Sourcing and Supplier Evaluation Practices in Small and Medium

Abstract Number 003-0295

SOURCING AND SUPPLIER EVALUATION PRACTICES IN SMALL AND MEDIUM FIRMS IN THE U.S. TEXTILE AND APPAREL INDUSTRY

16th Annual Conference of POMS, Chicago, IL

April 29 – May 2, 2005

Jin Su

1528 Spartan VLG, Apt B

East Lansing, MI 48823

Phone: (517) 410-6047

and

Vidyaranya B. Gargeya

Department of Information Systems and Operations Management

JosephM.BryanSchool of Business and Economics

The University of North Carolina at Greensboro

Greensboro, NC 27402

Phone: (336) 334-4990

Fax: (336) 334-4083

Please address all correspondence to Vidyaranya B. Gargeya

Sourcing and Supplier Evaluation Practices in Small and Medium

Firms in the U.S. Textile and Apparel Industries

ABSTRACT

Within the global dynamic business environment, three key factors – the supply environment of the firm, the level of competition, and changes in the purchasing/sourcing function – appear to have created the opportunity and necessity for an increase in integrating purchasing and supplier into global strategic supply chain management. For small and medium sized firms, one powerful method of improving the firm’s competitiveness is through strategic approaches of sourcing and suppliers, which emphasize supplier’s contributions to the total product and to overall customer satisfaction. However, little is known about how and to what extent small and medium firms are implementing sourcing and supplier evaluation practices in global supply chain management. This study presents the results of an empirical study of companies within textile and apparel industries in the U.S. Southeastern area.

INTRODUCTION

A number of factors appear to indicate that purchasing/sourcing and suppliers should play an important role in decision-making process in the U.S. textile-apparel-retail supply network. These factors can be grouped into three key categories: the supply environment of the firm, the level of competition, and changes in the purchasing function. These categories appear to have created the opportunity and necessity for an increase in integrating supplier and purchasing into the strategic decision-making process.

The Supply Environment

The supply environment before the 1990s was relatively stable for the U.S. textile-apparel-retail industries. Thus, for many firms the impact of purchasing and the importance of suppliers were not fully understood for a long time. However, dynamic changes started to occur in key supply markets in the 1990s when economic, trade, technological, and social impacts greatly challenged the business environment. Globalization requires U.S. firms in the textile and apparel industries have more and more off-shore suppliers who can provide high quality and low cost goods. Quick response for the U.S. textile-apparel-retail supply chain combines technology and collaboration in the network, which in turn creates requirements for vendors and increases the need to manage suppliers in a strategic way. Lean retailing puts much pressure on and requires more capability for firms to survive in the retail-apparel-textile channels (Abernathy, Dunlop, Hammond, & Weil, 1999). Being responsive to consumer tastes is central to lean retailing, and dealing with variability in demand has become crucial to the suppliers competing in a lean retailing world.

Intense Competition

As the level of competition has intensified, due primarily to the globalization of manufacturing and service, many firms are carefully evaluating their purchasing function, and the contribution of purchasing and suppliers to the firm. Associated with the new higher level of competition is the effort placed on the importance and improvement of product quality and short lead time. Companies realize that a significant percentage of the final quality of a product is determined in the early design and manufacturing stages of components that make up a significant part of the product (Abernathy, Dunlop, Hammond, & Weil, 1999; Pearson & Gritzmacher, 1990). The increasing interdependency of the textile-apparel-retail supply network to achieve innovation, efficiency, flexibility, and high quality will support stronger sourcing approaches which emphasize stronger partnership-based alliances rather than the traditional adversary-based approaches.

The Changing Role of Purchasing

In the past, many firms viewed purchasing as a cost-cutting rather than a profit-generating function. This was due primarily to the stable nature of supply markets, and to the slowly changing technology as well as the competitive situation of the company. However, the evolving nature of the supply market along with the increasing level of firm competition has fostered a reevaluation of the nature and characteristics of the purchasing function. Top managers are realizing the importance and the contributions purchasing/sourcing could provide to the business, and are starting to commit resources to purchasing/sourcing development. This development includes a shift in focus from cost cutting to profit generating with an increased concern for a new set of performance measures.

Traditionally, firms in textile-apparel-retail industries purchased products at low costs through buying power (volume or cash position), or via access to the cheapest domestic and international sources for apparel (Abernathy, Dunlop, Hammond, & Weil, 1999; Barbee, 1998; Dickerson, 1999). International sourcing arrangements that had been created by retailers and manufacturers over the last twenty years reflected a quest for minimizing unit labor costs. But the long lead times increasingly challenged such arrangements. Manufacturers and retailers that rely on international sourcing therefore have to reassess the total costs associated with offshore production and revise existing arrangements.

Trade data already suggest a major restructuring in the sources of U.S. apparel imports. Although these shifts in part reflect changes in U.S. trade policy, such as the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI), they fundamentally arise from new sourcing patterns attributable to channel integration and the consequent need for apparel items that can be delivered in a shorter time to the U.S. market (Abernathy, Dunlop, Hammond, & Weil, 1999).

