Liz Claiborne Outsources Sourcing

Mar 26, 2009

By Tom Ryan

Liz Claiborne recently announced plans to
close down its sourcing operations and buy all its offshore garments through
Hong Kong-based Li & Fung. While Claiborne will still handle the design
and merchandising, Li & Fung takes over responsibilities for identifying
and conducting negotiations with vendors as well as quality monitoring.

Claiborne hopes that tapping into Li & Fung’s
global sourcing network will not only give the company more flexibility, but will
also tackle the specific needs of each brand, improve speed to market and
ultimately benefit margins and profitability. Li & Fung agreed to pay
$83 million upon completion of the deal.

In a statement, Mr. McComb said
the elimination of quotas and
other globalization factors has "dramatically" changed the manufacturing
world in recent years, and its current sourcing organization wasn’t providing
enough flexibility.

"Our ‘one size fits all’ sourcing model
does not align well with our brand-centric strategy – a strategy that requires
each brand to build separate and unique sourcing plans based on specific
requirements," said Mr. McComb in a statement. "With Li & Fung as a partner,
our brands will have access to a vast, worldwide network of manufacturing
partners and best-in-class systems, management and talent – all of which
give us more flexibility and a better competitive position. Greater buying
power will enhance our going in margins, and disciplined execution will
improve our speed-to-market."

Brian Sozzi, equity
research analyst with Wall Street Strategies, told The Wall Street
that Claiborne might wind up reducing costs fairly substantially
because of the arrangement with Li & Fung. He also said Claiborne "has
been struggling for about three years getting goods to key department store
customers in an efficient manner," and the Li & Fung arrangement
may speed up the process.

Still, Mr. Sozzi described
the accord as "the type of measure a company often does too
late, when operating results have come under pressure."

Claiborne was one of the first apparel companies
to source product in Asia back in the Seventies and Eighties.

Discussion Questions: What do you think of
Claiborne’s move to turn over sourcing responsibilities to Li & Fung?
Do you see others moving away from the direct-sourcing model?

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7 Comments on "Liz Claiborne Outsources Sourcing"

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Max Goldberg
13 years 2 months ago

It’s interesting to compare Claiborne with H&M and Zara, which is the next of today’s topics. On one hand, it’s positive that Claiborne is moving to cut costs, but at what cost? Will this make them more agile? Will they be able to offer more styles more frequently or will they stay in the traditional “change only with the seasons” mode? Most importantly, will this allow Claiborne to be competitive?

Camille P. Schuster, Ph.D.
13 years 2 months ago

Doing business in the Chinese market is such that unless Liz has someone either permanently living in Hong Kong to oversee quality control or someone makes very frequent visits (some unannounced throughout the year every year), quality control will suffer over time and Liz could be open to complaints about working conditions in factories.

Given the increased requirements to know where all materials come from, unless there is a system in place to tag each garment identifying what materials came from which sources, they will risk having to recall whole batches of garments in the future.

This is a very high risk decision.

Carol Spieckerman
Carol Spieckerman
13 years 2 months ago

One of the reasons for the diminishment of the “big three” apparel manufacturing houses (Liz, Kellwood, Jones), is their outdated and cumbersome sourcing, manufacturing and inventory-ownership models. By contrast, brand management companies such as Iconix have been able to make hay with low overhead models that rely on intellectual property and royalty streams rather than inventory ownership (a model that Liz and others are attempting to emulate. That’s why Payless is now called “Collective Brands”). Retailers too have been quietly shifting back to outsourcing their manufacturing (one of the reasons for Walmart’s recent moves in its apparel division) after years of taking a “We own it all” approach. This move will not only help Liz streamline and allow its heavy-hitting design team to focus on what they do best; it will also provide a much-needed boost for Li & Fung, a company that recently demonstrated its lack of immunity to the retail downturn (just-announced 21% drop in net profit).

Ryan Mathews
13 years 2 months ago

I guess in this economy the question ought to be, can they afford not to look at reducing supply chain costs? Outsourcing has many pros and cons but clearly it appears to be the wave of the future in fashion–at least for the moment.

Anne Bieler
Anne Bieler
13 years 2 months ago

There can be real benefits as well as cost efficiency with a a professional partner to handle sourcing. Having the right company can ensure that criteria are met consistently, logistics are efficient, and provide access to additional, complementary resources. Further, transparency and accountability are developed across the supply chain when with the collaborative partners are vested in the same model for long term growth. In a complex, challenging business like this, letting companies work to their strengths makes sense.

Paula Rosenblum
13 years 2 months ago

I wonder how much this has to do with the retirement of Bob Zane, more than anything else. Liz was one of the few large brands to own its own factories.

The subjects of each brand doing its own sourcing vs. sourcing internally or externally are two different subjects. Certainly it makes sense to aggregate demand–especially for commonly used fabrics and trim. Merchants/product designers tend to dislike this because they perceive it limits their creativity. In fact, one of the first policies that got undone after Paul Pressler left Gap was “aggregated sourcing across divisions.”

My opinion?
– It doesn’t make sense to own your own factories.
– It does make sense to do your own factory audits.
– It makes sense to aggregate demand and purchasing power for commonly used components.
– Divisions need the ability to design their own products–otherwise the offerings really do become too bland.

All the rest is just noise.

Brian Sozzi
Brian Sozzi
13 years 2 months ago

These are some great thoughts everyone, all of which I happen to agree. The model employed by Liz Claiborne and Jones Apparel truly began to show stress, in my view, back in 2006. Could we blame department stores for wanting product to market in a faster time frame? I hope Liz Claiborne makes it through the cycle. If by some chance things get dicey, they have a nice group of retail store related assets to divest.


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