Tuesday, April 12, 2011

Vietnam fashion industry-A logistic and supply chain management case study

Being in the position of a manufacturer, logistics and supply chain management is the important key of the organization success. This report is aimed to illustrate overall issues of logistic activities in Vietnam Fashion industry for men and women’s apparel and suggest how Zara Vietnam can manage its supply chain models by setting potential strategies and respective operational plans.
The Industry of men and women’s apparel supply chains in Vietnam is developing tremendously and is considered one of the world’s most feasible and believable apparel production platforms. Moreover, Vietnamese government is highly supportive to the textile and garment sector and there are strong incentives to appeal foreign investors.
There are five main logistic issues for Vietnam apparel supply chains industry: duplicated inventory deployment, lack of the cooperation between the key players in the supply chains, high inventory carrying costs, few and unsuitable warehouses and forecast errors.
Zara Vietnam can utilize three feasible strategies, which are Collaborative, planning, forecasting, and replenishment (CPFR), third-party logistics (3PLs) and Warehouse management system (WMS) to address five issues mentioned above. The first two strategies, to a certain extent, could be the most effective and feasible strategies. In the short-term, they can generally reduce the overall logistics costs, increase accuracy rate in forecast, decrease stock-outs. In the long-term, they help strengthen the collaboration between all key players and the supply chains, generating higher revenues for all parties involved.
The operational plan will be attached at the end of the report. It will be extensively focusing on the roles and effectiveness of CPFR and 3PLs strategies to help Zara succeed in this new potential market.

2.1. Zara Men and Women’s apparel channels distribution: 6
2.1.1. Channel mapping: 6
2.1.2. Key Players: 7
2.2. Current situation analysis: 8
2.2.1. Overview of apparel supply chains Industry in Vietnam: 8
2.2.2. SWOT analysis: 9
2.2.3. PEST analysis: 9
2.2.4. Logistics and Supply Chain Management issues: 10
3.1. Feasible Logistics and SCM strategies: 11
3.1.1. Collaborative, Planning, Forecasting and Replenishment (CPFR): 11
3.2.2. Third-Party Logistics (3PLs): 12
3.2.3. Warehouse Management System (WMS): 12
3.2. Evaluation (Pros and Cons): 13
3.3. Quantitative evaluation: 13
3.3.1. Multi-criteria decision matrix (MCDM): 13
3.3.2. Explanation of MCDM: 13
4.1. Operational plan: 15
4.2. Key performance indicators (KPIs): 16
4.2.1. Transportation KPIs: 16
4.2.2. Warehousing KPIs: 16
4.3. Projection of the overall cost/benefit: 17
2.1. ZARA Men and Women’s apparel channels distribution:
2.1.1. Channel mapping:

2.1.2. Key Players:
Key Players
Retailer 2 Hanoi retailing outlets, 3 Hochiminh retailing outlets, 5 foreign retailing outlets serve the purpose of directly distributing and selling the finished goods to the end-users.
Manufacturers Factory located in Binh Duong province in combination with 3 external neighboring workshops being in charge of manufacturing and producing the commodities.
3PLs Transportation, Outsourcing firms and 3 sewing workshops act as the role of external suppliers performing parts of Zara’s manufacturing processes.

2.2. Current situation analysis:
2.2.1. Overview of apparel supply chains Industry in Vietnam:
According to an article established by Fibre2fashion.com (2009), “apparel industry is the largest industrial employer and the second largest export industry in Vietnam”. Hence, not only does this potential market help Zara expand its apparel business in Vietnam, but the business also assists Zara to advantageously create supply chain relationships since Vietnam already is a low-cost apparel supplier to many European Union (EU) and Asian countries (Tait 2000), and it is remarkably noticed by the global apparel market with the conscious attention from many international apparel brands (Fibre2fashion.com 2009).
Transportation has been playing an important role in providing the critical linkages between the supply chain networks within separated organizations located both domestically and internationally. Recently, there have been third-party logistics enterprises heading to Vietnam as external suppliers to perform its logistics functions such as transportations or distributions (Coyle et al 2009). These activities entail difficulties for supply chain organizations. To illustrate, the recently constant increase in the price of petrol in Vietnam results in many firms having increased transportation costs, especially where offshore manufacturing with vast distance occurs, inventory carrying costs and warehousing costs. This forces them to cut down on the number of carriers, leading to the slower delivery time.
The apparel’s demands were said to have fallen from major international markets where the apparel retail turnover was recorded to have diminished up to 20 per-cents and the export contract numbers also dropped up to 25 per-cents and prices were down 10-15 per-cents (LookatVietnam.com 2009). Therefore, most apparel firms are handling their sources of raw materials to alleviate the strength of the apparel industry development for the next years. To narrow the gap between supply and demand, “the enterprises have turned to the domestic market to offset the export reductions via promotion programs” (LookatVietnam.com 2009).
2.2.2. SWOT analysis:

