Global Supply Chain Management

Esquel Group: Transforming into a Vertically Integrated, Service-Oriented, Leading Manufacturer of Quality Cotton Apparel Introduction Esquel Group (Esquel) is one of the world’s leading producers of premium cotton shirts, and among the most dynamic and progressive global-scale textile and apparel manufacturers. The company, which is privately owned and in 2005 employed around 47,000 people, was established in 1978 by Yuan-Loong Yang. In 1995 his daughter, Marjorie Yang, became the group’s chairperson.

Esquel is rather unique in the apparel manufacturing industry in a number of ways, the first being its vertical set up; it has capabilities that range from cotton farming, ginning, and yarn spinning, to production of fabrics, garments, and accessories, and all the way to retailing. In addition, despite operating in a traditional industry, Esquel implemented a series of supporting IT (Information Technology) and supply chain management applications to improve operational efficiencies.

Under Marjorie Yang’s leadership, a strong corporate culture has been established, with uncompromising emphasis on ethical business practices, creativity, and continual improvement. Finally, in addition to its business goals of growth and financial success, Esquel always strived to contribute to the community and bring about a positive change in society. While Esquel’s strategy had proven to be very successful, and was in-line with management’s values, competition in the apparel industry was fierce.

Therefore the company had to continue seeking for new ways to maintain its leading position in the market and achieve its goals for future growth and profitability. Esquel needed to re-think the overall company direction: Should it revise its product and service offerings, and if so, how? Could its operations achieve higher cost efficiencies while still maintaining high quality products and service offerings? And how should the company react to global changes such as the expiration of textile quotas under the Multi Fiber Agreement (MFA) on January 1, 2005? Company Background Company Founder and History: Y. L.

Yang was part of a stream of talented entrepreneurs who fled from Shanghai to Hong Kong around the communist takeover in 1949. In 1978, in response to the opening up of the Chinese economy by Deng Xiao Ping[1], Y. L. Yang returned to China. At that time the business, which operated out of a small corner office in the Tsimshatsui district in Hong Kong, pioneered the use of compensatory trade[2] to export garments from China to the United States. Y. L. Yang also injected his interest in a garment factory in Penang, Malaysia, into Esquel. In addition to the garment factories, the company included a fabric trading division called CLYTEX.

The company started by servicing the low end of the market, selling TC (Terylene-Cotton), CVC (Chief Value Cotton)[3] and cotton shirts as well as trading in other items such as pajamas, pants and jackets. The early customers included Arrow, a division of Cluett Peabody, Phillips-Van Heusen and Kmart. Over the years the customer base changed to include high-end brands and retailers such as Abercrombie & Fitch, Tommy Hilfiger, Polo Ralph Lauren, Nike, Brooks Brothers, Hugo Boss, and Nordstrom. Esquel, which started out as a typical player in a traditional industry, gradually grew to become a larger and more modern organization.

The company transformed its operations as well as its product and service offerings in many ways. Geographically, the company expanded its operations by opening manufacturing facilities outside China. In an effort to provide better service and establish more direct contact with customers, Esquel also opened several representative offices in the U. S. , the U. K. and Japan. By 2005 Esquel had 47,000 employees, garment manufacturing facilities in several locations in China, as well as in Malaysia, Sri Lanka, Mauritius and Vietnam, and a network of offices servicing key markets worldwide (see Exhibits 1 and 2).

Esquel started as a trader, buying fabric and garment capacity from various companies in China. It had small operations in Hong Kong, including Alda Garment and Shandah Garment, as well as Eastern Garment in Malaysia. In the early 1980s the company added Tai Lon in Singapore, and built or took over other factories in Taiwan, the Philippines, Sri Lanka and Jamaica. From the late 1980s onwards, Esquel gradually expanded its scope of operations, adding to garment manufacturing the production of woven and knit fabric, yarn spinning, and eventually cotton ginning and farming.

Being vertically integrated provided Esquel with the means to better control the entire manufacturing process, and to ensure high quality of the end products. Esquel’s textile and apparel production was complemented by strong product development capabilities. The group’s design and merchandising teams worked closely with what would later become its research and development (R&D) center to create unique fabric and garments that gave Esquel an edge in the apparel industry (for the organizational structure of the company in 2005, see Exhibit 3).

