TeXtile Corp.

Case A: Globalization in the Textile Industry1

Klaus Halberstam, the President and CEO of TeXtile Corporation (TXC), was worried, as he prepared for the Annual Shareholders Meeting of the company. As he contemplated the difficult questions facing his firm, he could not help but long for the good old days during the 70s and 80s. The industry was thriving then, all the mills were humming along at capacity, and it was easier to compete successfully, with well-defined markets and a simpler competitive environment. Since then, the textile industry seemed to have gone into a tailspin, and even though TXC had managed to stay financially healthy and relatively successful, it seemed that he was fighting an ever-more difficult battle each year.

The Company
TXC was a leading manufacturer of textiles with operations in a number of countries worldwide. Starting from a single upholstery fabrics mill in Charlotte in the 1950s, the firm had expanded through a combination of internal growth and acquisitions (mostly international), to a global enterprise by the turn of the century. Currently headquartered in the USA, in Charlotte, North Carolina, it also had extensive operations in Europe (headquartered in London, UK), and Asia (headquartered in Nagoya, Japan). See Appendix 1 for an organizational chart of the company. Worldwide sales for the company were currently $800 million ($400MM in the US, $250MM in Europe and $150MM in Asia) with net profits of $36 million (mostly in Asia). Currently the company had just over 2000 employees. TXC had a broad array of products, ranging from denims and pure cotton fabrics to sophisticated man-made fabrics based on various polyesters and blends. The firms fabric mills were spread across its various divisions. In the US, it had production facilities in Durham (NC), Lancaster (PA), Burlington (VT) and Milwaukee (WI). In Europe, the factories were located in Milan (Italy), Manchester (UK) and Cologne (Germany). The Asian facilities were in Baroda (India), Kuala Lumpur (Malaysia) and Nagoya (Japan). The mills were fairly modern and efficient, and required between 30 and 100 employees per shift to operate. The company was a leader in its markets, with a strong reputation for quality products, product innovation and excellent service. It had a wide range of customers, including mega-retailers such as Carrefour and Walmart, apparel makers such as the Gap, Lands End and Marks & Spencer, home furnishings producers, specialized fashion houses, clothiers and interior design suppliers. Manufacturers of automobile, bus, train, aircraft and boat seats were also a major customer segment. The products were sold
This case study was prepared by Professors Amit Basu and Steve Muylle, as a basis for discussion of a typical business situation, and not as a factual description of a real firm.
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through multiple channels, including textile distributors, salespeople and independent agents, and company-owned stores.

Products
TXC had two broad categories of products. The first category consisted of standard products, such as Textura 200 blue cotton denim, or Duralon Pashah Green 50-50 Polyester-Cotton Upholstery fabric. These were produced in large batches based on aggregate sales forecasts. Most of TXCs standard products were branded, and many of these brands were leaders in their category (e.g., Textura and Supima for clothing, Duralon and PolyVelour for upholstery). The entire line of standard products spanned over 200 different products in each region. In some cases, the fabrics were used to make plain products, like T-shirts, which were in turn processed by small print shops who screen-printed logos, banners, etc. before selling to retailers. In addition to widely used fabrics, the company also sold specialized fabrics, such as flame-retardant fabrics for fire-fighting and chemical company uniforms, and other special materials for military uniforms. The second category of TXC products was made-to-order fabrics, which were made in varying size lots (depending on order size). The orders typically specified three dimensions: the fabric composition and weave, the design, and the order size. Each mill was designed to produce a certain range of fabric compositions. All the clothing and drapery fabric mills had dyeing, printing and finishing facilities, while the upholstery mills used sophisticated weaving methods for texturing and designing their products.

Operations
TXC had extensive competencies in textile manufacturing, including textile chemistry and textile technology. It had a research and development (R&D) group in Charlotte, which worked closely with the Textile Technology Center at NC State University, of which TXC was a major sponsor and partner. In addition, there was a small R&D group in Nagoya, which specialized in advanced synthetic materials. Each division was responsible for its profits and losses (P&L), and the various country operations had traditionally been very autonomous. Historically, each division created its own products (both fabrics and design lines) in response to local markets and sourced raw materials from local suppliers. Thus the perception was that there was no need for much coordination across divisions. Even fabric designs for standard products were developed separately by each region. However, each division used a similar value chain as other divisions, for each product category (see Appendix 2 for a description of these value chains). Till recently, the clothing and apparel industries had been very different in different regions, due to factors such as culture, geography and demographics. Thus, fabrics and designs popular in one market often had little or no demand in others. As an example, khadi, a relatively coarse cotton-based fabric that had traditionally been homespun and was very popular in South Asia was virtually unknown in Europe and the US, and to a large extent, even in Japan, which was in the same division. On the other hand, the use of sophisticated man-made fabrics was highly successful in Japan. Page 2 of 11

