Get Connected

By Matthias Knappe, ITC
International Trade Forum - Issue 3/2005

Buyers are pushing clothing manufacturers to use information technology to speed up delivery, lower costs and improve services.

Before rushing to invest in technology solutions, manufacturers should piece together the value chain "puzzle", from fabric mill to retailer.

Information technologies are changing trade in textiles and clothing. A few years ago, a cheap product was incompatible with fast delivery. Clothing manufacturers produced either standard goods in bulk at low prices with long lead times, or pricey fashionable items with short time-to-market. If buyers wanted faster delivery, they had to pay a higher price. With the evolution of e-solutions, this has changed.

May developing country producers are not aware of these changes and what they imply for participation in global, buyer-driven value chains. They don’t always realize that the ability to adopt e-applications is a key survival tool in the post-quota era.

Major international buyers are shifting to new ways of buying, and developing country exporters have to adapt. As quotas cease to restrict buyers’ choices, their sourcing requirements and patterns are changing. Looking to get the most benefit from quota-free markets, shorten lead times and reduce expensive inventories, larger buyers are exploring ways to connect the entire value chain electronically, including sourcing of fabrics and accessories, garment manufacturing, and sales to the final customer. This goes hand-in-hand with an increased demand for service-oriented suppliers.



Lean retailing
Retailers are concentrating on their core business, which is selling to the end consumer. Many are turning to “lean retailing”, or cutting down inventory to the minimum, as a means to achieve this. Reducing stocks requires fast and on-time delivery from the manufacturer. Shipments become smaller but more frequent, with point-of-sale data transmitted directly to the manufacturer, who gets alerted when to produce and ship garments.


Raising the bar for manufacturers
More and more, clothing manufacturers are becoming service providers to retailers. With lean retailing and the evolution of electronic solutions, retailers give up more responsibilities, which manufacturers who want to remain competitive have to take up.

From product development to fabric and trim sourcing, these developments create new challenges for garment manufacturers in developing countries, on top of those they faced before. To stay competitive, manufacturers need to find innovative solutions that go beyond “just” manufacturing good-quality products. In many cases, information technology or “e” can help them become more efficient and offer new services.


Adopting “e” successfully
The use of e-applications per se does not guarantee success. To adopt e-applications successfully and develop fruitful long-term relationships with major buyers, many manufacturers will have to move from a “fire-fighting” approach to a more systematic way of doing business. An important success factor is to reorganize the company’s business and management structure, and then decide where to apply e-solutions along the value chain.

Manufacturers need to develop business processes to implement and manage e-technologies efficiently. For example, to provide buyers with a “quick response”, manufacturers have to analyse the complex problem of what is their optimal time-to-market. Quick response is like a puzzle made up of the entire value chain, which manufacturers should piece together before introducing e-solutions. They can learn from exporters in other developing countries that have already found ways to integrate their systems with those of customers and suppliers, opening up long-term perspectives.

Textile and clothing exporters need to view e-business in its broadest sense and not as an alternative term for online sales. E-applications can increase efficiency and reduce costs and lead-time. They are already widely used in the market to improve customer relationships, forming part of a larger approach to customer satisfaction.


Trends to watch
Over the next three to five years, the main trends affecting developing country manufacturers will not be in production technology, but in technology to link the value chain. The reason is low labour costs in most developing countries, which offset the advantages of e-solutions in manufacturing.

One key trend is to develop e-solutions in partnership with buyers, or simply take over their system. Close partnerships start with sharing information, advance towards synchronized planning and reach an optimum when workflow cooperation between buyer and supplier is automated. Electronic data interchange (EDI) systems are the most common applications to ensure that the retailer is never out of stock. However, as the JC Penney-TAL example shows, the tendency is increasingly towards vendor-managed inventories, where manufacturers such as TAL take over stock-replenishing responsibilities for retailers like JC Penney.

Other e-solutions gaining ground are integrated design and product development. Virtual garment prototyping and real-time “try on”, which simulate the fit and appearance of new garment designs in two or three dimensions, reduce research and development costs considerably.