Esquel offered various garments while operating as a trader – blended and cotton; men’s and women’s; wovens and knits; jackets, pants, dresses, blouses, shirts, pajamas, robes and boxer shorts. Esquel bought fabric mostly from Asian countries, including Japan, Taiwan, and China; orders were placed with Esquel’s factories as well as with subcontractors which were Chinese factories under the compensatory trade arrangements. However, with the strategy of moving out of the commodity market and focusing on quality, Esquel changed its direction and moved up in quality while narrowing its offering.

The Next Generation: In 1995, when Marjorie Yang took the leadership role, a strong corporate culture has been established, with uncompromising emphasis on ethical business practices, creativity, and continual improvement. To ensure that internal operations were conducted in an efficient and modern manner, Esquel developed a series of supporting IT (Information Technology) and supply chain management applications. These applications ensured a high level of nformation sharing across the entire organization, and improved production-planning processes. Later, in 2003, the company applied advance RFID (Radio Frequency Identification) technology to capture information that was used in local production monitoring and planning, inventory control, and overall optimization planning. Esquel also drew upon modern management methodology, including transformation of its human resources department from an administrative role to one that proactively managed and developed its staff through people practices.

All of these initiatives provided Esquel with the means to offer high-quality, innovative products and services, and to secure a loyal customer base of some of the world’s best known and most highly respected brands, including Tommy Hilfiger, Polo Ralph Lauren, Banana Republic, Hugo Boss, Brooks Brothers, Abercrombie & Fitch, Nike, J. Crew, Lands’ End and Muji, and major retailers such as Marks & Spencer, Next, Nordstrom, J. C. Penney, Ito-Yokado, Aoyama and Aeon. As of 2004, 61 percent of Esquel’s 50 million garments were sold to the U. S. 15 percent to Europe, 11 percent to Japan, 4 percent to China, and 9 percent to other markets. Total revenues of the group reached US$462 million in 2004, with operating profits of US$17 million (see Exhibit 4). While striving to run a successful business, Esquel also took steps to ensure the well-being of its employees. For example, Esquel strived to provide good working conditions for all its employees, and organized social as well as educational activities to improve the employees’ quality of life, including educational sessions on HIV/AIDS and sponsorship for continuing studies.

In parallel, Esquel made efforts to have a positive impact on society. As the largest foreign investor in Xinjiang, the furthermost northwestern part of China (see Exhibit 2), Esquel undertook initiatives to improve the well-being of its people, such as building schools and libraries, providing scholarships, and sponsoring Eco-mobiles that educated local children on environmental protection. In addition, the company was devoted to protecting the environment in areas where it operated.

Examples include wastewater treatment plants to handle fabric dyeing and finishing run-off and practicing sustainable and organic farming. Striving for Quality and the Transition to Vertical Integration One of the major transformations the company had gone through in its striving for quality was the gradual backward integration of its operations. While Esquel was not opposed in principle to outsourcing and preferred to work with reliable existing suppliers rather than develop the same capabilities internally, it would do so only as long as the quality of its products was not compromised.

Therefore, when over the years specific needs for quality, reliability, and sufficiently short lead times could not be satisfied from existing supply partners, Esquel developed these capabilities in-house. Still, even after developing a full, vertically integrated supply chain, Esquel continued to purchase some commodities in the open market, and when possible, developed strategic partnerships with major suppliers and educated them on how to achieve the required quality level.

Esquel prided itself on being the recognized quality shirt supplier. As Joel Horowitz, a Co-founder, President and CEO of Tommy Hilfiger once said about Esquel, “We always buy a substantial portion from Esquel because of your quality and reliability. ” In addition, Esquel was also recognized as one of the best-quality fabric producers in China (it won the “China Top Brand” award in late 2005), an achievement that was gained through multiple initiatives.

Some of the initiatives the company took to improve quality included the implementation of the ISO9001 quality standard as well as the ISO14001 standard for environmental management, the use of external consultants to provide employees with training on Total Cycle Time[4] and quality issues, and the adoption of the 5S principles of maintaining an effective, efficient workplace, which formed the foundation of the corporate goal of being a leading quality shirt supplier. [5] Investment in the best equipment and the willingness to encourage a well-educated, young management team to adopt innovative practices, were lso factors contributing to the goal. At Esquel, the group’s chairperson, Marjorie Yang, actively encouraged young management members to take calculated risks and try new ways of doing things. In addition, to better address customer needs, Esquel made a strategic decision to focus on quality, merchandising service, product development capability and speed-to-market rather than on cost. One example of Esquel’s dedication to quality is the standards they achieved in yarn spinning. From virtually nothing, Esquel built a yarn spinning capability that attained USTER® certification in 2005.