Furthermore, different divisions had different product mixes. For instance, in Asia, the firm had a leading position in standardized products, such as those used for uniforms and work-wear (organizations, schools, hospitals, etc.), so the factories were geared towards large order and batch sizes, producing garments that comply with specific regulations and standards. On the other hand, many of the European factories specialized in made-to-order fabrics, and thus had sophisticated design specification and production set-up capabilities. Automated systems were used to generate designs, which were loaded into the production systems using specialized software. In the US, the firm had a large share of the market for manufactured fabrics for interior design, as well as a significant business in made-to-order fabrics and even standard products. The Durham and Milwaukee factories specialized in heavier fabrics such as upholstery fabrics, while the Lancaster and Burlington factories produced a lot of clothing for large retailers such as Gap and Lands End. The order process for TXC products varied, depending upon the product category. In the case of standard products, the orders were based on product catalogs, which were distributed in hard copy, along with sample swatches, to distributors and direct customers. In addition, catalog information was also available online to distributors. In the case of made-to-order products, TXC salespeople received requests for quotations (RFQ) including the specifications from customers, and they would then bid for the order. Typically, customers worked with single suppliers for each order, and approached alternate suppliers only when needed. Thus, the customer relationship was crucial for such business. Often, customers had a partial specification in the RFQ, and the salespeople worked with the customer in completing specifications of aspects such as fabric composition. This could be a complex, iterative process, since the customers buyers sometimes had to consult the designer who generated the original specifications, and sometimes even their merchandizing managers, to get their approval if any changes were proposed.

Supply Chain
The supply chain of TXC consisted of two categories of suppliers. The first consisted of direct suppliers of raw materials for fabrics. These included cotton, silk and wool merchants, who supplied the appropriate natural fibers to each plant, yarn suppliers who supplied yarn to mills that did not spin their own yarn, and chemical companies who supplied synthetic fibers, including nylon, polyesters, polyamides and acetates. Most of the mills traditionally sourced their raw materials independently, particularly in regions such as the US where the product lines of each mill were quite distinct. Most of the mills in Europe, the US, and Japan had EDI (electronic document interchange) links to their suppliers. The European division had initiated coordinated buying of some materials for multiple mills from large suppliers, to exploit volume-based negotiated prices. In some cases, particularly for synthetic fibers, many of the suppliers were very large chemical companies with global operations.

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TXC had recently initiated internal coordination of raw material order data across different divisions, at the prodding of a newly appointed corporate vice president (VP) for operations, Joseph Kleinfeld. The objective of the program was also to build this system on a Web-based platform, to avoid the higher costs of EDI. Also, the Nagoya mill in Japan and the Durham mill in the US, which were highly automated and produced large batches of synthetic textiles and upholstery materials, had signed up key suppliers for a VMI (vendor-managed inventory) program. The suppliers had access to fiber inventory data from the mills, by controlled access to the mills ERP (enterprise resource planning) systems. In South Asia, each mill still used procurement agents to manage the order process via email and telephone with suppliers, with significant paper flow between companies. Also, as a result, order data was not shared much, and it took several days before divisional managers got the relevant reports. The second category of suppliers consisted of indirect suppliers. This included manufacturers and distributors of textile manufacturing equipment and supplies (both for new equipment as well as maintenance, repair and operations (MRO) requirements), office equipment suppliers, information technology suppliers and service providers. Orders to these suppliers were generated and processed a number of ways, depending upon the supplier. In some cases, procurement agents from TXC used the suppliers Web site to place orders and re-orders. In a few cases, such as for office supplies in the US, key vendors had standard supply contracts which were managed by the vendors delivery personnel, and these contracts were set for several years. The rest of the suppliers were managed by traditional means by designated procurement staff at each location.

Sales
TXC sold its products through a number of channels, which depended on three factors: the region, the product category and the customer type. First, the firm had a number of salespeople in each region and market, who sold textile fabrics to apparel makers. These salespeople worked with designers and textile buyers from the apparel making firms, and the sales process often involved significant negotiation and iteration. Designers and buyers presented their requirements to the salespeople, who assessed the feasibility of the requirements, and sometimes presented different options in design, material and/or texture. In some cases, the customers asked for samples. The salespeople sometimes also had to consult technical experts at TXCs R&D Center or production managers at the relevant mills to ensure that the requirements of the customers could be met, and if not, what variations were needed. The focus of the direct sales force was primarily on made-to-order textiles. The second channel used by the firm was independent distributors. These firms carried TXC product inventory, and used their showrooms, sample books and agents to sell primarily standard products. These included textiles for uniforms, draperies and home furnishings, upholstery materials for furniture, and seat covering materials to transportation equipment suppliers, such as makers of auto, bus, aircraft and boat seats, as well as furniture/fixture suppliers to commercial builders of auditoriums and other public buildings. TXC also used distributors to sell clothing fabrics to independent clothiers, Page 4 of 11

