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Sustainable outsourcing trends in the clothing industry

Written by D. Backelin, P. Welchermill

Paper category

Master Thesis

Subject

Business Administration>Supply Chain & Logistics

Year

2013

Abstract

Master Thesis: Outsourcing methods and theories The main and general theme of this report is sustainable outsourcing. In order to better understand the changing environment and reasons, some methods and theories have been studied. This section defines outsourcing and emphasizes its importance in terms of competitiveness. An overview of McIvor’s outsourcing model as it provides guidelines for which businesses can be reliably outsourced and which businesses are best kept in-house based on the company’s core competencies. In addition, important factors to keep in mind when calculating outsourcing costs are discussed, and the risks associated with these issues are discussed. Finally, it covers China's changes affecting the supply chain and related trends. 2.1 Outsourcing/near-source procurement/resource outsourcing “The definition of outsourcing is to transfer all or part of an organization’s business to external suppliers acting on behalf of the company” (Zhang and Huang, 2012). It allows companies to use external suppliers to help manufacture goods and manage services. The benefits and advantages that organizations can obtain by outsourcing internal business processes are reducing labor costs, tax incentives, and access to foreign markets (Monczka and Carter, 2005). The acceleration of new product launches and the intensification of globalization have highlighted the importance of outsourcing strategies in a competitive environment. Also in markets where short delivery times are crucial, such as the clothing industry where trends are changing, outsourcing is a good competitive tool that can be used to shorten delivery times and make companies less susceptible to changes in trends. However, outsourcing to low-cost countries with underdeveloped infrastructure and far from the market makes the supply chain longer (Zhang and Huang, 2012). One example is the clothing company H&M, which outsources all production while focusing on design. In this way, H&M can customize their production lines and replace or add suppliers instead of opening new expensive factories. Changing or finding new suppliers is costly and takes time. Therefore, a common strategy of major global sourcing companies is to establish strong relationships with suppliers in the supply chain. By building strong relationships with suppliers, it can improve quality and reduce production costs (Gérard and Robert, 2010). Nearsourcing is basically an outsourcing closer to the market. The benefits of near outsourcing include reducing logistics costs and shortening delivery time. Being close to the market is a big competitive advantage. Due to the rising transportation costs, it will play a more important role in the future. 3. The Apparel Industry and Changing China This chapter introduces empirical research on the outsourcing economy. The empirical data consists of qualitative interviews, which are subsequently supported by Chapter 2 theory. Respondents are familiar with outsourcing and provided expertise in the field, including current strategies and future prospects (including trends). 3.1 Focus on China Eric Bengtson, CEO of Sourcing Allies AB and China outsourcing expert, is experiencing a lack of knowledge among outsourcing practitioners. He said that companies often underestimate the difficulties when outsourcing to China. A common idea among Outsourcing Allies customers is that automated outsourcing means lower production costs. They only know the cheap labor provided by developing countries, but they lack the understanding of the important factors that affect the outcome of business investment. These factors include cultural differences, language issues, product quality errors, transportation costs and currency fluctuations. Bengtson further stated that most of their clients have tried to manage outsourcing by themselves, but failed. Bengtson also sees an increase in China's awareness of social and environmental issues. This can be seen in the provisions of the employment contract. In recent years, the size of employment contracts has doubled, and issues such as pensions, maternity leave, eight-hour working days, and holiday entitlements are now covered (Bengtson, 2013). Due to rising labor costs, this has led to higher outsourcing costs in China. Bengtson said that product attributes will have a greater impact on determining future outsourcing locations. Products that use heavy raw materials will benefit more as manufacturers are closer to the market. At the same time, products with light weight and high effective packaging density will not be affected by increased transportation costs. The textile industry is an example. In the near future, transportation costs may continue to increase without reaching critical levels. Bengtson also pointed out that offshore outsourcing requires constant review, goods need to be controlled regularly, and goods must undergo quality inspections. This is an ongoing process that requires a lot of time and cost. According to Bengtson, product failures and defects are the biggest concerns when outsourcing to low-cost areas. Bengtson said that Chinese manufacturers do not want to lose face, this is a cultural difference. As a result, they never say no, but always say yes. This can lead to misunderstandings and errors, because Chinese manufacturers never admit that they do not understand or cannot achieve production goals. Read Less