This gave Esquel the right to use the quality brand USTERIZED® for its yarn. [6] Esquel’s spinning mill was the first in China to have this honor, and at that time there were only a dozen more mills worldwide that had earned this certification. Being a market driven company, Esquel believed that it is the market that should dictate new product development as well as capital investment. As is evident from the description of Esquel’s supply chain in the next few pages, its backward integration also came about due to a market need. Supply Chain Structure

By 2005, Esquel’s internal supply chain covered all the main steps in the garment manufacturing process, starting from cotton farming to the manufacturing of the final garments and accessories (see Exhibit 5). The bulk of the operations were located in Gaoming, Guangdong Province, Southern China, which is about one hour away (by car) from Guangzhou and three hours (by ferry) from Hong Kong. While cotton farming, ginning and most of the yarn spinning took place in Northwestern China, the fabric mills and several garment and accessories factories were located in Gaoming.

Garment making also took place in Changzhou (near Shanghai), and Hong Kong, as well as in a number of overseas locations. All of the garment factories, including those overseas, were supplied with fabric made in Gaoming. In general, most operations, except for cotton farming and spinning of gray yarn, were conducted based on actual customer orders. If needed, portions of the manufacturing process were outsourced when internal capacity was insufficient to meet all customer demands. This vertically integrated and mostly self-sufficient supply chain helped Esquel to provide its customers with high-quality products and services.

Following is a more detailed description of each part of the company’s supply chain, the reasons that led the company to bring each of these activities in-house, and some of the means the company put in place to ensure high quality. Cotton Farming High-count[7] fine cotton woven fabric for dress shirts is made from Extra Long Staple (ELS) cotton such as Egyptian Giza or Peruvian Pima. To obtain the highest quality of fabric, Esquel used mainly ELS cotton for its high-count products.

Once Esquel discovered that Xinjiang grew ELS cotton it decided to source the majority of its cotton supply from that region and purchase additional cotton from the U. S. or Egypt only when local supply was insufficient or when there were specific requirements. To gain sufficient knowledge that would ensure successful collaboration with local farmers, Esquel expanded its operations and in 1998 entered cotton farming by forming a joint venture in Xinjiang. As of 2005, about 10 percent of the company’s total ELS cotton supply was provided by its own farm, with the remainder being purchased from other local farmers.

Esquel also gave purchase commitments to the farmers before the cotton was planted, to secure the cotton supply and to ensure that the cotton was grown according to the company’s specifications. In addition, Esquel organized training sessions to educate the farmers on seed selection, cotton farming practices, ways to improve yields and reach the desired quality, and techniques to eliminate impurities during picking and storage. The company also provided incentives to the farmers based on cotton quality rather than purely based on quantity to encourage them to grow ELS cotton that met the required quality.

Ginning The ginning process separates cotton seeds from the fiber. By 2005 Esquel operated three ginning mills, all of them located in Xinjiang, in close proximity to cotton farms. The first mill, with an annual output of 1,200 tons, was used for cotton from Esquel’s own farm. Two other mills, which started operating in September 2003 and September 2004 respectively, were used for collecting and ginning cotton from other farmers. Together these two mills processed 7,000 tons of lint cotton. Esquel’s remaining cotton requirements were filled by other ginners.

Since ginning was important in controlling the quality of the yarn, bringing this activity in-house provided Esquel with valuable in-depth knowledge and the means to better control its quality. One of the means used for improved quality was the use of rollers (blunt edge) rather than saw/blades (sharp edge) for the ginning process. While roller ginning is faster and therefore cheaper, it can damage the seed and the fibers. In addition, as machine quality is important for the ginning process, Esquel decided to invest in more expensive machines, which were imported from the U. S.

Another parameter that impacts the quality of the ginning process is the amount of trash and foreign fiber that gets mixed in with the cotton. By giving farmers guidelines on how to harvest and transport the cotton to the ginning mill, Esquel could maintain its quality. Being a natural product, the quality and characteristics of cotton vary across farms and from season to season. High Volume Instrument (HVI) tools were therefore used in the ginning mills to inspect each bale of cotton to assess its quality attributes, and an RFID Cotton Bale Management System was used to keep track of the quality of the cotton at the bale level.

