Outsourcing at Levi’s

Table of Contents1. Introduction:..................................................................................................................................2

1.1. Apparel Industry in the US:....................................................................................................2

1.2. Levi Strauss & Co.:.................................................................................................................3

2. Trigger for Outsourcing:................................................................................................................3

3. Outsourcing: as it panned out:......................................................................................................4

4. Benefits Reaped:............................................................................................................................5

5. Challenges:....................................................................................................................................6

6. Towards Total Outsourcing:...........................................................................................................7

7. Recommendations.........................................................................................................................8

8. Conclusion.....................................................................................................................................9

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Levi Strauss & Co- Manufacturers without factories

1. Introduction:

1.1. Apparel Industry in the US:The U.S. apparel market is the largest in the world, comprising about 28 percent of the global total and has a market value of about 331 billion U.S. dollar. Apparel industry is highly labour intensive and the low labour cost is a prime factor for developed countries when sourcing from under developed countries with assurance of consistent quality and on-time delivery of products. The most important parameters in apparel industry are:

Cost Quality

Lead Time

In their quest to cut down costs, most of the major players in this sector have outsourced production to Asian countries, primarily China. The following info graphic illustrates the American apparel import shift:

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Those nations in the innermost circle each account for 10 percent or more of the total value of U.S. clothing imports in 1998, while each of those in the outer ring makes up 1 to 2 percent of total imports. In other words, as countries move from the outer rings to the inner ones in this import map, their relative importance to U.S. apparel imports increases.

China is currently the largest supplier of apparel to the U.S. market supplying nearly 33.2 percent of apparel sold in the United States. 97.7 percent of apparel sold in the United States is made internationally. China represents the number 1 global market for U.S. cotton exports, the number 2 global market for U.S. yarn exports, and the number 3 global market for U.S. fabric exports. As most of the apparel sold in the US is made globally, trade assumes great importance employing about 3 million apparel industry workers in the US.

1.2. Levi Strauss & Co.:

Founded in 1853, Levi Strauss & Co. (LS&Co.) is one of the world’s leading branded apparel companies with sales in more than 110 countries. The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories for men, women and children under the Levi’s, Dockers and Signature by Levi Strauss & Co. brands in markets around the world.

Levi Strauss' market position is good as one of the larger apparel companies, with sales of $4.7 billion. The company's Levi's and Dockers brands continue to have significant market share in the highly competitive denim and casual pants markets. Also, the company has good geographic diversification, with 43% of sales generated in Europe and Asia, and its products are widely distributed across wholesale and retail channels. However, the company's product focus remains somewhat narrow, as roughly 80% of revenues are generated from Levi's branded merchandise, roughly 85% of its sales are from pants, and over 70% of its products are sold to men, despite the company's other brands such as Dockers and the newly launched Denizen brand.

2. Trigger for Outsourcing:

The company faced a number of challenges beginning ‘90s. These included:

Levi’s lost sales when they missed and failed to forecast trends in the 1990s. Increased competition from new entrants-

o designer jeans manufacturers (like Tommy Hilfiger, Ralph Lauren and Versace)

o Retail chains (Perman)

Lack of product innovation and design- no new products had been launched for fairly long

Lack of customer responsiveness- when the trend was moving towards ‘baggy’ outfits, Levis altogether missed the bus

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The company was faced with a situation where other players, who were being benefitted by outsourcing, were eating away the market share of Levis. Levis also felt that outsourcing would help it:

Reduce Cost Enable the management to focus more on new design, product innovation and

marketing strategies Better respond to changing fashion trends

The company decided that design and marketing had to be its core which would not be outsourced and that production could be outsourced.

The Wal-Mart Push:

In 1996, Levi’s sales peaked at $7.1 billion. By 2003 they had fallen to $4.1 billion. The competition had nibbled away at Levi’s jeans market share, which had tumbled to about 12 percent from 18.7 percent in 1997.

At this juncture, Levi’s decided to sell its jeans in Wal-mart stores. Wal-mart is known to be a ruthless retailer. It is common perception that Wal-mart squeezes even the largest suppliers to comply with its demands for lower and lower prices because these suppliers cannot afford to have their goods taken off its shelves. This put immense cost pressure on many suppliers including Levi’s forcing them to outsource operations to low cost destinations.

3. Outsourcing: as it panned out:

Initially production was carried out in the United States or in production-sharing arrangements with suppliers in Mexico, Central American, and Caribbean nations. But over time, Levi’s strategy was to de-emphasize their production activities in favour of building up the marketing side of their operations by capitalizing on both brand names and retail outlets. As Levi’s sought more low cost partners overseas, their plants in the US were shut one after the other.

The company had experienced rapid expansion of its manufacturing capacity from fewer than 16 plants to more than 63 plants in the United States from 1964 to 1974 and 25overseas. By 2003, Levi’s had shut all its manufacturing plants in the US.

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Levi’s outsourced production to many suppliers in different countries. Levi’s forms a cluster

of different partner organizations whose actions are coordinated by contracts and

agreements. A partner will be replaced if it doesn’t meet Levi’s standards.

