Polo Ralph Lauren & Luen Thai: Using collaborative supply chain

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BENJAMIN YEN ALI FARHOOMAND

POLO RALPH LAUREN & LUEN THAI: USING COLLABORATIVE SUPPLY CHAIN

INTEGRATION IN THE APPAREL VALUE CHAIN

Henry Tan, CEO of major apparel manufacturer Luen Thai1, needed to decide which supply chain strategy would differentiate it from other apparel manufacturers after textile quotas2 were lifted in 2005. Its key partner and industry heavyweight Polo Ralph Lauren wanted the three partners, including raw material provider Ruentex (Taiwan), to tighten their “collective” supply chain through further collaboration using a “design-to-store” (“D2S”) supply chain strategy as its platform.

D2S's philosophy rested on synchronising the apparel supply chain by rationalising business processes and improving information management in order to create efficiencies throughout the chain. Although Tan was committed to the principle of integration, he wondered if D2S could enable Luen Thai to become more customer-centred and act as the information and business hub for partner interactions. The high level of complexity throughout the apparel design, development, manufacturing and delivery processes meant there would be a myriad of implementation issues.

Tan understood that sharing information would be critical in tightening their supply chain. But how would the three partners shift their IT focus from intra-company to inter-company perspectives and successfully use technologies to encourage information sharing or joint planning and implementation amongst the partners?

He set a final meeting with Polo and Ruentex' senior managers in early January 2005 to provide him with conclusive answers on how the partners could manage the various

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1 Luen Thai was headquartered in Hong Kong. It had sales and marketing offices in Hong Kong, New Jersey, Columbus OH, London, Tokyo and Manila. Production and distribution centres were located in China, the Phillipenes, Cambodia, Saipan, Guam, South Korea, Vietnam and the USA.

2 Between 1974 and 2004 the world's textile and garments business was governed under the Multi Fibre agreement (or Agreement on Textile and Clothing). The agreement imposed quotas on the amount of textiles and garments certain developing countries could export to developed countries.

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Shamza Khan prepared this case under the supervision of Dr. Benjamin Yen and Prof. Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.

© 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet—without the permission of The University of Hong Kong.

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complexities of integrating their collective supply chain and to determine if D2S would be flexible enough for the partners to meet their operational and strategic supply chain objectives in a dynamic apparel market.

Apparel Industry Dynamics

I like the word ‘weiji’ very much. It means ‘crisis’ in Chinese but it also means that with a crisis always comes opportunity. It’s just a matter of who is better prepared.

- Henry Tan, CEO, Luen Thai3

With textile and apparel quotas expiring in January 2005, the apparel industry was expected to undergo sweeping changes, especially in current supply chain practices. The quota removal was expected to put further pressure on prices and squeeze already razor-thin margins in the apparel sector. For example, consultants A.T. Kearney projected that unless manufacturers and retailers increased product value (ie, through better materials and style features etc), they would face lower gross profits after quota elimination.4 The quota system created inefficiency and allowed incompetent manufacturers to exist; in a competitive market, however, companies would only choose suppliers who provided competitive apparel products and enhanced customer value.

JC Penney's vice-president Janet Fox emphasised that value did not imply a product with the cheapest price but meant a supplier who could provide a quality product and service, including speed to market and supply chain efficiency and reliability.5 This was the reason why many (competitive) suppliers saw the post-quota environment as a catalyst to growth because they understood that cost was not the only consideration for private retail decision- makers; additional considerations included inventory risk, product diversity, speedy replenishment capabilities and a supplier's customer service. Many China-based manufacturers already understood their clients' needs and were engaged in far-ranging discussions on how to better respond to these needs by improving the apparel supply chain. The shared belief was that value could be created by developing tighter collaboration among members. In fact, collaboration between key supply chain partners was thought to be critical to fulfill the market gap for shorter lead times.

While apparel businesses recently made a lot of progress towards more effective collaboration, the “end-to-end” management of value-added processes was more theoretical than a reality for most apparel companies. Typically, supply chains in the apparel industry had been asset- based and production was designed for mass manufacturing. Various business processes typically operated in silos and technology was either limited or fragmented; as a result, the information gathered was old and decision making was based on past information, resulting in low service orientation and lack of customer management.

In addition, supply chains in the apparel sector usually operated as loose alliances which temporarily joined force to gain advantage through co-operation, instead of acting as organised and integrated clusters. As a result, the implementation aspect of supply chain collaborations was a huge challenge because firms typically failed to adequately address the strategic, processual and organisational dimensions of supply chain integration.

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3 Mak, C. (2005) “Apparel Manufacturer Designs New Business Model”, Career Times.

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