Reverse Internet auctions, as described in the Newage case study, demonstrate both the bargaining power of retailers and the fact that manufacturers in developing countries have to adapt quickly to newly introduced e-tools if they want to keep their customers. Using the Internet for sales is not yet an option for developing country clothing manufacturers, as they are located far from their markets with their different habits, tastes and languages. For countries with large domestic markets such as Brazil, China and India, selling directly to consumers will be an option in the future.

Sourcing could be an area for e-solutions. In this case, the clothing manufacturer would be the buyer. However, clothing manufacturers face powerful business partners in textile mills. Around the world, textile mills are consolidating and growing. Thus, when sourcing fabrics and trims, clothing manufacturers have to contend with stronger bargaining power on the other side, which restricts a proactive development of e-solutions.

Finally, logistics — including organizing shipments — are becoming more important, especially with the further development of lean retailing. Introducing software solutions that help buyers to know exactly where their merchandise is, are important services that increase the competitiveness of manufacturers.

In textiles and clothing, understanding the changing market and the role of e-solutions is an unavoidable challenge for manufacturers of all sizes who wish to stay in the game.

Matthias Knappe is ITC Senior Market Adviser on textiles and clothing. For more information about e-applications in textiles and clothing, see ITC’s new publication, Get Connected (to order a copy visit ITC's e-shop at http://www.intracen.org/eshop), or visit ITC’s site at http://www.intracen.org/textilesandclothing

Teradyne Honors Solectron with Supplier Recognition Award

sdcexec.com

By Editorial Staff

Solectron's collaborative manufacturing, supply chain management leadership cited

Milpitas, CA — November 8, 2005 — Teradyne Inc., a supplier of automatic test equipment and interconnection systems, today gave Solectron Corp. a 2005 Supplier Recognition Award for Solectron's collaborative approach and leadership in adopting supply chain management practices.

"Teradyne's business model is highly dependent on the ability to scale quickly as business demands change," said Jim Federico, Teradyne's vice president of ATE Operations. "Solectron has partnered with Teradyne to establish a lean and collaborative supply chain that is helping us reduce cycle time and react to market changes efficiently and cost-effectively. Our partnership with Solectron helps us meet customer requirements in a rapidly changing market."

The Solectron Production System, or SPS, has been at the core of Solectron's approach to delivering flexibility, cost competitiveness and quality to customers.

"We are honored to receive this award from Teradyne," said Marc Onetto, executive vice president, Operations, Solectron. "Customers today want to leverage supply chain efficiencies and best practices that deliver the best value and flexibility to ensure that quality products are available when and where they are needed. By partnering with our customers, Solectron is providing a collaborative business model that harnesses the power of SPS to achieve optimal results."

With more than 600 suppliers, Teradyne recognized eight companies with its Supplier Recognition Award, including Solectron. The award was presented to Solectron at the Teradyne Supplier Day Event "Supply Chain 2005 — Achieving Results."

Menlo gets lean

The third-party logistics provider figured lean was too good to leave to manufacturing.

By Gary Forger, Editorial Director
Modern Materials Handling November 1, 2005

Looks can be deceiving. Take Menlo Worldwide's warehouse in Brownstown Township, Mich. as an example.

This 250,000 square foot facility, known as the Great Lakes Lean Logistics Center, is quite orderly. All of the aisles of rack are neat and clean. It's all almost too orderly, neat and clean.

There's also not much materials handling equipment to be seen. Some lift trucks. There's rack, of course. And someone mentioned a warehouse management system (WMS) running on a server away from the warehouse floor.

A quick look in shipping belies that there's much happening there either. People are putting items into yellow boxes perfectly squared up in quadrangles on the floor. How neat, again. Every 20 minutes, the boxes get emptied and the items moved to packing just prior to shipping. How efficient.