Interestingly, this was the first time RFID was used anywhere in the world for managing cotton during ginning. Spinning In the spinning process, lint cotton is spun into yarn. Esquel decided to bring in-house yarn production, as well as ginning and cotton farming, due to difficulties the company experienced in purchasing consistently high quality yarn from the outside. Xinjiang was the perfect region to establish spinning mills due to the close proximity to high quality cotton and the low cost of energy (spinning is an energy and equipment intensive process).

Spinning of all gray yarn, which was the yarn most commonly used internally, took place at two spinning mills in Xinjiang. The first mill was established in 1995 and the second in 1998, and together they produced around 9,000 tons per year. The spinning mills used ELS cotton and focused on high-count yarn, up to 170s. The newer of the two mills used advanced technology to make compact yarn, which is characterized by improved strength and reduced yarn hairiness compared to regular yarn.

Esquel invested in compact spindles to produce better quality yarn because it was crucial to achieving softer, smoother fabric hand-feel. Throughout the spinning process, the quality (strength, evenness, etc. ) of a sample yarn was tested at a QA lab located in each spinning mill. After spinning, the yarn was transported to Gaoming for weaving and knitting into fabric. In addition to the spinning mills in Xinjiang, Esquel operated a smaller spinning mill (called GES) in Gaoming. This smaller mill specialized in heather and fancy yarn.

Unlike gray yarn, heather yarn is made from dyed cotton, and is used for making fabrics with a more random color pattern. Given the wide selection of colors and types of yarn, most heather yarn was produced based on actual orders, with an average lead-time of 2 to 3 weeks. Since this top dyeing process originated from the wool industry, heather yarn was typically used for winter clothes, which made demand very seasonal. To reduce the seasonality of orders, the mill created new products such as uneven yarn, Cashmere-Like-Cotton Yarn, and soft touch yarn, that offered customer more choices throughout each season.

To make the best use of the available capacity, heather yarn was also sold to sweater manufacturers, with whom Esquel had no direct competition. GES also partnered with the merchandising team to develop a range of basic fabrics out of fancy yarn s that the products became more fashion forward but were still relatively easy to make. In fact, the team added creativity and technology to the smaller spinning operation, transforming it from an un-profitable commodity business into a small high-return operation with tremendous growth potential. Knit Fabric

Esquel used to buy its knit fabric from suppliers in Hong Kong and Taiwan. This was acceptable for TC and CVC shirts but made it harder to control the quality for 100% cotton shirts. Esquel started its own knit business in 1984. While running a small yarn dye knitting operation called Silverdeer in Hong Kong, Esquel still needed to buy solid knit fabric from suppliers in Hong Kong and Taiwan. At that time, Arrow and Warnaco (Hathaway, Puritan) were the biggest customers in CVC knit, while Mervyns was a big knit customer in 100% Cotton knit.

After paying a claim to Mervyns for an order of cotton shirts that could not meet the customer’s shrinkage requirements, Esquel made a decision to invest in its own knitting mill in order to offer consistently high quality knit shirts. In December of 1987 Eastern Knitters (EK) was set up in Penang, Malaysia. At the beginning EK mainly produced yarn dye items (that is, the yarn was dyed prior to the knitting process); a few years later the piece dyeing facility (for solids, which are dyed after the knitting process) was set up with state of the art equipment, all sourced from Krantz (West Germany).

This was notable because at that time, most piece dyeing mills were using lower-quality equipment from Hong Kong or Taiwan. The knit factory was relocated from Malaysia to Gaoming in 1996. As of 2004, it had 179 knitting machines that provided the capacity to satisfy the majority of Esquel’s internal demand for knit fabrics. By 2006, Esquel was preparing for another round of investment in new equipment, to take its knit factory in Gaoming to the next level. One of Y. L. Yang’s philosophies was to always buy the best equipment. This philosophy was in line with the company’s emphasis on technology leadership and superior product quality.

Woven Fabric As Esquel moved up-market and started to supply customers such as Polo Ralph Lauren, it found that customers demanded higher quality fabrics. However in the late 1980’s textiles from Japan, which used to be Esquel’s main source for high-quality woven fabric, became too expensive and at the same time, its quality was deteriorating. Esquel was unable to find other sources that could provide consistently high-quality woven fabrics at a reasonable lead-time and price, so eventually the company decided to set up its own woven fabric mill.