2.2.3. PEST analysis:

• State Bank supports business firms by paying 4% of loan interest for business purposes (Thu & Hoang 2009)
• Strict transportation regulations prevent big trucks from operating within cites during the working hours.

2.2.4. Logistics and Supply Chain Management issues:
 Duplicated inventory deployment:
Vietnam Apparel industry’s characteristic is that almost wholesalers and retailers carry the same merchandise in the same cities. Zara is currently selling similar finished goods to the identical people residing in that city (Craig et al 2004). This issue has led to Zara difficultly gratifying Vietnamese fashion tastes. “This may be due to Asian tastes differ from European preferences” (Craig et al 2004).
 Lack of cooperation between the key players in the Supply Chains:
With the era of globalization, fashion firms in Vietnam Apparel Industry are confronting more considerable difficulties coordinating their businesses and developing a strong supply supply chains. This subsequently negatively affects their sales (Regielive.ro 2004). Therefore the vertical integration which is a distinctive feature of those firms ‘business models tend to affect the costs but in a negative way.
 High inventory carrying cost:
The Industry is now facing high costs of carrying inventory due to the poor infrastructure and road condition. Zara’s inventory productions virtually are kept in its head-office in Portugal and some manufacturing plant around Spain (Tokatli 2007). Therefore, the costs of carrying inventories from such plants to the factory in Binh Duong for production processes are expensive.

 Forecasting errors:
Almost fashion firms in Vietnam industry use POS (Point to Sales) terminals running on the DOS system which Microsoft no longer supports. These terminals do not facilitate store staff to look up the balances of inventory, the goods demanded and the determination of replenishment quantities to the reasonable precision (123helpme.com 2009).
 Warehouses: fewness and unsuitability
Almost warehouses are currently located in Spain. These are apparently not enough for such a multinational company like Zara with many retailing stores located differently across Vietnam from Hanoi to Hochiminh and some Asian regions. Zara’s distribution operations seemingly do not work accurately with the difficult product movements across continents, leading to the long delivery cycle times, especially for those retailers located internationally.

The number of warehouses located in Vietnam territory has been facing poor storage conditions with no temperature control when raining seasons come. It directly can damage Zara’s inventories (unfinished goods or raw materials) stocked in those limited warehouse numbers in Vietnam.