Based on the U.S. textile-apparel-retail industries’ current situation, the motivation for this research primarily stems from three critical issues associated with sourcing and supplier evaluation in the U.S. textile-apparel-retail complex. First, the U.S. textile-apparel industries are currently experiencing many challenges and hardships. In this study, the current situation of the U.S. textile-apparel industries functions as the stimulus to investigate the new opportunities which new managerial approaches can bring about. Second, US textile and apparel industries are representative of small and medium-sized business. The majority of firms in textile and apparel industries are small and medium size. They actively involve in sourcing activity. Third, the global market has traditionally been the battlefield of large, multinational corporations. However, the past years has witness the evolution of a new global manufacturing and trade environment, with firms of all sizes now competing globally. Unfortunately, most global operational research has focused on the practices of large firms, and neglect the fact that small and medium firms and large firms do not operate in similar ways. Previous supply management research is mainly focused on large firms and little research has been undertaken on sourcing and supplier evaluation practices in small and medium firms. According to The Office of Advocacy, a small business for research purposes is defined as an independent business having fewer than 500 employees. About ninety-eight percent of firms in U.S. textile and apparel industry have employees less than 500. Therefore, it is important to know the operations practices in small and medium firms and to explore their perceptions of the business environment.

LITERATURE REVIEW

Sourcing and Supplier Evaluation

In order to compete effectively in the world market, a company must have a network of competent suppliers. Supplier assessment and selection is designed to create and maintain such a network and to improve various supplier capabilities that are necessary for the buying organization to meet its increasing competitive challenges. A firm’s ability to produce a quality product at a reasonable cost and in a timely manner is heavily influenced by its suppliers’ capabilities, and supplier performance is considered one of the determining factors for the company’s success (Davis, 1993; Hahn, Watts, & Kim, 1990; Krause, Scannell, & Calantone, 2000; Monczka, Trent, & Callahan, 1993; Tan, Lyman, & Wisner, 2002). Consequently, without a competent supplier network, a firm’s ability to compete effectively in the market can be hampered significantly.

There are several key reasons why suppliers are becoming increasingly critical to the competitive success of the U.S. firms. First, manufacturers are beginning to focus on their core competences (Prahalad & Hamel, 1990) and areas of technical expertise (i.e. firms concentrating on what they do best). An emphasis on internal competences requires greater reliance on external suppliers to support directly non-core requirement. Second, developing effective supply base management strategies can help counter the competitive pressures brought about by intense worldwide competition. To remain globally competitive, firms in the U.S. must receive competitive performance advantages from their suppliers that match or exceed the advantages that suppliers provide to leading foreign competitors. Third, suppliers can support directly a firm’s ability to innovate in the critical areas of product and process technology. As organizations continue to seek performance improvements, they are reorganizing their supplier base and managing it as an extension of the firm’s business system (Trent & Monczka, 1998; Vonderembse & Tracey, 1999).

Given that over 50% of the cost of goods sold worldwide is derived from purchased materials, supplier selection is an important strategic decision and serves as a source of competitive advantage (Simpson, Siguaw, & White, 2002). Supplier selection becomes a central concern as the buyers look to form strategic partnerships (Spekman, 1988; Mabert & Venkataramanan, 1998). A growing emphasis on establishing long-term channel relationships, driven by competitive pressures and business complexity, has encouraged many firms to become highly selective in their choice of supplier. To build more effective relationships with suppliers, organizations are using supplier selection criteria to strengthen the selection process. The results of Vonderembse and Tracey (1999) indicatemanagers should focus on a set of supplier selection criteria that evaluates suppliers across multiple dimensions including product quality, product performance, and delivery reliability. Effective evaluation and selection of suppliers is considered to be one of the critical responsibilities of purchasing/sourcing managers. The evaluation process often involves the simultaneous consideration of several important supplier performance attributes that include price, delivery lead time, and quality.

The U.S. Textile and Apparel Supply Chain

The U.S. textile and apparel industries are large and highly fragmented. In the past, each segment in the U.S. textile-apparel complex operated more or less separately, producing intermediate products for the next stage of the production chain. Fragmentation has made the textile and apparel industries more vulnerable in facing global competition (Dickerson, 1999). The textile and apparel manufacturing industry is especially vulnerable to off-shore competition because historically it has been comprised primarily of small and medium-size firms (Sullivan & Kang, 1999).

Traditionally in the textile-apparel-retail supply chain, each chain member runs its business based upon separate concerns and interests, sometimes causing conflicts in the relationships with chain partners. In the apparel industry, very little coordination exists among companies. Lack of information sharing on actual demand between chain members creates long lead-times and high levels of inventory with consequent risks of obsolescence at each segment (Kincade, Vass, & Cassill, 2001).

Apparel manufacturing is labor intensive with companies historically competing on price. In the apparel industry, the upper end of the supply chain contains an abundant supply of available manufacturers and low-wage workers from various countries. Manufacturers compete for retail business, and retailers select vendors, primarily on a cost basis. Retailers can use this competition among manufacturers to their own advantage in demanding lower costs and improved quality for goods and services. However, over the last ten years, the multiple criteria of cost, quality, delivery speed, and delivery reliability, are becoming critical for the textile and apparel industries.