tailors and interior designers, who custom built products for both consumers and businesses. Finally, certain distributors specialized in surplus and salvage stocks of materials. The third channel used by TXC consisted of a set of outlet stores in mills (for employees) and discount malls. These outlet stores were mostly owned by the firm, and were used to sell end-rolls and surplus stocks to the general public. According to Sheila Brutten, TXCs VP of Sales for over ten years, My job is to balance the needs and cultural preferences of customers and markets in each region with effective sharing of best practices across the company, to help us be the highest quality product and service provider in the textile industry.

Information Technology at TXC

John Dexter, the Chief Information Officer of TXC, was proud of the firms IT infrastructure, and its role in supporting the firms dominant position in quality of products and services: While most other textile companies were late in adopting computers in their organizational workflow, we recognized that we could use computers not only for personal productivity applications for clerical staff, managers and engineers, but could actually weave computer-based information processing and flow into our business processes. This was the motivation for our investment in J.D. Edwards ERP software. As we went through the process of installing this software, we discovered numerous ways to improve the flow of information throughout the organization, from the front office and sales desks to the loading docks. No doubt it was a painful process the first time, but we learnt how to do it better, and have been able to now install our customized version of the software in all our mills and divisions, far ahead of our competitors. Not only is the order management process in each division fully supported by the ERP systems, but also, employees are moving to Web-based interfaces to the systems, and are for the most part, loving it. Projects to link mobile appliances such as digital mobile devices and notebook/tablet computers with the systems were also under way, and salespeople in particular were very enthusiastic about the project. Also, all EDI systems were fully standards-compliant with industry standards in each region, as appropriate. There were also ongoing efforts to implement new inter-firm links using Web services and XML, rather than traditional EDI. The firms corporate offices in Charlotte had a comprehensive suite of reporting and analysis packages in place, most of which were developed internally. The Corporate IT staff, which was the core of the firms IT workforce, was organized as the Computer and Network Services (CANS), and located in the corporate building at Charlotte. It operated a host of Oracle-based databases and applications, on an IBM server platform. All application development was done by CANS, and when ready for rollout, teams of IT personnel were sent to the relevant divisional offices and facilities to manage the implementation, testing and training. They worked with the small IT operations personnel that were based in the divisional offices and mills. Also, the help desk at CANS had Page 5 of 11

designated key contact personnel for every application and system, who were readily available to the divisional colleagues by mobile phone, email and fax. However, IT personnel at different divisions did not interact much with each other, only with the CANS staff. Data from the divisional ERP systems were batch loaded to the corporate data warehouse on a weekly basis. The firm leased dedicated network links between its main offices in Charlotte, London and Nagoya, as well as links between each mill and its divisional headquarters. Also, since corporate users could access some of the ERP applications over the Web, they could obtain more current divisional operational data as well, when necessary. The development staff at CANS was fully committed to Webenabling all existing applications (enabling access to these applications using a generic Web browser like Microsoft Internet Explorer). Due to the emphasis on mobile applications, relevant applications were also configured to operate effectively on such limited browser platforms as well. The firm also provided significant information technology support for its distribution chain. For instance, the companys Web site had product information on all its products. This included color palettes and all major technical specifications. The firm had considered an online store for selling standard products, but concerns about alienating the distributor network had prevented this move. However, distributors in the US, Europe and Japan could access a secure Web site (each region had a separate site) to place orders from the local TXC division. The site also provided technical support on product characteristics, with email help and a FAQ (frequently asked questions) list organized by product category. Some large distributors had their own Web sites that they used to sell products, including TXC products. Similarly, salespeople had a secure Intranet resource that provided them with technical information on fabrics, availability (via a link to the divisional ERP system), and guidance on pricing. This was most extensive in Europe and the US, but was expanding for the Asian division.