Not far from the shipping area, a small group of workers is watching one of their peers explain some changes that are going to be made in picking procedures. It's all carefully mapped out on a presentation grid. And the person making the presentation has just spent the past two days planning these changes with three other people from the team. No supervisors or managers were involved.

Over on a wall next to the break room, are several other charts plotting various performance levels in the warehouse. The bottom line is that the Great Lakes Lean Logistics Center has shipped roughly 8,000 orders in the past two weeks without shipping a single wrong part or quantity. A recent audit showed that inventory accuracy was 99.9906%, or a few hundred dollars on several million dollars of inventory.

Yes, looks can be deceiving.

Rather than being some sleepy backwater of Menlo's third-party logistics (3PL) network, this Center is the home of the company's move into lean warehousing. Not only is this the pilot site for the effort, but it is the model for rolling out lean warehousing worldwide. And this is the story of Menlo's bet that lean is too good to leave to manufacturing.
Getting started

The idea of lean warehousing was brought to Menlo by Greg Lehmkuhl, vice president of global automotive, as a key enabler for long-term improvement.

The premise was very simple, says Jeff Rivera, senior manager of automotive warehousing. "Lean is all about eliminating waste." And Menlo saw an opportunity to improve its 3PL warehousing operations by going lean.

As Rivera puts it, the fundamental goal of lean is to reduce the time and resources needed to convert customer orders into high-quality, low-cost deliverables. Rivera, by the way, was brought into Menlo to manage this project due to his experience working in a lean manufacturing operation as well as in warehousing under a manager who had worked for Toyota.

Menlo's template for lean warehousing (see drawing below) is built directly on the Toyota lean manufacturing template.

All metrics are focused on service, quality, delivery, cost and morale. The three pillars of making that happen are just-in-time, people and built-in quality. Just-in-time is based on doing only what is needed when it is needed at the rate of customer consumption. The people aspect is focused on flexible and highly motivated people. And built-in quality relies on tools from error-proofing and designing for warehousing to elimination of variations.

But as Rivera and others soon discovered when this facility opened in July 2003, the template is a great starting point. Lean warehousing success happens only by actually doing it.

When the Center opened, it had only one customer and just 13 people. It also didn't have much history about demand for the parts it was handling. That required great flexibility, recalls Rivera. It also allowed people to focus on processes, refining them at every opportunity.

Constantly refining processes is essential to lean success, points out Bob Blevins, operations manager at the Center. Since startup, he says, they have been focused on eliminating non-value-added steps to reduce total lead time. Doing that allows the warehouse to be more responsive and efficient.

"We're not out there trying to reduce costs but working to reduce waste," Blevins says.

More than two years into the project, the Center has a different look today. However, the basic tenets of lean continue to guide all activities.

What started as one automotive customer now has three with a fourth set to come in quite soon. There are now 85 people on the warehouse floor. The racks have roughly 7,000 storage locations today. About 16,000 lines are being picked and shipped a month, accounting for 65,000 pieces. And those numbers will increase as that fourth customer starts up.

Even though a WMS is directing activities, the pick system is paper-based. There are no wireless terminals. Rather than assigning work in increments of 4 or 8 hours, workers operate in 20 minute segments. That maximizes flexibility and allows labor to be best used to minimize response time to orders.

Underpinning day-to-day operations are the basic tenets of lean: manage flow throughout the warehouse and set expectations.

The Center is set up as a series of mini-warehouses in a big building. Meanwhile, items are slotted in storage based on a commodity code that segregates parts by size and velocity (fast movers up front, slow movers in the back). This tends to minimize congestion not just of parts but of workers who are storing and retrieving parts, maximizing flow in the facility.

Individual workers are assigned responsibility for maintaining order in individual aisles. The person's picture is posted on the rack at the end of an aisle along with a list of responsibilities and a sign-off sheet for completing those. Order in the aisles also helps to maximize flow.

Picking and other assignments are handed out to workers from a central desk. Each paper pick list details what needs to be done in the next 20 minutes.

"What we have here is a team of short order cooks," says Blevins.

Pre-set amounts of time have been assigned to each task required, setting expectations for all.