3.1. Feasible Logistics and SCM strategies:
3.1.1. Collaborative, Planning, Forecasting and Replenishment (CPFR):
One of the most recent innovations targeted at gaining appropriate supply chain integration in order to solve the issues: lack of cooperation, forecast errors and duplicated inventory deployment is CPFR. It is a breakthrough business model for planning, forecasting and replenishment with the preliminary utilization is internet-based technologies in order to cooperate on operational planning through execution (Coyle et al 2009).
Firstly, problem related to the lack of cooperation between the key players and the company in Vietnamese supply chains can be solved via the process of Internet-based collaborative planning. The CPFR process allows the cooperation and exchange of data amongst business partners (Textile and outsourcing companies, sewing workshops) and the sharing of business plans between Zara Vietnam’s key players such as account planning, market planning, demand planning or production and supply planning. Once the arrangements are accomplished, the commitment will be implemented to follow the collaborative plans closely between all key players, helping them remove all the incompatibility and the lack collaboration.
By applying CPFR, also the forecast errors can be diminished. Coyle et al (2009, p.249) highlights that “CPFR allows trading partners to agree to a single forecast for an item where each partner translates this forecast into a single execution plan”. It, therefore, removes the outdated approach of forecasting where each key player set up its respective forecast and each of this differs from the other supply chain partners.
Thirdly, with the problem of duplicated inventory deployment occurring, the coordination and integration can facilitate to minimize inventory levels on such a vertical firm like Zara in the supply chains. Moreover, developing a business model to collaboratively replenish inventory via CPFR (Harrison & Hoek, 2008) can feasibly assist Zara not to design and produce its merchandises identically in its market segments especially in Vietnam and Asia.
3.2.2. Third-Party Logistics (3PLs):
To resolve the problem related to high inventory carrying costs on hand, using 3PLs strategy is apparently appropriate. “Essentially, a third-party logistics firm is an external supplier that performs all part of a company’s logistics functions” (Coyle et al 2009, p.119). As the serious problem was previously stated above, Zara Vietnam has the alternatives to opt competent transportation service providers having well-equipped carriers to distribute its commodities nationwide and in Asian regions when required in order to reduce the costs of carrying inventories.
3.2.3. Warehouse Management System (WMS):
WMS has been known to be widely used to support all types of distribution operations (Coyle et al 2009). Zara, therefore, had better apply WMS software control system that is used to enhance product movement and storage operations through efficient management of information and completion of tasks. In order to minimize the warehousing issue identified above, the value-added capacity of WMS likes transportation management will address the issue, providing a strong flow of information across Zara Vietnam distribution channels from Hanoi to Hochiminh and Asian regions.
3.2. Evaluation (Pros and Cons):

Advantages Disadvantages
CPFR * Effective partnering supply chains co-operations.
* Decrease overall logistics costs owing to collaborative planning and shorter order cycle times.
* Increase forecasting accuracy, decrease stock-outs and lost sales.
* Collaborators may not desire to reach an agreement on CPFR which can also reveal information or business plans to their rivals as well.
* To install all the collaborative data-base systems requires vast sum of capitals.
3PLs * Ability to decrease asset investments (warehousing, distributions…), help Zara to focus extensively on its core business.
* Transportations or distributions are smooth-sailing, leading to high level of customer service. * Possible risk of disclosing competitive advantage if largely relies on 3PLs firms.
* If Zara completely depends on 3PLs, it lacks in alternatives and trustworthy 3PLs usually require high expenses for their services.
WMS * Ability to gain a high level of control, inventory accuracy and productivity.
* Enable integration of materials-handling equipment, picking or sorting systems. * WMS often has weak interfaces to the main computer system and need to be maintained two complete databases, one for the main system and one for the WMS.

3.3. Quantitative evaluation:
3.3.1. Multi-criteria decision matrix (MCDM):

Alternative selections Duplicated inventory deployment Lack of cooperation between key players in the supply chains High inventory carrying costs Forecasting errors Warehouses: fewness and unsuitability Total

15% 20% 10% 20% 35% 100%
CPFR 8 9 0 7 0 4.4
3PLs 0 4 9 1 7 4.35
WMS 1 0 6 1 8 3.75

3.3.2. Explanation of MCDM:
Generally speaking, each strategy can resolve the issues to a certain extent. By applying MCDM, we can identify which strategy is the most effective approach to solve the problems on hand. As revealed, CPFR has the highest score amongst three feasible strategies. In the tables below, there will be full explanations of the results (for CPFR and 3PLs) from quantitative evaluation:
Issues: CPFR:
Duplicated inventory deployment Through integrating Vietnamese supply chain members, CPFR could help to diminish the high level of duplicated inventories. CPFR is an effective business model that can facilitate Zara Vietnam to produce fashion that mostly suits to the taste of Vietnamese by collaborating with the trading partners and its 3PLs.
Lack of the cooperation When utilizing CPFR, Zara Vietnam can be allowed to engage in the cooperation and exchange the information between its supply chains via high-tech system such as EDI or Internet-base collaborative planning. This can be used to avoid the incomparability or misrepresentation or poor communication between the supply chains. This strategy can address the issue well-competently, helping Zara Vietnam build the strong and effective supply chains.
Forecast errors The errors occurring frequently but can be diminished if Zara Vietnam engages in CPFR. It provides a single forecast from which commercial partners can build up manufacturing, replenishment and merchandising plans. If collaborated and applied satisfactorily, the demand or supply forecast and the risk of stock-outs will be minimized.
Issues: 3PLs:
High inventory carrying costs Using 3PLs transportation providers can resolve the problem promptly.
Few and unsuitable warehouses Zara Vietnam can meet warehouse providers to be given good storage conditions and more stocking places to keep the inventories for the production.