Trends in the Industry

Since the early 1990s, the order process had come under significant pressure, as the apparel industry had become increasingly competitive and cost conscious. In some markets such as the US, retailers faced a shrinking window of opportunity for each garment style, due to rapidly changing fashion trends and cost-conscious shoppers. Thus, products that were successful often resulted in re-orders with very tight time constraints. Similarly, the shift of apparel retailing from small retailers to large, national and even global retail chains had further tightened the order cycle at even larger scales. Furthermore, using highly sophisticated computerized inventory management systems, these mega-retailers collected precious POS (point of sale) data and pressured textile manufacturers into taking responsibility for inventory data analysis and management (e.g., replenishment of fast-selling item inventories). With the globalization of the movie, television and fashion industries, more and more apparel makers were using the same or similar fabrics in different regions, as well Page 6 of 11

as the same apparel designs in different markets. This was having a significant impact across the textile and apparel value chain. For instance, global retailers like the Gap, Nike and Esprit were finding that they could sell some of the same products in many, if not all markets. This in turn allowed them to negotiate larger contracts with apparel producers. As part of this process, the retailers wanted shorter cycle times for product, thereby pushing makers to use local or regional facilities, and in turn, local suppliers of materials. For fabric producers like TXC, this meant a greater push towards producing the same fabrics in multiple markets, or else really accelerating the distribution chain across multiple regions. A striking example of this trend was in sporting apparel, where the same fabrics (highly breathable, lightweight and stretchable) and styles were becoming universal. Furthermore, the greater bargaining power of the customers enabled them to be more stringent on quality control, and fabric producers (and apparel makers) had to ensure consistent quality across all regions in such cases. Another consequence of global fashion trends was that more ethnic elements were being introduced into apparel. For example, when African prints became popular, demand for them in markets as diverse as Japan and Finland posed challenges for both designers and producers. The push towards globalization of the textile apparel industry was compounded by important shifts in apparel production. The high cost of labor in Europe and the US had already significantly shifted apparel production to low wage countries. For instance, in the US, apparel imports from the Caribbean region, Mexico and Asia had increased dramatically for several years. Similarly, European garment makers had come under severe cost pressure from producers in Turkey, Egypt and Asia. The following excerpt from a textile trade association in the US illustrated the situation there:
The American Textile Manufacturers Institutes (ATMIs) annual business and economic report paints a dismal picture of 2003 and lays much of the blame at the feet of Chinese imports and the failure of the Bush administration to address the industrys trade and economic problems. Looking ahead, industry officials say 2004 may not be much better, and it could well be a make or break year for US textiles. In 2003, the textile industry lost 10 percent of its workforce, as more than 50 plants were shuttered in what ATMI called the industrys second worst performance in half a century. Overall, textile and apparel imports rose 7 percent to $85.7 billion, with textiles alone increasing by 6 percent to $17 billion. Exports of textiles and apparel were down by 2 percent and exports of textiles alone were up by only 1 percent. That resulted in a textile and apparel trade deficit of $70 billion.

There were similar fears in the Caribbean, which had traditionally been a large supplier of garments to the North American market. Figure 1 shows the relative labor cost rates in many countries that vied for the low-cost apparel manufacturing business.

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The industry trends also varied by fiber type. Figure 2 shows recent trends in demand for different textile fibers:

Furthermore, the trends were very different in different segments of the textile industry. For instance, firms that supplied fabrics for upholstery, draperies and Page 8 of 11

furnishings, automotive and marine vehicles and uniforms, had enjoyed relatively stable markets, although they too had some impact of fashion trends. However, the constraints on the order cycle of these industries made it significantly advantageous for the manufacturers to source their fabrics and materials from local or nearby companies, and this kept much of the demand for these industrial fabrics and materials fairly stable in their individual markets.

Stemming the Tide

Mr. Halberstam knew that the company had to make some changes. But it would not be easy. How do you tell loyal employees who have worked long and hard to excel, and who are justifiably proud of the companys success and reputation, that all this was not enough? What could TXC do to maintain its industry leadership, and to position itself so that it would not be ruined by the flight of apparel making from its primary markets? How could the global presence and reach of the company be leveraged to gain competitive advantage? How to do all this while maintaining the companys stellar reputation for quality of both products and services?

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Appendix 1: Organizational Chart of TXC Senior Management

CEO & President Klaus Halberstam

CFO Donna Albright

GM USA Peter Marlin

GM Europe Hans Goldblum

GM Asia Ushio Sumita

VP Sales Sheila Brutten

Plant Manager Plant Manager Plant Manager Plant Manager

Plant Manager Plant Manager Plant Manager

Plant Manager Plant Manager Plant Manager

CIO John Dexter

VP Operations Joseph Kleinfeld

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Appendix 2: Value Chain by Product Category

Mfrs of furnishings & uniforms

Businesses & Govt

Yarn and Fiber Suppliers

TXC

Distributors
Custom Clothiers, drapery/furnishing makers

Value Chain for Standard Products

Custom Apparel Makers Yarn and Fiber Suppliers

Retailers

TXC

Stores, Catalog, Web Vertically integrated apparel makers and retailers

Value Chain for Custom Products

Yarn and Fiber Suppliers

TXC

TXC-owned Stores

Value Chain for Direct Sales to TXC Employees and Consumers

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