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Every day, managers in the U.S. apparel industry take a leap of faith. They order thousands of garments and accessories worth millions of dollars from factories in Asia and Central America, with the hope that the items will arrive in the United States on time, under budget and undamaged.

How well they sleep at night is another question. Take Ralph Shank, corporate risk manager for VF Corp., one of the largest apparel distributors in the world. When the U.S. apparel industry made its clothes on U.S. soil, it was easier for risk managers to control the supply chain, and intervene before problems degenerated into a crisis.

"Moving offshore into less-than-highly protected facilities plays havoc with insurance coverage," says Larry Workman, controller for Alexander City, Ala.-based Russell Corp. "One reason is that, when you move offshore, you have to keep more inventory on hand than you would like. You can't keep it as lean as you can domestically."

Broadly speaking, supply chain risks faced by the apparel industry come from three sources: management of overseas contractors, delays in the delivery of products from overseas, and missing the all-important "fashion window."

"While some manufacturers own their own overseas facilities, most use contractors," says John E. Caldwell, a partner with the Context Group, an apparel industry consulting firm. "The result is that they have to rely on management that is thousands of miles away."

WEST COAST BOTTLENECKS

Of greater concern is trying to manage delays of shipments from foreign countries into the United States, especially since Sept. 11, 2001, after which regulators cracked down on cargo inspections.

"The main problem is getting the goods in a timely manner from the source factories to the United States and into the warehouses that the manufacturers themselves still own," says Caldwell.

Port delays on the West Coast are a sore spot for many risk managers After traveling thousands of miles only to have inventory stacked up in a Long Beach, Calif. warehouse eats away at many a manager's psyche, not to mention profit margins.

"There is a lot of concern about the amount of product piling up in West Coast ports," says Alison Scholin, director of risk management for Chesterfield, Mo.-based Kellwood Co. "You may have to wait weeks for products to get through."

"As more goods are sourced from China, there is a big backlog on West Coast ports, especially Long Beach," says Bob Copeland, a principal with Kurt Salmon Associates, an Atlanta consulting firm to the retail and apparel industries. "This can play havoc with your lead times and inventory levels."

While Long Beach is the prime culprit, the West Coast ports of Oakland and Seattle are also seeing significant delays.

Regulators and inspectors are opening up more containers and spending more time filling out paperwork, says Kathy DesMarteau, editor-in-chief of "Apparel Magazine." "In addition, if they see anything suspicious, they may hold it up longer than normal," she says.

Another huge risk in the apparel industry is the fashion component--getting the right number of garments to the right people well before deadline.

"Compounding the problem are long lead times to react to what is happening in the marketplace," says Copeland. "You have to place your bets up front on what you expect to sell, and if you don't manage that risk well, you will end up having to discount or try to get back into the product much later."

While threading the so-called "fashion window" has always been a challenge, even when the product was manufactured in the United States, it has become an even bigger problem now that the majority of apparel products are manufactured overseas.

China has continued to pose a huge question mark for most U.S. apparel companies in the last two to three years. Is China a competitive nightmare, or is it a solution in the form of cheap labor?

In truth, it is both. As of Jan. 1, 2005, though, it stands to become more of a problem than a solution for a lot of U.S. apparel companies, according to some experts.

The reason is the following. On Jan. 1, quotas related to the importation of a number of different types of apparel goods into the United States were removed for countries around the world. The fear is that China, with its incredibly inexpensive labor pool, will flood the domestic market.

"As of January 2005, most categories of apparel that have had quotas for a number of years will no longer have limitations on how much can be sourced from where," says Copeland. "This will likely result in a rush to China for lower-cost goods."

This places U.S. manufacturers in a dilemma. "On the one hand, if you don't take advantage of this, you could suffer from competitors that end up with better pricing," says Copeland. "However, if you place all of your business in China, but the U.S. government imposes a continuation of the quotas, you will have availability problems."

"The lifting of quotas Jan. 1 will change the whole face of how we supply our customers," says Kellwood's Scholin. "Will everything in the world fall into China? If so, it will likely destroy some economies that are currently just hanging on."

The trend may be somewhat tempered, according to Peter Harding, a partner with the Context Group, a consulting firm, because of China's entry into World Trade Organization, which protects the United States from too many Chinese imports.

"Imports from China will still increase, the restrictions will be temporary, and imports from countries other than China will increase," says Harding.

Given the complex issues related to supply chain risk management, what can managers do to mitigate these concerns?

One solution is to own your manufacturing facilities overseas. This approach works well for Russell Corp. "We are a fully vertical manufacturer," says Workman. "One solution for us is that we own our manufacturing equipment and have simply moved it offshore to foreign facilities that we also own."

For companies that work with contractors, though, the most basic and obvious strategy is to select the contractors carefully."Many companies have formal and comprehensive vendor certification programs," says Harding.

Next, if you don't use your own employees to audit the quality of goods made by contractors, select third-party inspectors carefully. "When it comes to contractors in Mexico, the Caribbean, and Central America, most companies send their own employees to inspect quality," says Caldwell. "In the Far East, though, companies usually hire quality [-control] agents to do the testing and sampling in contractors' factories."

To address its contractor risk issues, VF Corp. has placed more emphasis on business interruption exposure and retained more risk."We have developed some ways to address this, so we maintain more retention," says Shank. "One way has been taking a lot of time to identify and develop the best contractors that meet our standards of excellence, which in most cases even exceed the requirements of our customers."

In addition, if the company loses a backpack manufacturer, for example, it has several others that are able to jump in and take over. "We also pay our contractors in a timely manner to keep them loyal. If they know there will be steady business from us, and that they will get paid for it, they will do what it takes to do business with us," he says. In sum, the company looks at its contractors' exposures as if they were its own."Insurance companies seem to like what we're doing, and this is reflected in our premiums," adds Shank.

To address the risks associated with delayed shipments, Copeland's first bit of advice is simple: order early. Beyond that, he suggests shipping to less congested ports on the West Coast, or even shipping products through the Panama Canal to the East Coast. "In this way, everything is not tied up in Long Beach," he says.

Also, consider certification through C-TPAT, which helps expedite overseas shipments coming through U.S. Customs. C-TPAT, an acronym for Customs-Trade Partnership Against Terrorism, is a program that allows companies to have their incoming shipments expedited in return for implementing security measures designed to ensure the integrity of shipments from overseas.

"C-TPAT can definitely help you expedite Customs," says DesMarteau. An alternate solution is to invest in radio frequency ID technology, which allows the reading of cargo container contents electronically, without having to break open the containers.

"Another solution to consider for supply chain risk management is to find a comprehensive supply chain software program," says Caldwell.

Kellwood's Scholin encourages managers to talk with their sourcing people to encourage them to use third-party logistics companies.

"They give us data on where our product is at any one time, and a lot of this information is available on-line."

Regarding the question of China, "Make sure your sourcing people are creating a portfolio of sourcing options that don't commit you rushing to China 100 percent, but that does increase business in China," says Copeland.

JOHN WILLIAMS, an Indiana-based freelance writer and author, is a frequent contributor to Risk & Insurance®.

March 1, 2005

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