This mill was set up at the Gaoming location and was dedicated to making yarn-dyed woven shirting fabric. One of the first products the mill produced was the Oxford that went into making the famous Polo button-down that almost every yuppie owned. As of 2005, Esquel was making internally all yarn-dyed woven fabric, while purchasing from external resources the piece-dyed woven fabric. The weaving production process included yarn dyeing, weaving, and finishing. Quality control took place throughout the manufacturing process. Dyeing: The first step is for the dye lab to determine the exact color formula for each yarn based on customer specifications. Once the formula was determined and the resulting color approved by the customer, it was saved to a computer, which then controlled the dye formula mixing for the yarn. This automatic control ensured consistency of the dyeing process across different batches. • Weaving: The yarn-dyed weaving factory was built in 1989, and its capacity grew over the years to meet the needs of the company.

By 2004 the factory had 560 weaving machines, providing capacity to satisfy all internal demand for yarn-dyed woven fabric. In addition, a small portion of the output was sold to external domestic customers, to utilize capacity as needed. The weaving process is highly automated, with minimal human intervention. To minimize defects and ensure high quality, Esquel equipped the factory with the best machines available. • Finishing: This step removes the residual chemicals needed for the weaving process and imparts the fabric with the characteristics required such as dimensional stability, durability and the desired hand-feel.

Special treatments to manipulate hand-feel, smoothness or other surface characteristics as well as functional treatments like stain resistance or wrinkle-resistance can also be imparted at this time. Finishing requires more human intervention than weaving as each fabric is customized to the customer’s requirements. • Quality inspection: During the manufacturing process, key control points were identified and in-process inspection carried out to ensure the materials continued to meet specifications throughout the process. For less stable processes or products, 100% quality control was carried out to minimize rework and wastage.

The end product was audited by random sampling before being released to the garment factories. After production was completed, the fabric went through 100% inspection. All quality problems were recorded. Designated quality control groups then worked with the production people to identify the source of each problem and determine ways to eliminate the defects. This method had proven to be very successful, as it resulted in substantial and sustainable improvement in the quality of fabric. In late 2004, Esquel decided to further expand its woven fabric capabilities.

The company planned a new factory adjacent to the existing weaving mill in Gaoming. The site would be a modern, spacious and energy efficient mill equipped with the best-of-class machinery from Europe and Japan. The investment was estimated to be US$150 million. The new facility was scheduled to be completed in October 2006 and was expected to produce over 40 million yards of the highest quality woven shirting fabric. The company expected this move to further consolidate its leadership in the woven shirt business. Quality was of critical importance to Esquel.

Although the company had been recognized as a high quality vendor, the cost of quality had been quite high, affecting profitability and its ability to grow market share. Further, maintaining consistent quality was a constant challenge. While Esquel was considered to be much better than the industry standard, that still did not meet what Marjorie Yang, the company’s chairperson, wanted to achieve. Consequently, in the second half of 2004, the various QA sections were consolidated into a single Corporate Quality Assurance Department, to align the overall company strategy.

The department structure, responsibilities and quality definitions were standardized across all garment manufacturing operations. Another top initiative was to stabilize quality and control the cost of quality. Esquel was trying to learn from leading companies such as Toyota how to change the culture of the company to achieve 100% quality and service. Garment Manufacturing As of 2005, garment production took place in several locations inside and outside of China (see Exhibit 6). Overseas factories were located in Malaysia, Vietnam, Sri Lanka, Mauritius, and Hong Kong.

Work orders were distributed among the factories based on the required customer lead-time, individual factory capability and capacity, buyer preferences, as well as trade policies such as quotas. In fact, trade policies had been one of the most important factors affecting the choice of manufacturing locations for the garment industry. From the Multi Fiber Agreement (MFA) to the General Agreement on Tariffs and Trade (GATT), countries had used quotas to regulate the level of textile and apparel imports from other nations. Typically, export quotas were distributed to companies through mechanisms determined by the exporting government.

Such mechanisms varied from country to country, and from category to category – examples include open bidding, and allocation based on historical export performance. Companies without quotas would have to purchase quotas from the quota-holders and the price of quotas might fluctuate significantly over time. As a result, the availability of quota was almost as important as the production costs and capabilities in deciding the manufacturing locations and capacities. The use of Outward Processing Arrangement (OPA) is an example where quotas shaped Esquel’s manufacturing setup.

