Walmart CSR again
So, here's my kindergarten summary of how the mass market apparel industry works:
You have a company (a manufacturer) that makes clothing. If you don't actually sew it (you contract that out), you are still called a manufacturer. You are selling your clothing through boutiques, the internet, and so on. You want to make the leap into large retail outlets like J. C. Penney, Wal-Mart, Sears, Dillards, Macy's, whatever, so you start trying to get into those stores.
Those stores have very funny (funny-strange, not funny-haha) policies on charge-backs, returns, and how they pay their bills. Basically, they make you take all the risk. You send them clothing, they send back what they don't sell, they charge you back for every non-compliant item they can find (e.g. the tags are crooked). And to top it off, they don't get around to paying the bills for 3, 6, 9 months on end. But still, you are moving a lot more product through them.
Eventually, you realize that the interest rates on the money you are borrowing is killing you, so you get involved with a factor. The factor acts as a bridge: they take over your accounts receivable, but they pay you faster. The factor holds lots of sway over the retailers because they represent lots of their suppliers exclusively. If the retailers wants product, they have to pay the factor. The factors, though, charge for this service, and charge a lot: 15-20%. And that comes from you, the manufacturer. But at least you're getting paid, right?
So by choosing to sell through a major retailer, your choices are either to borrow money and pay interest on that or get a factor and pay them (though effectively you become their employee, since they have now taken over your accounts receivable). If you want to keep making money at these volumes, you need to cut costs. The easiest way is to go offshore and get cheaper sewing contractors.
Wal-Mart, on the other hand, has the reputation of paying their bills in a timely manner. They berate you on pricing [1], but at least they pay on time and offer volume opportunities.
If the major retailers would pay their bills quickly, there would be no need for factors and thus less temptation to go offshore [2]. Perhaps people concerned about Corporate Social Responsibility (CSR) are going after the wrong target? Perhaps they ought to be scrutinizing manufacturers' complaints about retailers' pricing and other policies, their business-to-business relations, rather than their employee or customer relations.
I'm just sayin'.
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This is Wal-Mart CSR again because I already wrote about it.
[1] Apparently, Wal-Mart also brow-beats its suppliers over their use of packaging and renewable fuel content, among other things. Wal-Mart is the world's largest buyer of organic cotton (WSJ-$), and becoming the largest purchaser of sustainably harvested shrimp and fish (WSJ-$). Is it green-washing? Could be. These efforts overlook more sustainable practices -- they are optimizing locally while sub-optimizing globally. But they aren't the ogres normally claimed.
[2] Why wouldn't they go offshore, for profit maximization, even in a factor-free world in which everyone paid on time?
1. Quality control, the ability to see and control problems
2. Flow, in Chandler's sense, the flow driven by the visible hand. This was the preferred method of operating a mass production business before WWII and the ascendancy of the GM/DuPont theory of management. You can't achieve flow with a 3 week or longer delay in the supply stream.
3. Leisure time; if you run a local business, you have the opportunity to blur work, relaxation, and other personal time, whereas when you run an international operation, you have to be "on" 24/7. This is the same problem faced by racing enthusiasts who are offered a sponsorship: do you really want it to be a job instead of a hobby?
4. Some other stuff that will have to wait for another post. Why do factors exist? Why doesn't someone vertically integrate textile, apparel, and retail? Or perhaps we can just shame my wife into writing that book.
You have a company (a manufacturer) that makes clothing. If you don't actually sew it (you contract that out), you are still called a manufacturer. You are selling your clothing through boutiques, the internet, and so on. You want to make the leap into large retail outlets like J. C. Penney, Wal-Mart, Sears, Dillards, Macy's, whatever, so you start trying to get into those stores.
Those stores have very funny (funny-strange, not funny-haha) policies on charge-backs, returns, and how they pay their bills. Basically, they make you take all the risk. You send them clothing, they send back what they don't sell, they charge you back for every non-compliant item they can find (e.g. the tags are crooked). And to top it off, they don't get around to paying the bills for 3, 6, 9 months on end. But still, you are moving a lot more product through them.
Eventually, you realize that the interest rates on the money you are borrowing is killing you, so you get involved with a factor. The factor acts as a bridge: they take over your accounts receivable, but they pay you faster. The factor holds lots of sway over the retailers because they represent lots of their suppliers exclusively. If the retailers wants product, they have to pay the factor. The factors, though, charge for this service, and charge a lot: 15-20%. And that comes from you, the manufacturer. But at least you're getting paid, right?
So by choosing to sell through a major retailer, your choices are either to borrow money and pay interest on that or get a factor and pay them (though effectively you become their employee, since they have now taken over your accounts receivable). If you want to keep making money at these volumes, you need to cut costs. The easiest way is to go offshore and get cheaper sewing contractors.
Wal-Mart, on the other hand, has the reputation of paying their bills in a timely manner. They berate you on pricing [1], but at least they pay on time and offer volume opportunities.
If the major retailers would pay their bills quickly, there would be no need for factors and thus less temptation to go offshore [2]. Perhaps people concerned about Corporate Social Responsibility (CSR) are going after the wrong target? Perhaps they ought to be scrutinizing manufacturers' complaints about retailers' pricing and other policies, their business-to-business relations, rather than their employee or customer relations.
I'm just sayin'.
-------------------------------------------
This is Wal-Mart CSR again because I already wrote about it.
[1] Apparently, Wal-Mart also brow-beats its suppliers over their use of packaging and renewable fuel content, among other things. Wal-Mart is the world's largest buyer of organic cotton (WSJ-$), and becoming the largest purchaser of sustainably harvested shrimp and fish (WSJ-$). Is it green-washing? Could be. These efforts overlook more sustainable practices -- they are optimizing locally while sub-optimizing globally. But they aren't the ogres normally claimed.
[2] Why wouldn't they go offshore, for profit maximization, even in a factor-free world in which everyone paid on time?
1. Quality control, the ability to see and control problems
2. Flow, in Chandler's sense, the flow driven by the visible hand. This was the preferred method of operating a mass production business before WWII and the ascendancy of the GM/DuPont theory of management. You can't achieve flow with a 3 week or longer delay in the supply stream.
3. Leisure time; if you run a local business, you have the opportunity to blur work, relaxation, and other personal time, whereas when you run an international operation, you have to be "on" 24/7. This is the same problem faced by racing enthusiasts who are offered a sponsorship: do you really want it to be a job instead of a hobby?
4. Some other stuff that will have to wait for another post. Why do factors exist? Why doesn't someone vertically integrate textile, apparel, and retail? Or perhaps we can just shame my wife into writing that book.
Labels: management, organization, trade
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