Levis Strauss & Co. has contractual agreements with approximately 600 external suppliers in more than 50 countries. A detailed list of suppliers is attached here.

Outsourcing at Levi’s was more of a forced exercise than a pre-thought strategy. But it was largely well executed.

Design is performed in the U.S. and foreign partners produce and distribute products. A

partner will be replaced if it doesn’t meet Levi’s standards. Staffs from more fashion-

oriented European divisions were called to brainstorm, develop new and trendy designs and

guide the outsourcing partners.

4. Benefits Reaped:

Production facilities located around the world to take advantage of low cost foreign labour. Also led to supply chain optimization

Opportunity to focus on design & marketing strategies- resulted in launch of new product lines and technology assisted marketing strategies to capture the youth market

Organizational flexibility and assistance to realize trans-national strategy and expansion- long term strategic perspective

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Facilitated easy customization to suit the local customers- eg. smaller sized jeans offered in Asia, special colours introduced in some countries etc.

Increased responsiveness to global customers

5. Challenges:As discussed before, apparel industry is driven by three main factors:

Cost Quality Lead Time

When production was outsourced, Levi’s definitely had huge cost savings. Asian manufacturers offered the cheapest service. But just that would not suffice.

A stringent quality control was maintained by Levi’s in vendor factories through constant monitoring and quality assessment. A lot of effort went into ensuring that good quality raw materials were used in vendors’ factories.

Outsourcing to vendors in distant countries would typically increase the lead time- also an important driver in apparel industry. Levi’s could not risk delaying launches of new products or replenishments for its stores when competition was at its neck.

Therefore Levi’s strategy was not to outsource just on cost considerations. To keep lead times within acceptable limits, outsourcing was done to several vendors in different countries.

Other Challenges:

Cultural challenges involved in working with a large number of vendors in different countries

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Ethical concerns over labour practices in Asian countries like China, Bangladesh Increased criticism over job losses in America due to outsourcing Political pressure over outsourcing

Levi’s started several programs (like HER project, Project Change, and others) to promote diversity and cultural- sensitivity within the organization. This would equip employees to deal effectively with partners from outside.

Levi’s also as a strategy has always pushed for greater corporate responsibility which has helped it offset some of the criticism it faces for outsourcing. Levi’s also has stringent terms of compliance- related to labour practices and code of conduct apart from those related to product/quality, that its vendors have to follow.

6. Towards Total Outsourcing:Levi’s is on its way to total outsourcing- i.e. Outsourcing every non-value add function in its operation.

Earlier a lot of effort would go into quality assurance and monitoring sourcing for quality. Now Levi’s focuses on partnering with large vendors who have the scale and skill to procure raw materials and carry out production in a way that meets Levis’ standards. Similarly Levi’s has outsourced supply chain management to a whole range of vendors in different countries that has enabled efficient operations.

Hiring for its retail stores and other HR activities would also require considerable effort. Today, Accenture is providing recruitment process outsourcing services to LS&Co. US Retail through its HR Transactions and Contact Center teams in Bangalore, India and a Client Service Manager at the client site in San Francisco, United States. The full suite of services offered by Accenture includes:

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Supply Chain ManagementInventory

Management

Procurement &

Merchandising

Quality ControlCustomer

Service Support

IT Support

Value Added

Services

Staff Functions & Admin

Receiving and posting new retail positions to job boards. Resolving all Tier 1 level calls, providing user guidance and process coaching. Providing Tier 2 system support, resolving integration issues and evaluating change

requests. Providing HR process support for new hire record completion and validation;

incomplete Taleo entry escalation, tracking and closure; background check, I-9/eVerify, W-4/acknowledgement form and PeopleSoft records completion.

Providing vendor management support. Monitoring and coaching client store managers whose applicants’ eVerify status

shows ‘tentative non-confirmation’ due to failed verification. Implementing change requests and enhancements to the retail recruitment solution.

7. Recommendations

Similar to Zara, Levi’s could engage in “Fast Fashion” and would develop products quicker and have them in stores more rapidly.

To cater to the ‘fast fashion’ segment of customers, Levi’s could meet trends faster and enjoy higher consumer satisfaction by speeding up the process of spotting trends, manufacturing and distribution.

Vendor evaluation and contracts to newer vendors who can offer better services reducing the need to monitor quality, labour-practices, legal-environmental-ethical compliance etc.

Also different Outsourcing model to suit different fashion-trends should be assessed.

Use of technology to streamline operations and further reduce costs

8. Conclusion

The Levi’s experience of outsourcing tells the following:

Outsourcing helped Levi’s stage a comeback – a successful turnaround story

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Fast Fashion Lead Time Captive

Seasonal Quality Hybrid

Basic Cost Third Party

Outsourcing has to have a long term strategic perspective Outsourcing is just not about contracting some-one to do a job; it also involves

monitoring, knowledge transfer and a broader strategic view Outsourcing will lead to challenges.

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