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

Contents

• One side of the story • The other side of the story • Opportunities and strategies for SEE countries in the garments sector

2

One side of the story .

one of the European Union‟s (EU) main producers of low-technology products. high-tech and capital intensive sectors. when the other European main industrialised countries progressively moved to more sophisticated. and still is. a position conquered in the early 1980s.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. 4 . • Italy has been one of the most active countries in this process both because of its geographical proximity and because it was.

5 . particularly Romanian. leather and leather products (dc). wood and wood products (dd). Italian manufacturing firms directly acquire raw or processed materials and then export them to Romania or other SEE countries. • To give and indication of the phenomenon we consider here Veneto. furniture and other manufactured products (dn).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. one of Italy‟s most active regions in this process. 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. To this aim. firms developing a buyer-driven value chain.

000.000 800. DD.000 1.000.000.000.000 1.000.000 200.000. DC.000 600.000 0 1994 Source : Istat Exports Imports 1995 1996 1997 1998 1999 2000 2001 2002 2003 6 . DN).000.400.200.000.000 400.The case of Veneto and Romania/1 Veneto: Imports and exports from and towards Romania in the Made in Italy sectors (DB. 1994-2003 (euros) 1.

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 7 .000.000 600.000 100.000 400.000.000.000 300.000.000. 2003 (euros) 700.000.000 500.000 200.

2005. In these type of global value-chain. buyers with core competencies in branding and marketing act as the driving actors in setting up the value chain. increasingly organizing. industrial districts suffer/1 • Italy‟s manufacturing firms. • This process. might involve some concrete risks for Italy’s industrial districts (Crestanello and Tattara. 2005). and garments firms in particular. 8 . while convenient for the single firm. are increasingly transferring their production in SEE both through FDI (mainly greenfield) and through subcontracting with the latter form still prevailing on the former. coordinating and controlling the production. Gianelle.Leading firms thrive. • They have developed what in the literature is referred to as buyer-driven value chain. designing and marketing activities to target consumer markets (Unido 2005).

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. some companies grow more than others acquiring a leading role. 9 . • They become a pivotal element for other smaller firms. developing their product. • They grow in dimension. sometimes passing from small to medium-sized enterprises. as the district evolves. • Growing in size they strengthen and multiply their backward and forward linkages. industrial districts suffer/2 • In a typical industrial district firms are not all at the same level. Usually.Leading firms thrive.

however. 10 .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. • In both cases what happens is that more and more backward and forward linkages inside the districts are weakened or disappear. • As they transfer stages of production outside the district. • Small firms progressively loose their local clients and have to face the choice between downsizing their activity. or look outside the district for new clients. and eventually go out of business.

clothing and leather sectors (CPATECO DB. industrial districts suffer/4 Veneto: exports and employees in the textiles.000 1.000.000.000.000.000 160.000. DC).000 140.000.000 80.000.000 180.000.000 3.000.000 6.Leading firms thrive.000.000 9.000.000 5.000.000.000 60.000 8.000.000.000 4.000.000 0 Source: Istat Employees Total export Total export minus Romania 11 .000.000.000 40.000 7.000 20.000 120.000.000 100.000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 200.000 2. 1991-2004 10.000.

Leading firms thrive.000 20.000 100. 1991.000 60.000 80.000 Textiles Clothing Leather and leather products 1991 1996 2001 Machinery Wholesale (except motor vehicles) Source: Istat 12 .000 40.1996.2001 120. industrial districts suffer/5 Veneto: N° of employees in various sectors.

000 45. industrial districts suffer/6 Veneto: N° of productive units in various sectors. 1991.000 15.000 35.000 30.000 10.000 25.000 Textiles Clothing Leather and leather products 1991 1996 2001 Machinery Wholesale (except motor vehicles) Source: Istat 13 .Leading firms thrive.1996.000 5.000 40.2001 50.000 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. 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. 15 . and all the more of the garments sector. joint-ventures or partnerships.Beyond the immediate advantages • The increasing internationalisation process of the Italian manufacturing industry. or create new companies through direct investment. but is directed to a specific area. • These firms establish links with local firms through subcontracting. as it is the case of Veneto‟s firms internationalising in the Timis province in Romania.

A possible virtuous process • As time goes by and linkages between foreign firms and local firms become stronger and stable. 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. 16 . • This could prime a virtuous process in which. thanks to their linkages with foreign companies. moving them from their original district. 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. foreign firms may found convenient to subcontract other and more complex stages of production.

