across the globe. The majority of its outsourcing partners were from Asia. Around 71% of the
manufacturing requirements of the company were met by suppliers from the Asian region5. By the
end of 2018, the top five Asian countries where the suppliers were located were China, Vietnam,
Korea, Indonesia, and India

The supply chain of Flapbet mainly comprised main suppliers, subcontractors, material and other
service providers, licensees, and agents. (Refer to Exhibit I for the details). Flapbet maintained three
types of sourcing relationships – the direct sourcing model, the indirect sourcing model, and local
market production. In the direct sourcing model, the company maintained a direct relationship with
the suppliers for the production, planning, sourcing, and distribution of most products offered by
Flapbet. This category of suppliers occupied a major share in the overall sourcing volume of the
company. In the indirect sourcing model, Flapbet sourced a minor share of products through agents
or through licensing agreements. The third mode of sourcing was through association with local
manufactures to meet the demand of niche markets. This mode of sourcing was also followed in
order to meet the regulatory requirements in local markets. (Refer to Exhibit II Supply Chain
Structure of Flapbet).

THE US MARKET

North America was the biggest market for sporting goods, and Flapbet, which did not have much of
presence in the market, looked at it as the single biggest growth opportunity for the brand. The
company made USA its strategic priority and increased investments in the country. It also introduced
mid-range apparel in the market, which became highly popular. According to Gabriel, “We’ve doubled
our business in the U.S. in the last three years, and the volume expanse we’ve had we simply can’t
 supply it’s a demand problem – we can’t really deliver on the demand of the market.”7
The reason was internal planning, and a failure to respond quickly enough to the demand signals,
which led to supply chain shortages. However, a senior academician from a reputed University
defined the situation at Flapbet as a “slow signal uptake” and termed the Flapbet supply chain as a
“low responsive supply chain” when there was as substantial demand for the products. He also
attributed the situation to the “bullwhip effect8” related to the improper designing of the supply
chain. He said the situation did not emerge because of planning or procurement related issues9.
Pointing to the statement made by the CEO of Flapbet, who said that the company had failed to
respond in a timely manner to meet demand, a senior supply chain analyst said that the issues may
not be related to demand forecasting; rather, it was related to the execution. He said that executing
a demand plan based on a reliable and accurate forecast was not only crucial, but also required
flexibility across the supply chain processes. Besides, analysts also pointed to improper data
management across the supply chain.

DISCUSSION QUESTIONS:

1. What do you think was the major issue with supply chain management at Flapbet? Discuss.
2. Do you think the management needs to take immediate measures to mitigate the situation and
to meet the expected demand from the customers?
3. What is the solution that you would suggest Mr. Gabriel to follow to win this war?

Make the solution innovative, state any assumption that you have taken.
 Exhibit I:
Types of Supplier

• Main suppliers. These suppliers have a direct contractual relationship with the company to
cater to the requirements of the export and domestic markets. The main suppliers have
factories across the globe and are the major source of providing the required supplies. They
are categorized as Tier-1 suppliers by Flapbet.
• Subcontractors. These are factories that have been subcontracted by the main suppliers to
perform the manufacturing operations the main suppliers are not capable of doing in their own
facility. The company does not have any direct relationship with the subcontractors.
• Material and other service providers. These suppliers include providers of support services
in the manufacturing process of main suppliers. They supply goods and services to the main
suppliers. The company does not have any direct relationship with these service providers.
• Licensees. Flapbet has given some manufacturers the license to design, produce, and
distribute specific products. These are specialists in manufacturing goods according to the
demands of the local markets, where their operations are located. These licensed agreements
help Flapbet make tailor-made products.
• Agents. Independent companies that act as intermediaries to source product manufacturing,
manage the manufacturing processes, and sell finished products to the company.

Exhibit II:

FLAPBET