4.1. Operational plan:

Operations 2009 2010 2011
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Vietnam Fashion Industry overall analysis
Assess and opt feasible trading partners
Bargain and develop front-end arrangement
Negotiate regulations for accountability and information sharing
Develop the integrated technology software system used between partners
Tutorial workshop for practicing technological systems
Create joint business plan and collaboration arrangement
Create sales forecasting and order forecasting
Identify exceptions for sales and order forecasting
Resolve and cooperate on exceptional items
Order generation and fulfillment between trading partners
Evaluate logistics and SCM performance and create necessary alternatives

Operations 2009 2010 2011
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Determine which logistic operations are the core competency at out firm
Decide which logistics functions need to be relied on the external suppliers
Discover the third party logistics in Vietnam
Elect the suitable 3PL providers (Warehousing, Outsourcing and Distributing providers)
Connect and negotiate with our 3PL providers
Select the suitable transportation and warehousing 3PL providers
Implement 3PLs strategies
Evaluate the performances of 3 PL service providers and make necessary adjustments
Build up new warehouse for storing stocks in both Hanoi and Hochiminh city
End the contracts with warehousing 3PL providers

4.2. Key performance indicators (KPIs):
4.2.1. Transportation KPIs:
This KPI will measure the costs used for the transportation and be based on:
- Amount of fuel per Package
- Average Freight Revenue per Ton-Mile
4.2.2. Warehousing KPIs:
- Stock turnover: Principally, the lower the investment in stocks the better. The formula for this ratio is:
Stock Turnover = Average Stocks

(Cost of Sales/365)
- Percentage of inventories incorrectly located

4.3. Projection of the overall cost/benefit:
The future of Zara’s Vietnam of the implemented strategies will be considered by the cost/benefit analysis in the table below:
CPFR - Installation of technological software and database system between the supply chains and trading partners.
- Training sessions for staff on how to utilize the software.
- Untruth-worthy partners can collude with other competitors, - Create the effective and efficient supply chains to fulfill the customer’s requirement and to reduce the costs, helping Zara focus on its core competency.
- The use of collaborative efforts among partners can result in positive performances.
3PLs - Having well-competent transportation providers create more costs to pay. - Outsourcing 3PLs can provide Zara more inventories to produce goods.

123helpme.com, 2009, Zara’s Business Model, Information and Communication Technologies, and Competitive Analysis, viewed 30th July 2009, http://www.123helpme.com/view.asp?id=97642
Coyle, J, Langey, CJ, Gibson, BJ, Novack, RA & Bardi, EJ 2008, Supply chain management A logistics perspective, 8th edn, South-Western Cengage Learning, Ohio
Craig, A, Jones, C & Nieto, M 2004, Zara: Fashion follower, Industry leader, Philadelphia university, viewed 30th July 2009, http://www.philau.edu/sba/news/zarareport.pdf
English.vietnamnet.vn, 2009, Firms beef about forex, subsidised loan policies, viewed 1st August 2009,
Ferdows, K, Lewis, MA & Machuca, JAB 2004, Caso Zara Rapid-fire fulfillment, Georgetown university, viewed 30th July 2009, http://www.twistedesign.com/master_logistica/05-12-06/Zara%20rapid%20fulfillment.pdf
Harrison, A & Hoek, R 2008, Logistics management and strategy, 3rd edn, Pearson Education Limited, London
LookatVietnam.com, 2009, Apparel exports tumble 1.3% in first half, dated June 2009, viewed 30th July 2009, http://www.lookatvietnam.com/2009/06/apparel-exports-tumble-13-in-first-half.html
Tait, N 2000, The state of Vietnam’s Apparel industry, viewed 31st July 2009, http://findarticles.com/p/articles/mi_m3638/is_1_42/ai_65807137/
Tokali, N, 2007, ‘Global sourcing: insights from the global clothing industry—the case of Zara, a fast fashion retailer’, Journal of Economic Geography Advance Access published online on October 23, 2007, viewed 30th July 2009, http://joeg.oxfordjournals.org/cgi/content/abstract/lbm035v1

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