Picked items are brought to the shipping area. Items are placed in boxes in designated areas, where they are confirmed as the right part and quantity. They are then packed prior to loading on over-the-road trucks.

As Blevins explains, team leaders, not supervisors or managers, own all of these processes. He calls them "the glue that holds all this together." Supervisors and managers, on the other hand, address roadblocks that are holding back leaders and their teams.

Bonuses of hourly team members are tied directly to meeting various metrics. Those cascade from broader goals set and reviewed by Menlo with its customers on a quarterly basis.

Team leaders determine how to meet those metrics and improve processes. There are several techniques used here.

For instance, every Wednesday, each department takes an hour to meet and discuss its performance. That forces people to constantly look at how they can improve. The hour also renews Menlo's commitment to provide the tools needed to make the operators successful, says Blevins.

Every month, a Kaizen event is held. For three to five days, workers focus not on the day's picking and shipping, but on how to improve an operation. As many as six people will work on that at a time.

Another technique for continuous improvement is called "parking lot ideas." These are often ideas that came out of the Kaizen event but could not be addressed there. Similarly, a small group will work for a day or two to find a way to make improvements.

In all cases, the conclusions these groups reach are shared with the rest of the team and implemented.

"The great thing about where we are now," says Rivera, "is that we are only now just scraping the surface. There's lots more to come."

And he's not just talking about what's happening at Brownstown Township.

Menlo currently operates more than a dozen lean warehouses, all based on what has been learned at this facility. But it won't stop there. The company is rolling out the concept to all of its facilities worldwide during the next year.

The Tax Efficient Supply Chain

Supply Chain Demand Executive

By Giles Sutton

It has been said that the ability to learn faster than your competitors is the only truly sustainable competitive advantage. And that's just what those companies that learn to apply tax planning best practices to their supply chain structure are finding out.

For several years purchasing executives, particularly in the retail industry, have been trying to squeeze every conceivable dollar out of the supply chain. They have focused on process improvements such as total quality management, just in time (JIT), and Six Sigma. In addition, they have poured significant investments into information systems and, more recently, vendor partnering. However, one of the single biggest costs of managing a supply chain has often gone unaddressed: tax.

The reason for this disconnect is that, unlike procurement professionals and information technology (IT) professionals who work on the operational side of the business (i.e. in profit centers), tax professionals have typically limited their discussions to a company's financial group (a cost center).

Typically, corporate tax professionals are measured on a “no surprises” basis and are seldom looked to for innovations. Instead, they are encouraged to mitigate tax “overhead” costs. Often, from a strategic perspective, no news is goods news from the tax department. Commonly, this has led to a disconnect between pragmatic operational logistical planning and the most sustainable form of tax planning — functional-based tax planning.

What Are Supply Chains Trying to Accomplish?

Supply chain design is unique to each industry, and the measurement of supply chain effectiveness can be based on several different metrics, such as the percent of perfect orders, cost/margin or other asset-based measurements. Regardless of the metrics used, the end result must be to satisfy customers while managing costs.

In most circumstances, managing costs (i.e. reducing retail costs) equates with customer satisfaction, but in almost every circumstance cost is at least a component of customer satisfaction. As a result there has been an intense focus on cost reduction.

Supply chain managers are trying to respond to the increased velocity through supply chains in response to accelerated changes in fashion, technology and volume. In some cases this has lead to a split in supply chain methodologies within organizations for volatile and nonvolatile goods.

The thought processes and technologies required to optimize a given enterprise's supply chain have also changed. Increasingly, companies are developing tighter relationships with their suppliers, including the sharing of information once thought of as being “sensitive.” There has also been an enhanced reliance on technology hardware and software. Two further complexities arising in the early part of the 21st century are cross ownership integration and the internationalization of the supply chain. From an operational perspective, this has resulted in new thinking and greater contractual flexibility regarding commercial relationships.