Over the last two decades, the U.S. textiles-apparel complex has experienced and is still experiencing radical and continuous change in their product, process, and business. In some ways, companies seek to reduce their impact, reflecting the need to increase flexibility and to excel on core activities through greater specialization by focusing resources and expertise. They have sought lower levels of diversity by focusing on core customers, products or activities. They have reduced complexity by focusing on core competencies and contracting-out specialist tasks. They have also reduced hostility by establishing stronger, more stable and congenial supply chain relationships.

The textile-apparel-retail supply chain is global and complex. The intricate nature of the sector is reflected in the numerous steps in the chain, the diversity of activities, the fragmentation of the market, and the varying product and quality specifications being managed. From the point of the U.S. textile and apparel supply chain, there is increasing tendency for each type of organizational buyer in the textile-apparel-retail supply chain to become more actively involved in offshore sourcing (Gereffi, 1999). The globalization of the U.S. textile and apparel industry has been significantly spurred by the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI), and it will be influenced by the future trade regulations such as the elimination of quotas on January 1, 2005.

RESEARCH METHODOLOGY

A survey instrument was developed to collect data for this study. A survey instrument in the form of a structured questionnaire was designed based on the literature review of previous research, and discussions with industrial practitioners. All questions were designed to be answered by the buyer firm and from the buyer’s perspective. A five-point Likert scale (for example, 1=not at all important, 5=extremely important) was used. Likert scales provide a proven method for constructing such measurements. The survey instrument was pre-tested for content validity by 9 purchasing managers. Where necessary, questions were reworded to improve validity and clarity.

The survey sample included small and medium firms in textile and apparel business in North Carolina, South Carolina, Georgia, California, and New York. North Carolina, South Carolina, Georgia, and California are the center areas of the U.S. textile and apparel industries and New York is the center of apparel retailing industry. This study focused on corporate level with 25 employees at least, considering the nature of this research and the purpose of getting reasonable response rate. It is considered that firms with very few employees are difficult to reach and get their participate in research.

The survey was sent to 317 small and medium-sized firms with employees less than 500 in NC, SC, GA, CA, and NY, identified from D&B’s Million Dollar Database and two directory books  Textile World Blue Book (2003) and Davison’s Textile Blue Book (2003). The target respondents for the survey represented purchasing professionals with titles such as purchasing manager, director of purchasing, and vice president of purchasing. In an effort to increase response rate, a modified version of Dillman’s (2000) Tailored Design Method was used. Mail survey, follow-up phone call contacts, and e-mail survey were used to request firm’s participation and to remind them to return the completed survey.

Of the total 317 surveyed firms, 37 firms declined to participate in the survey because of the company’s no survey policy; 5 companies closed; 5 companies were not in textiles and apparel business any more; 53 firms were identified as non-reachable or returned undelivered (e.g. wrong address). Sixty-three usable responses were returned from 217 reachable firms in the sample, representing an effective response rate of 29.0%.

RESULTS AND ANALYSIS

Demographic Statistics

Tables 1, 2, 3, and 4 provide the demographic information of the survey results. Approximately 47.6% of responses came from textile industry, 38.1% from apparel manufacturers, and 14.3% from apparel retailers. The titles of the respondents are mainly Director of Purchasing/Sourcing (22.2%), CEO/President (15.9%), General Manager (14.3%), and Vice President of Sourcing/Purchasing/Logistics/Operations (22.2%). Companies with less than 100, 100-249, and 250-499 employees represented 23.8%, 44.4% and 30.2% of the responses respectively. Seventy-six percent of the companies had annual gross sales (in US$) less than 100 million. About 14.3% of companies didn’t provide annual gross sales information.

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Insert Tables 1, 2, 3, and 4 About Here

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Sourcing and Supplier Evaluation Practices

Almost all of the firms agreed that sourcing/purchasing function is very important to the overall success of my company. The sourcing function adds value to the firm in the area of production/operations/logistics and sourcing contributes to the firm’s bottom-line profit. The three most mentioned sourcing practices in the buyer firm’s are: sourcing function has active interaction with other functions (e.g. manufacturing, marketing, etc.); sourcing emphasizes customer satisfaction; sourcing function includes developing relationship with key suppliers.

There have been obvious changes in the supply market (Table 5). Over 71% of the respondents indicated that the supplier’s methods used to produce products or services have changed to some extent or to great extent. Over 93.6% of the respondents indicated that the geographic location from which they procure products or services is more dispersed. Over 62% of the respondents reported that the number of suppliers offering materials that meet their specification requirements has increased to some extent or to great extent. Over 62% of the respondents reported that the availability of substitute materials has increased to some extent or to great extent.

In terms of supplier evaluation systems (Table 6), about 26% of the respondents clearly indicated that they had formal supplier certification program for evaluating and recognizing suppliers, while 30.6% reported they had no supplier certification program. Only 42% reported that their company had a formal system to track the performance of the suppliers. The results show many small and medium firms in textile and apparel industries didn’t formally implement supplier evaluation system.