Chain Reaction

Supply Chain Management

By Carmen Pang,Executive EditorChain ReactionFaced with the elimination of textile quotas in
2005, a Hong Kong apparel manufacturer reinvents the supply chain and hopes to emerge as an
industry leader.

From a dozen or so plants in China, Cambodia, the Philippines and the Mariana Islands, Luen
Thai’s products are shipped to buyers in the U.S., Europe and Japan. Raymond Tan has a vision — he
wants to revolutionize the apparel manufacturing business. Tan is the executive vice president of
Hong Kong-based Luen Thai International Group Ltd., a shipping-turned-apparel business started by
his father in 1965. Today, Luen Thai operates about a dozen plants in China, the Philippines,
Cambodia and the Commonwealth of Northern Mariana Islands, employing more than 13,000 people who
turn out apparel products for export to the United States, Europe and Japan.“In 1998, I was
assigned by the board to come up with a new business model to deal with the 2005 challenge when
textile quotas will be eliminated,” Tan said. “In the past, quota had been a competitive advantage
for many oldtimers. It’s not how well you manage the company, but how much quota you have for you
to do business. But in 2005, quota will be gone, and it will be how well you manage the
business.”The new business model Tan developed relies heavily on logistics and information
technology.“We decided that we do not want to be a vertical player. We feel that if we own our own
fabric mills, we may be forcing ourselves to take orders that fit our mills and we won’t be
flexible enough to serve our customers’ needs,” Tan said. “On the other hand, we also do not want
to have our own brands, because when you have your own brands, you start to compete with your
customers. So, we’re stuck with just making apparel. One has to ask, if you’re just going to make
apparel, what kind of volume do you need to be competitive? And how do you make yourself different
from other [suppliers]? When we looked at the whole supply chain, we saw information technology and
logistics as very important parts of the supply chain.”Hence, the creation of two subsidiary
companies — Integrated Solutions Technology (IST), an information technology company, and CTSI
Logistics, a third-party logistics provider.“Our company is actually sitting in the middle of the
supply chain, in which we have upstream vendors — our fabric and accessory trim suppliers, and
downstream customers. We’re actually in the best position to manage the supply chain because we’re
in the middle of it,” Tan said.

Raymond Tan was responsible for developing a new business model for Luen Thai.Design To
StoreUnder the new business model, termed Design to Store (d2s), Luen Thai created what Tan
described as supply chain cities. Within each supply chain city, the company provides services in
design and development, materials management, manufacturing and logistics.Design and development:
For each major brand client, the company has built a development center with a dedicated management
team. “[The client] also can have its designer or developer work at our factory. The co-location
concept allows us to make decisions right away,” Tan explained. “Because the development center is
within our factory, there is a lot of technical support, such as embroidery, printing, washing and
sample making. This reduces a lot of design and development time and cost. Not only that, we can
actually build the product to fit the target price [the client] wants to achieve. We’re actually
transferring some of the functions from [our clients’ factories] into our factories.”

Materials management: This works on several levels. First, Luen Thai plans to put offices for
its key vendors in the supply chain city. “Their teams will support us in fabric design and fabric
development and also work with us on costing, product planning, etc.,” Tan said. “Imagine you’re a
designer from one of our clients. You can come to our factory and work with our garment technology,
and at the same time you can go to this building where we have different fabric vendors. You can do
your fabric shopping there.” He explained that the idea is to create an environment in which the
fabric vendors will compete to provide the best service to Luen Thai’s customers.Second, Luen
Thai’s staff also will be stationed at the key fabric mills to manage quality and logistics issues.
Third, Luen Thai will encourage its upstream vendors to work with the information technology
professionals at IST. “We know that most of our vendors would have a difficult time if we were to
ask them to develop their own IT systems,” Tan said. “So we developed IT systems that they can sign
on. They can now send us their materials with bar code, EDI quality inspection and advance shipment
notice reports, and so on. We now are able to have upstream information transparency even before
the materials reach our factory.”Manufacturing: Luen Thai uses a multi-product, multi-country
manufacturing strategy. “China obviously is going to benefit a lot after 2005, but there are
uncertainties; therefore, having that multi-country manufacturing capability is very important,”
Tan said. “But, more importantly, we have been acquiring different factories with different
capabilities, so our customers can come to us and we can develop a full range of products for them
in or outside of China.”Logistics: The new strategy has much to do with the elimination of the
quota system. Up until now, quotas have forced many retailers to source from different countries
and different vendors, and they have had to consolidate all merchandise in the United
States.“Traditionally, customers give us purchase orders, and we send them boxes with solid-color,
same-size packing,” Tan said. “We send all these boxes to our customers’ distribution centers,
where they have to do pick-and-pack and then send them to the stores. You can imagine how much time
and cost are involved to have all these goods going to different areas.”In the future, when quota
is eliminated, different types of garments from different suppliers can be shipped together in one
container.“We have a few programs now where we do store-ready pack — we can do multi-ratio purchase
orders, assorted-style pre-packing, so on and so forth,” Tan said. “We’re trying to move the
logistics function from the country of destination to the country of origin. The beauty of this is
now we can actually ship the goods directly from our factory to the United States and distribute
the goods directly to the store. It cuts down on a lot of time and cost.”Under-One-Roof Service
PartnerUsing the d2s model, Luen Thai has put the four areas — design and development, materials
management, manufacturing and logistics — all under the same roof in the supply chain city. “We now
take ownership of all four areas; the cycle time can be reduced tremendously,” Tan said. “You now
have an organization that is driven by service and supported by manufacturing. Our vision is to be
recognized by our customers as the best apparel supply chain service partner in the world.”Tan
stressed that all four areas in the new business model require excellent IT and logistics
capabilities, which are fulfilled by CTSI Logistics and IST.“If we are able to build this model,
we’ll be in a new market where the demand is higher than the supply because there are not many
apparel companies that have this kind of capability,” Tan said. “We believe eventually we’ll be
supporting our customers to manage their supply chains — we’ll be managing the smaller vendors of
our customers.”A Consolidated FutureAs Luen Thai’s new business model takes shape, Tan sees a
bright future for the company. “Our industry is a $400 billion export business, but there is no
multibillion- dollar company in the manufacturing side yet,” he said. “The reason is because the
quota system doesn’t allow companies to grow very large. But we’re going through this revolution.
The apparel industry is probably one of the few industries that hasn’t been consolidated yet.
Therefore, there are huge opportunities for a few companies, and we believe we will be one of

Summer 2004