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. • For this to happen. but has lower labour costs and similar product quality. • As a result of this process in the medium term a new industrial district may develop. A district that is in direct competition with the district of origin of the first internationalising companies. 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. however. 17 . in the South of Italy industrial districts.

• These firms are used to operate in a cooperative/competitive environment. 18 .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. • 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. where the ability to create efficient and stable backward and forward linkages constitutes an essential characteristic of the firm and of its modus operandi. the industrial district. A trend that has indeed been reported by Majocchi (2004) in his paper on the experience of Italian firms in Timisoara.

19 . not only the characteristics of the foreign companies pose few obstacles to the transfer of technology. to local firms. 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. and more in general of knowledge.Acquiring knowledge: the role of foreign firms/2 • Thus.

a.The case of Montebelluna Montebelluna Industrial District: Production stages that have been delocalised (N° fof stages of production). 20 . 20002004 80 70 60 50 40 30 20 10 0 Concept/design Project making Source : OSEM Cutting 2000 2001 Assembling 2002 2003 Printing 2004 Whole product N.

Opportunities and strategies for SEE countries in the garments sector .

Districts or not internationalisation is positive • If the internationalisation process gains a relevant dimension and is protracted through the years. partnerships might in any case help local firms to grow. 22 . Moreover. this goal might be pursued not by attracting foreign direct investments. but also in knowledge and technical capabilities. promoting the evolution from mere sub-contractors to real and proper garments producers. not only in production capacity. from cutting to packaging. and eventually produce their own brands. • Leading to the development of an embryo of an industrial district or not. but through sub-contracting. 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. in general a more difficult task. able to manage the whole production process.

FDI vs. but costs would be high and it is hard to think that they could be repaid in the short to medium term. 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. but because most of the Italian firms that had the capabilities to invest have already done so. has been for the case of Cotonella. This not because of particular problems regarding the “country products”. at least for what concerns the Italian garments sector. Sub-contracting/1 • FDI in the garments sector will hardly play a relevant role in the near future. ultimately. These could be switched easily enough. if the latter prove to be particularly convenient. in fact. • The firms that have not yet invested have mostly established partnerships. an Italian leading underwear producer that is transferring all its production from Romania to Albania. 23 . They could disinvest and then invest in other areas. as. More than a productive investment.

4. reliable and stable partners 2.FDI vs. low labour cost and taxes. flexibility and programmability of production and transport. but to take the responsibility for the whole production process. ensured rapidity. able not just to confection the product. from cutting to labeling and packaging. In particular Italian firms appear to be looking for: 1. Italian entrepreneurs seem still to be mainly interested in subcontracting instead than investing directly. Italian garments companies are looking for reliable and stable partners. 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. certainty regarding bureaucratic procedures and timing. 3. Sub-contracting/2 • • • Thus. 24 . However.

with foreign SMEs focusing on marketing. An evolution that helps SEE local firms in developing their capabilities of managing a complete production process and thus. more advanced partnerships are now increasingly taking place.Beyond the standard productive partnerships/1 • Traditionally. styling and distribution while delocalising the entire production process to sub-contractors. eventually. • 25 . to start producing their own products with their own brands. 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. the subcontractor would receive from its foreign client a semi-processed product or the processed raw material (cut textiles). However.

labeled or not. the number of wholesalers able to evolve in such direction were not many form the start.Beyond the standard productive partnerships/2 • Following this trend. and many of them have already done this sort of “jump”.e. without however engaging in the effective production process. i. recurring to subcontracting. 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. However. This leaves a small number of companies. the smallest and the less reactive. • 26 .

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. The company that produces the best sample will be selected to produce that particular product for that particular client.Beyond the standard productive partnerships/3 • Finally. option could be of entering the so called “sample and countersample” market. that however might still be out of reach for most of SEE firms: the large distribution company. In this context a viable. but feeble. there is a last type of partner. • 27 .

Beyond the standard productive partnerships/4 • At the moment this approach might still be too sophisticated for most SEE garments firms. 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 this market China represents the obvious and immediate competitor. in fact. Large distribution companies. SEE countries will have on their side a fundamental element: geographical proximity. but for producers that can ensure a continuous flow of small quantities of different products. • 28 . but it might represent an option in the future. but. are looking mainly not for large producers. once capabilities will have been developed.

00186 Rome Italy 29 .spaventa@leonardobc.Leonardo Business Consulting a.com Tel.Contact details Alessandro Spaventa Head of the Research Unit . +39 06 68891578 – fax +39 06 68891146 Via del Banco di S. Spirito 3.

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