OPA was an arrangement endorsed by the U. S. , where a garment could be manufactured in two countries while still be legally labeled as being originated in one of these locations – the place where the critical manufacturing steps were performed. In the case of Esquel, the company had better access to export quotas from Malaysia than from China, but high production costs in Malaysia and the lack of skilled workers forced Esquel to resort to OPA to keep the factory competitive. Esquel’s Malaysia factory partnered with a Chinese factory where the Chinese actory carried out the upstream production processes, while the Malaysia counterpart completed the rest of the downstream production. That way, the garments could be legally labeled as being of Malaysian origin as long as the critical manufacturing steps were performed in Malaysia. This was a most inefficient way of manufacturing but given the quota restrictions, it was the only way for Esquel to have enough quotas to meet its needs, while still maintaining its competitiveness. In addition, quotas and potential trade restrictions could sometimes thwart Esquel’s plan to expand garment manufacturing.

As an example, Vietnam had a large supply of low cost, skilled labor and Esquel started a garment factory there in 2002 when there were no quota restrictions. Despite the comparative advantages of Vietnam, Esquel had to take a slow pace in expanding the operation as quotas were put in place in 2004, which would not be removed until Vietnam joined the WTO. In some cases, Esquel chose to operate its garment manufacturing in dispersed geographical locations even though such setup complicated material flow and reduced economies of scale. One example is the special import privileges given by the U.

S. in favor of sub-Saharan African countries through what is known as the African Growth Opportunity Act (AGOA). Qualified goods under this act enjoyed zero import tariffs into U. S. – the duty benefit, to be split between customers and manufacturers, could have been as high as 20 percent of the FOB price. This was the main reason for Esquel to have a garment factory in Mauritius despite longer transit time for material flow and finished goods. Garment manufacturing included the following main steps: • Sample Development: Samples were made only based on customer order.

The Technical Development Center generated the Paper Patterns as well as Work Instructions for the garment factories. • Fabric cutting: Took place either automatically (using laser cutting machines) or manually. While automatic cutting might have been more efficient, manual cutting was required for fabrics with special patterns or for small orders. Cut fabric pieces that were intended for high-end products then went through a special inspection procedure to ensure quality and precision before cut pieces passed to the next processes. • Sewing: This part of the process was very labor intensive.

Each job could have dozens of sewing operations, with each worker specializing in only a few of them. Sewing instructions were hung above each workstation to ensure that orders were processed correctly. Typically, sewing of knit and woven fabrics took place at different workshops, with the layout of the sewing floor following the steps of the production process. • Washing: When needed, garments were washed for special effects. • Quality inspection: During the manufacturing processes, random sampling and 100% manual inspection were carried out to ensure that defects were not passed on to the next process.

Before bulk production, a pre-production meeting was carried out to review the customers’ specifications and requirements. A trial lot was carried out when necessary. At the end of the process, the garments went through 100% manual inspection. In addition, process measurement control was done for a sample of the products. • Finishing & Packaging: These steps included ironing, folding or hanging, attachment of accessories such as hang-tags, and packaging of the garments. Accessories

Esquel entered this business mainly because it was unhappy about poor trade practices and quality issues, and the high margins associated with outsourcing this part of the business. In 1985 the company formed a joint venture with Rochester Button Corporation, and five years later it bought Rochester’s share of the company. Over the years Esquel expanded this business, and by 2004 the EAP (Esquel Accessories & Packaging) division was making about half of all the accessories required for Esquel garments, including buttons, hang-tags, labels, tissue paper, plastic collar band strips, hangers, and poly-bags.

In addition to meeting internal demand, some of the accessories produced by the EAP factories were also sold externally. At times when customers chose Esquel as the sole provider of accessories while dividing their garment orders among multiple manufacturers to spread the risk, Esquel ended up selling its accessories to competing garment manufacturers as the nominated supplier. Similar to the smaller spinning mill in Gaoming, the EAP division’s main purpose was to support Esquel’s core business, but it had the freedom to pursue outside business and develop products outside of the main group’s offerings.

The EAP division created innovative new product lines to ensure efficient use of capacity, and in some cases these products had the added benefit of reducing waste. One example is the recycling of plastic waste from buttons, collar bands and other packaging products to make clothes hangers. Over time, the EAP division further expanded its scope of service by doing more product development and by acting as traders for its customers for those accessories that could not be made by Esquel, such as patches and lace.

