VF Sourcing Strategy Case Study Updates (May 2017)

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(Slide above: VF Corporation European Headquarter; Photo Credits: Hannah Wilson)

VF Business Operation General

V.F. Corporation (VF) designs, manufactures, distribute and market branded lifestyle apparel, footwear and accessories. The company offers Jeanswear, outdoor and action sports, image wear, sportswear and contemporary brands. The company markets its products under brands namely, the North Face, Wrangler, Timberland, Vans, Lee and Nautica, among others. It sells its products to specialty stores, department stores, national chains and mass merchants, as well as through direct-to-consumer channel consisting of VF operated stores and internet sites.

VF reported revenue of $12 billion in 2016, up 1% over fiscal year 2015. Gross margin% of the company improved 20 basis points to 48.4% as benefits from pricing, lower product costs, and a mix-shift toward higher margin businesses. However, gross margin% was partially offset by changes in foreign currency and the impact of restructuring charges. VF’s adjusted operating income was down 6 percent to $1.7 billion. Adjusted operating margin decreased 90 basis points to 14.0%.

VF

VF Sourcing Strategy

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VF’s centralized global supply chain organization is responsible for producing, procuring and delivering products to its customers. On an annual basis, VF sources or produces approximately 523 million units spread across more than 30 brands. VF’s products are obtained from its 27 self-operated manufacturing facilities and approximately 1,600 contractor manufacturing facilities in over 50 countries. No single supplier represents more than 10% of VF’s total cost of goods sold. In 2016, 22% of VF’s units were manufactured in VF-owned facilities and 78% were obtained from independent contractors.

VF operates manufacturing facilities in the U.S., Mexico, Central and South America, the Caribbean and Europe. A significant percentage of denim bottoms and occupational apparel is manufactured in these plants, as well as a smaller percentage of footwear and other products.

For VF’s self-owned production facilities, VF purchases raw materials from numerous U.S. and international suppliers to meet their production needs. Raw materials include products made from cotton, leather, rubber, wool, synthetics and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers, snaps, eyelets and laces). Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors.

Independent contractors generally own the raw materials and ship finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with satellite offices across Asia) and Panama. These hubs are responsible for managing the manufacturing and procurement of product, supplier oversight, product quality assurance, sustainability within the supply chain, responsible sourcing and transportation and shipping functions. In addition, VF’s hubs leverage proprietary knowledge and technology to enable certain contractors to more effectively control costs and improve labor efficiency. Substantially all products in the Outdoor & Action Sports and Sportswear coalitions, as well as a portion of products for VF Jeanswear and Imagewear coalitions, are obtained through these sourcing hubs.

Products obtained from contractors in the Western Hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives VF greater flexibility, shorter lead times and allows for lower inventory levels.

This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing. VF intends to continue to manage its supply chain from a global perspective and adjust as needed to changes in the global production environment (VF Annual Report, 2015, 2016).

“Third-Way” Sourcing Update

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VF has the goal of 40/40/20 for factory ownership. They want to own 40% of the factories they use, utilize the third-way approach in 40% of the factories, and use transactional sourcing for the other 20% (Glaser, 2014).

VF has expanded its Third-Way manufacturing program to sub-Sahara Africa, in addition to the third way factories VF works within Bangladesh, Cambodia, the Dominic Republic and Nicaragua. VF is looking into Africa because, while Africa may not be as efficient as Asia currently, there is potential to get it to 80% efficiency in the coming years. It could also be cheaper to source from Africa given the African Growth and Opportunity Act (AGOA) with the United States

Since its creation VF has split its “Third-Way” factories into three different categories: light, medium, and heavy. Light Third-Way is having engineers consult with the factories and visit each week. The medium Third-Way involves having an engineer on site and a long-term commitment to the supplier from VF. Lastly, the heavy Third-Way involves profit-share and open book costing as well as sharing of research and development (R&D) (Barrie, 2015). 

Trust continues to be a central theme in Third-Way sourcing, as does having the right people on board with the initiative. VF also believes that any positive changes made to the factories because of the Third-Way program will ultimately help the whole industry and drive positive change, even if the changes are used for other companies that source from the same vendor (Barrie, 2015).

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Author: Sheng Lu

Professor @ University of Delaware

22 thoughts on “VF Sourcing Strategy Case Study Updates (May 2017)”

  1. Something that I found very interesting about this case study was that our class came to the conclusion that there is not one solid answer for the best way for a company to source products. There will always be “winners and losers” when trying to produce merchandise for a retailer. When I originally read the case I thought that third-way sourcing was a great solution for VF. After the class discussion I am not 100% sure anymore. It is going to difficult for VF to convince some of their older vendors to switch to third-way sourcing. This is because many of them are very set in their ways and do not want to share factory costs or secrets with VF, if they feel it is unnecessary. If VF can’t convince vendors to switch, then I don’t believe they will see as much of an improvement as they would like. While I think third-way will help VF to shorten lead times and reduce costs, I think it will take some time before it is actually as successful as it is intended to be. Overall, our discussion was very interesting and made me see the new type of sourcing in a different light.