In an environment where supply chains are trying to respond to the pressures of maximizing technology, thinking outside the limits of economic ownership and extending beyond international boundaries, a tax focus has been glaringly absent.

Where is Tax Planning Applicable?

Tax planning applies to both the steps in the supply chain (supplier, distribution function, retail channels and customer delivery) and to processes that drive successful supply chain management (procurement, electronic data interchange (EDI), merchandising, finance, branding and asset management). Further, it applies to above-the-line and below-the-line taxes. (Above-the-line generally refers to taxes that impact operating income above the line labeled as “Net Income Before Income Taxes.” Above-the-line costs are expenses that are used to compute net operating income before income taxes. They include operational taxes such as sales and use taxes, property taxes, franchise and license taxes and excise taxes. Below-the-line taxes impact income-based taxes.)

Tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods. Tax planning can impact almost every aspect of the supply chain. As such, one of the few ways a company can benchmark its operational tax profile is to look at the economic efficiency of its supply chain.

Further, unless a holistic approach is adopted, supply-chain-related tax savings will often be left on the table. Below is a discussion of some of the areas, by function, where savings might lie.

Procurement
From a tax perspective, ownership of the transaction (i.e. the ability to determine the amount, subject matter and jurisdiction) of taxation is the single most crucial function to own. Ownership of this function will allow the taxpayer, not its vendors, to determine the subject matter of the transaction (services, intangible or tangible personal property), the value of each component (if it is a bundled transaction) and the appropriate jurisdiction to impose tax. This is critically important because each of these factors determine the level of tax the company will pay. Specifically:


In many states, intangible assets are not subject to property tax. As such, warranty cost included in and capitalized on as a part of certain asset purchases will unnecessarily increase a company's property tax base;

In several states, software electronically downloaded is not subject to sales tax. The ability to facilitate this type of delivery to the ultimate end-user may determine whether or not the software is subject to sales tax;

Many companies often disconnect vendor volume or contract inducement payments from the purchase of the underlying tangible personal property. As such, they overstate income, sales or property tax values of such assets;

The ability to value the importance of this function within the organization and charge related entities for its services may produce a more state income tax-efficient profile.

Planning pertaining to the importations of goods can often lead to a reduction in the customs and duties paid..

In situations with rapid vendor turnover, it's important to manage the related escheat (unclaimed property) exposure.
Further, owning the tax-determination piece of a transaction allows companies to reduce the exposure created by mis-compliance.

Brand Management
For many companies, brand management is “the” essential value driver of the organization. The ability to control the “look and feel” of the customer experience is essential to maintaining the company's position within the marketplace. The tax implications of branding include:


The determination within the supply chain of when goods are “branded” and therefore where the value is added. This, in part, determines the situs of taxability and the value of the goods for income and property tax purposes.

The ability to license and protect intellectual property associated with the brand, such as copyrights, patents, trademarks and trade names, will often impact the jurisdiction of income taxation.;

The ability to attach the value of certain intellectual property may impact the customs and duties charges on the importation of products.

The situs of where such intellectual property is held will impact the tax costs of dispositions when a business unit, and its related intellectual property, is sold.
Merchandising and Marketing
The merchandising function determines what merchandise is carried and where such merchandise is displayed. Often, it also determines the overall store layout or design. These are critical factors in retail operations, as convenience and functionality are essential in retaining customers in today's fast-paced society.
There are many tax implications, including:


The property tax implications of the capitalization of site selection and store design costs; and

The state income tax implications of valuing and properly sourcing the services associated with the merchandising and marketing functions.
Finance
The structure of a company's internal financing can also impact its overall tax profile.


The capital structure of a legal entity can often impact its franchise tax profile.

Efficient internal leveraging can, in some jurisdictions, serve to reduce an operation's state income taxes.
Customer Relationship Management (CRM)
Increasingly, companies are seeking to manage the data collected from a myriad of contact points with customers. Contact points include data gathered in surveys, interactions with customer service representatives, orders placed online, dealings with warranty personnel and the usage of coupons. This information is critical to companies because it tells them, from a customer perspective, the relevance of their products or services in the marketplace, the effectiveness of their marketing efforts and the efficiency of their delivery system. The tax implications of building the infrastructure to compile and store this data include:


Due to the extremely high value of customer data, there are state income tax implications as to where CRM data is stored and maintained.