Overall, the accessories business was quite profitable, accounting in 2004 for about 7 percent of the company’s total sales, with about 40 percent of these sales made to internal customers within Esquel. PYE – Brand Building In the early 1990s, Esquel created its own retail network to start selling its shirts in China. At the peak, PYE products were available for sale at more than 100 stores, but due to many hurdles, such as inconsistent quality of the franchisees, and inability to exercise management control at the time due to infrastructure limitations (e. . , immature inland transportation, no telephone connection to update the POS), Esquel was unable to provide end consumers with the desired shopping experience. Consequently, the company decided to close all stores and re-position itself. Esquel re-launched PYE in 2001 at a higher price point with a range of cotton shirts and tops for men and women that retailed at RMB 600 (US$ 75) and higher. At that time, two PYE boutiques were opened in Beijing.

The main purpose of these boutiques was not to generate additional profits immediately, but rather to build up brand equity for the future, offer opportunities to try out new products and demonstrate Esquel’s capabilities in terms of product quality and design. Furthermore, the boutiques provided Esquel with better understanding of the consumers. In 2004, a PYE outlet was opened in Gaoming, mainly Esquel’s own staff. With such a limited number of stores in China, they were not perceived as competition to Esquel’s current customer base.

Research & Development Activities Esquel’s R activities were conducted across the company, starting from cotton farming to new garment finishes. As a centralized department, the R Center assisted the company in improving the quality of its garments, expanding its product offering, and addressing requests made by customers for special product characteristics. R activities provided a significant competitive advantage for Esquel and helped the company to distinguish its products from its competitors, maintain current customers and acquire new ones.

R activities were conducted by production specialists in each function as well as the scientists in the R Center, Merchandising and Sales. Examples of these activities include: Cotton: A research team in Xinjiang looked for ways to modify the cottonseeds to achieve higher quality cotton, with better strength and fiber length. Higher quality led in turn to better yarn and fabric, which allowed the company more flexibility to make finer fabric or apply special finishes to the fabric while still maintaining its quality. Research projects included conventional and zero-gravity cotton breeding.

In addition, the research team studied irrigation methods in order to conserve water, a scarce resource in Xinjiang. A dedicated team worked with local farmers in Xinjiang on sustainable farming techniques and advised them on ways to grow and collect the cotton so as to improve cotton quality while at the same time increase the farmers’ income. Fabric: Research activities focused on special processing, dyeing, and finishing techniques, which aimed at improving the process and/or the end product, or at adding new performance features.

Process improvements included increased efficiency, lower cost, environmental issues, and lower energy/water/chemical consumption. In product development the focus was often on fabric, but many times also included modifications to the cotton, yarn, or garment production. Some of the special products developed by Esquel included: • Wrinkle-free woven shirts: To achieve this quality, the fabrics went through a special manufacturing and garment finishing process. This allowed both the fabric of the shirt as well as the seams, collars and cuffs to remain wrinkle free for 20 home laundry cycles. Nano-technology: In conjunction with universities and other commercial partners, Esquel developed nano-scale polymers to treat the fabric and impart properties such as water-, oil-, and stain-repellence, and UV protection. • Durable knit finishing: Known as “PerformanceCareTM”, this patented process helped to maintain the appearance and dimensional stability of a knit shirt up to 20 washes. Normal knits begin to fade and pill after 3 to 5 washes. • Anti-bacterial finish: Prevented growth of bacteria in garments. Moisture management: This product characteristic was developed for both 100% cotton and blended products. Provided sportswear with the enhanced ability to transport moisture from the wearer to the outside of the garment and maintain higher comfort for the wearer. • Cashmere-like yarn: Esquel’s Gaoming spinning mill used a special process to produce this type of yarn, which gave fabrics and garments the look and feel of cashmere. • RFID: Was applied to various manufacturing processes to improve efficiency and accuracy.

In addition to its focus on functional luxury[8], Esquel’s R center was also involved in other, longer range and strategic research projects, many of them conducted in collaboration with academic institutions. They focused on such areas as environmental conservation. Listed below are some examples of research that was aimed at reducing the impact of the company’s operations on the environment: • Reduced dyeing cycle: Esquel developed and implemented a new technology to shorten the dyeing cycle, which helped to save water and energy and to reduce the amount of dye used for the process. Use of natural resources: Rather than chemicals, Esquel started using environmentally friendly materials when possible. • Organic cotton: Since 2000 Esquel grew organic cotton in Xinjiang. The farm and related ginning and spinning mill were certified by OCIA (Organic Crop Improvement Association). • Recycled heat: Rater than discharge to the wastewater treatment plant directly, thermal energy was be recovered from the used water from dyeing and finishing processes. The heat recovered was recycled to heat up water for future cycles of dyeing and finishing processes. Recycled water: Esquel searched for ways to improve the quality of treated wastewater, so as to make it reusable. Some of the new innovations were initiated by the R group, and required the sales and marketing people to analyze their profitability. Other research initiatives were triggered by requests from Esquel customers. One such example was Nike’s request for Esquel to re-engineer the collar of its golf shirts. In April 2002, Tiger Woods won his second consecutive Masters Tournament in Augusta, Georgia.