    1. Glad to hear you learnt new perspectives from the case discussion. This is exactly the value of using case study as a teaching-learning method. I agree that the third-way sourcing is not a perfect solution.
      While VF has deep expertise in jeans manufacturing, life-style products (like The North Face performance outerwear, Napapiriji knit sweaters, Vans shoes) require very different manufacturing skills and processes. Third-way sourcing is more likely to be an alternative to vertically integration, but it is unsure what technical support VF can offer to factories that make life-style products.

  2. Going off of what Jenlevy1 posted, I completely agree that after making advantages and disadvantages lists in class, we all came to the conclusion that there will always be a winner and a loser in any trade/sourcing situation.

    This discussion made me rethink how most companies produce products when they branch into new product categories. I believe that in-house production is the most profit driven way to make products but I also believe in sticking to what you have the expertise in producing. For example I think it is a good idea for VF to continue producing denim in-house since this is where they will receive the most profits and fastest turn around. However, I think it is a good decision to outsource for the lifestyle brands since VF doesn’t necessarily have the best resources, knowledge or production capabilities for making this kind of product. I think currently the third way strategy is the best of both worlds for VF to still make a profit while also keeping up with the trends and branching into different departments.

    1. great thinking! Regarding your first point, I would say each sourcing strategy has its “trade-off”. For example, cost vs speed, control vs flexibility. There is no single sourcing strategy that is 100% perfect, but a company should make its sourcing strategy consistent with its overall business strategy.

  3. This case study was one that I found very interesting, because unlike many of the other ones, this had a very a debatable conclusion. The more I read up on and discussed this case study, the more confused on a solution I became. However, I do believe there might have to be a different solution to their sourcing strategy than the one they are trying to implement now. While, it has been succeeding in some aspects, there are many costs that have not improved, and that could be from a numerous amount of things. The main issue is that vendors have not fully adapted to this new way of doing things, and until that happens I am not sure if it will ever be successful. However, just like Jenlevy1 and CCgaeta posted, there are always going to be winners and a loser in these types of trade situations, and overall this case study truly showed me what that means.

    1. Agree! the conclusion is debatable and this is the value of doing case study. I hope the exercise can develop students’ critical thinking and problem solving skills. And it could te interesting to explore further why some vendors appear to be resistant to the “Third-Way” sourcing. It is also intersting to note there was very vew “thrid-way” factories located in China and Vietnam, the two largest apparel suppliers to the US market.

  4. I find this blog post on VF Corporation extremely interesting, especially since I visited the European Headquarters myself! When we read the case study, it was surprising to me to read about how VF operated prior to 2004. I had no idea that before 2004, VF sold mostly heritage brands and that they basically sold only what they could produce. This was a new insight for me because at the headquarters, the lifestyle products were such unique brands in their own areas of the building. To read that in 1983, jeans made up 75% of the company’s sales, was unexpected since I saw so many popular and individualized brands like The North Face, Timberland, Vans and more at their headquarters. I thought VF had always owned various lifestyle brands, and not that this was a new venture. Having this first-hand experience made me appreciate the case study and this blog post on 3rd-Way Sourcing in a more personal way.

  5. After reading this blog post and completing Case Study 3, I’m happy to see that VF is continuing to develop their “Third Way” sourcing strategy. I answered in the case study that I believe VF should continue “third way” sourcing strategy because it met all their goals and then some. This strategy lowered production costs and allowed the company to form relationships with suppliers. These newly formed relationships benefitted VF by lowering costs, lead times, producing greater quality goods, and allowed VF to rely more on their suppliers.Fraser was concerned with making the supply chain more efficient, and splitting the factories into three different categories with consultants that visit these factories was a conscious effort made to move towards a more efficient supply chain. VF’s “Third Way” sourcing strategy has greatly benefitted the company and should continue to be worked on in order to improve the strategy and accomplish more of the companies goals.

  6. I agree with Jen T’s comment above, for my analysis I wrote that I was in favor of the “third-way” sourcing strategy. I think what stuck out to me the most from this case study was that there is an obvious problem with the global supply chain. On of the main problems is that there is a lack of transparency and more importantly trust between supply and company. I thought the “third-way” sourcing was an excellent solution to this problem, in which the company can build strong and lasting relationships with their suppliers. I am also glad to hear that they are continuing with this strategy as in the long-run I think it can even more beneficial to the company.

  7. I agree with a lot of the comments in the sense that this case study had a lot of possible solutions and no one right answer. I also agree with the idea that while writing my case study, I was very adamantly in favor of the “third-way” sourcing and that it was the best thing for the company, but after our class discussion I understood that there could not be one right decision. I still believe that it is too early for the company to disregard the “third-way” sourcing completely, especially because its main purposes were solutions for where the other sourcing options lacked. I also think many companies deal with the same issue, which shows that its not the company but rather the way the supply chain works in general. I think with time and trial and error, the company will find its best option to accommodate all parties affected.