The ability to license and protect intellectual property associated with the brand, such as copyrights, patents, trademarks and trade names, will often impact the jurisdiction of income taxation.;

Property tax implications as to where CRM software is capitalized.

Since CRM is a communication-intensive function, a review of the excise tax amounts on telecommunications charges may lead to certain excise tax refunds.
Distribution and Asset Management
In an era of just-in-time replenishment, distribution is a critical function. Efficient management of distribution center (DC) functions and of the related transportation and merchandise handling equipment is a key component of creating a cost-efficient supply chain. There are significant tax impacts on these functions as well, for example:


Paying attention to the actual assets employed and special purpose designs of facilities can impact the amount of property taxes paid.

For those jurisdictions imposing property taxes on inventory, employing the proper valuation methodology can reduce the holding cost of such assets.

In certain jurisdictions there exist sales tax exemptions for transportation equipment used in inter-state commerce.

Improper capitalization of cost, such as duplicative site selection costs or the improper characterization of costs as real property as opposed to personal property, can impact property tax assessments.

Often, distribution activities, if not segregated into separate legal entities, can cause a company to expose its major profit centers to unnecessary multi-state income taxation.

Taking advantage of negotiating with, and sourcing of Internet sales to, local jurisdictions (cities/counties) can reduce the cost acquiring internal use assets.

A failure to closely examine inventory handling operations can lead to an overcapitalization of such costs for federal and state income tax purposes.
Retail
Tax also impacts the cost of running retail operations. Certain characteristics make operating retail operations susceptible to tax inefficiency, including:


The high turn over in employees can lead to escheat (unclaimed property) exposure.

The employee-intensive nature of retail can lead to process-based payroll tax incompliance and, perhaps, the payment of unnecessary payroll taxes.

Inefficiently designed gift card programs can often cause unnecessary escheatment of funds.

Certain operational structures may reduce the use tax cost of producing and distributing advertising inserts.

State income tax planning pertaining to vendor payments negotiated for retail display allowances, cooperative advertising, volume discounts and exclusive carry arrangements may lead to significant savings.

Potential state income tax savings may be obtained based on international sales and distribution assets.

Review of sales tax systems should be reviewed to reduce the costs of mis-compliance.
Key Factors in Creating a Competitive Advantage

A competitive advantage exists for those companies that look beyond tax compliance and towards tax self determination. Some of the key factors required to achieve this result are discussed below.

Inter-departmental Coordination
To effectively manage a supply chain from a tax perspective, certain departments must coordinate their efforts. Tax planning is most effective when tax planners know in advance what operating functions plan to do (purchase assets, restructure operations or locate facilities), before they do it. In particular, procurement and distribution operations as well as information technology (IT) should vet prospective planning, purchases and changes in operations with a company's tax department. Further, reaching out to the tax department and encouraging them to focus on reducing operating costs can often produce significant results.

Holistic Approach
Each supply chain has a unique structure. A detailed understanding of the operational elements of the supply chain is essential to effective and sustainable tax planning. Further, within tax, a multi-disciplinary approach is required to identify a broad range of potential efficiencies (property, sales and use, franchise, excise, state, and federal income tax).

Supply chains are not static structures. In fact, the structure of supply chains is constantly changing, as are the products they convey. The need for agility in the structure of supply chains leads to ongoing opportunities for tax efficiency or inefficiency, depending upon whether the organization has an operationally focused tax function. Significant investments in technology and processes in an attempt to create a competitive advantage can be squandered if tax is ignored.

About the Author: Giles Sutton, J.D., LL.M. is a Partner in the State and Local Tax practice of Grant Thornton LLP in the firm's National Tax Office in Washington, DC. Giles.Sutton@gt.com.