  8. When reading the case study I thought that forming a relationship with the supplier under the ‘third-way’ sourcing strategy was a good idea, but originally the goal was to form a trusting relationship that would benefit the supplier and VF. The suppliers they were using were people that already had their own ways of sourcing goods and ran their own plants, therefore they did not appreciate VF coming in and running their production. Although Chris Frazza believed that this strategy would benefit both the business and the suppliers I think that VF went about it the wrong way being too overpowering.

  9. I think the “third-way” will have its ups and downs as with any new policy. However, I do think in the long run, it will prove to be beneficial. Some argue that the cost benefits aren’t drastic enough to make the new process worth it. In saying this, I don’t think cost was their main concern in implementing the new process. I think it had to do more with trust and looking at outsourcing in a different way. Sure, cost is always on the radar and the race to the bottom is a very real phenomenon, but there is a cost decrease, however little. The other benefits that the “third-way” seem to be having outweigh monetary value in importance. VF wants to build trust with suppliers in order to create healthy relationships. This is something that other companies are not doing. If VF sticks with taking smaller suppliers under their wing and developing trustworthy relationships with them, I think the “third-way” strategy can prove to be extremely successful, one must just be patient.

    1. I agree! First, cost still matters for VF. the USFIA benchmarking study also suggests that sourcing cost remains one of the top challenges facing us fashion brands and retailers. Second, other factors such as speed to market and flexiblity are growing with importance. This is why VF wants to build a closer relationship with vendors without having to commit large amount of capital investments.

  10. I believe that third-way sourcing is a good idea for VF’s future plans. Although it has not proven to be the most cost efficient strategy so far, I think that in the future it could end up costing less than VF’s original sourcing strategy. In addition to the cost aspect, employing third-way sourcing is seemingly the better strategy because it would allow VF to become closer with its suppliers. This would help them create better relationships and allow VF to have more control over the products they produce. Additionally, VF is asking that each supplier only create a specific product for their company (i.e. Supplier A only creating backpacks for Kipling and no other brand outside of Kipling). This would help to create better, more individual and original products, and hopefully create a better and more profitable company.

  11. After our class made a list of advantages and disadvantages, we came to the conclusion that there will always be a winner and a loser in each trade/sourcing situation. The class came to other conclusions like typically in-house production is the most profit-driven, whereas outsourcing is more suitable for more complex products that require more skill. When you have product expertise, it is better to product in-house because it is the most profit-driven way to produce. For VF, their denim department is produced in-house because they have expertise in this area and will receive high profits and a fast turn-around. The third-way strategy is the perfect mixture of in-house and outsourcing for VF. The company will remain profitable while also keeping up with trends and while creating new departments.

    1. Partially agree, but not all: Companies can have more control of their supply chain through in-house production (vertical integration), but this is a very expensive option, especially for US-based fashion companies (this is why most apparel are imported from overseas). Outsourcing can be a less expensive option for companies and can also offer more flexibility in sourcing. For our case study, VF uses outsourcing for its life-style brands largely because it only has expertise in heritage brands products (such as jeans). It is NOT enough to say third-way sourcing is a “perfect mixture of in-house and outsourcing”. The evaluation needs to be put in a particular context.

  12. I found VF’s third way sourcing strategy very interesting. With the fashion industry being a constant race to the bottom, retailers are constantly looking for countries with low regulations and low cost for labor. While on the other hand, sourcing in America is expensive, but gives retailers a more hands on experience and better reaction to the market. third way is a perfect blend of those two options and gives the opportunity to be more socially responsible moving forward with sourcing.

  13. After discussing this case study in class, and applying the knowledge from the article in a more critical thinking way, definitely helped me understand this case, and how VF still has some work to do on the third way method of manufacturing. I think it is very smart to still have in-house production for certain products that are in a higher demand, due to the fact that it allows a shorter lead time. Items such as jeans, and other staple pieces are so common in customer wardrobes that it makes sense for these items to be cheaper. Production overseas is ideal for staple items in apparel, because it allows for large assortments of merchandise, and keeps the prices lower. The third way strategy would definitely be a good idea for newer manufacturers as oppose to ones that have been around for years, has an established client base of several American brands, and will not want to be told how to run their business with this new way VF is proposing.

  14. This case study was my favorite. The reason that I liked this one so much is because it really emphasized the ever-changing industry that us fashion majors will be a part of very shortly. I love to see that there continue to be new, innovative ways to get things done and that not everything is stagnant. It shows that the industry is still progressing, and makes me excited to see what will happen in the years to come.
    I think the third way is very interesting because its the first of its kind. I think it’s daring, exciting, and inspiring to see a company try a new thing, even if at first it is not succeeding. I think that it’s a great idea and combines the two opposing factors that have made manufacturing such a wishy-washy practice up until this point.

  15. I personally agree with many of the above stated comments. I agree that the third way sourcing strategy is a great one and it is new and interesting to see a company take initiative with such a technique, yet at the same time it is understood that in some instances there are failures and disadvantages. The only way to know what works best for VF, varies from situation to situation as opposed to being accurately predicted or assume.

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