Executives at Nike were pleased with the victory but horrified by the looks of his shirt(by the 18th hole, heat and humidity laid waste to the collar of his signature Nike golf shirt. Nike had always been very concerned with performance, so they contacted Esquel, asking the company to re-engineer the golf-shirt collar from scratch and create one that would not buckle in sweat and heat. Esquel tried different technologies, and within weeks already had multiple prototypes ready to be tested.

By October 2002 Esquel was already mass-producing the new line of shirts(which was a big win for the company since the previous version of the Nike golf shirts were made by one of its rivals. [9] An annual plan determined the group’s development activities (both proactive internal innovation and input from market) for the following year based on market needs as specified in conjunction with the sales and marketing departments. In addition, the R group was encouraged and provided with the time and tools to generate and test new ideas for product and process innovations.

Each of the new prototypes was first developed in the lab. Then, the R group started working with the Technical Development Center to determine the best way to work with the new fabric when making garments. In parallel, the R group worked jointly with the relevant factories, to help stabilize the process and bring it to mass production. Once the process was stabilized, marketing teams started promoting the new products. Costs and Benefits of Vertical Integration

Esquel’s vertically integrated operations ensured the highest quality in every step of the manufacturing process, quality that could not be easily imitated by other garment manufacturers that were not vertically integrated. Other advantages Esquel gained from being vertically integrated include shorter cycle time, the ability to maintain better control of the operations, as well as improved response time to new trends in the market. Furthermore, the company took advantage of the fact that the earlier in the supply chain quality was assured, the easier it was to reach a certain level of quality.

Vertical integration also enhanced the company’s R capabilities, allowed for new ideas to be explored throughout the supply chain in a relatively short time, and made it easier for each separate operation to learn from and share knowledge with other operations along the whole supply chain. It was also easier for Esquel to devote the required resources throughout the supply chain to develop samples for customers, which resulted in fast response to customer requests.

All these benefits helped Esquel to provide its customers with the desired high quality of products and services, and strengthen customers’ confidence in the company. Vertical integration also helped Esquel to better absorb fluctuations in cotton prices compared to smaller companies and yarn manufacturers who might have to immediately transfer the price increases to the customer, making it harder for them to plan and to control margins. Esquel, on the other hand, could improve efficiencies throughout the supply chain to absorb part of the price shock.

Still, such advantages did not come without cost. Having a vertically integrated and geographically dispersed supply chain had some negative implications, such as higher financial burdens, increased operating costs, and inflexible capacity that was hard to fully utilize at all times and required high capital investment to maintain and upgrade. The company had its hands full ensuring that each operation was competitive enough (in terms of quality/cost/delivery/flexibility), according to market standard. Furthermore, production planning and coordination of internal operations was lso a challenge, requiring the company to make significant investments in IT capabilities in order to improve the efficiency of these tasks. Value Proposition to Customers Due to the over-capacity in the apparel world, Esquel chose not to target the commodity market, where competition is based mainly on price, but rather to position itself as a quality vendor. As such, Esquel focused on the more demanding customers, developed tight relationships with them, and provided them with quality products and value-added services.

The company’s philosophy was to do whatever it took to meet its commitments and maintain good relationships with its customers. For example, if production was delayed, the company sometimes shipped products by air to customers to meet the promised delivery date, despite the much higher costs associated with air shipment. At the same time, Esquel was cautious not to offer its customers services that would expose the company to too much risk. For example, Esquel was not in favor of offering customers services such as inventory ownership, which would change the company’s risk profile.

Instead, the company worked with customers to use proper supply chain management techniques to minimize overall inventory in the pipeline. This way, customers carried fewer inventories while maintaining or expanding their business. At the same time, Esquel was not put in a position to overstretch its capital by taking on retail risks without receiving the relevant risk premium. Below are examples of some of the services Esquel offered its customers, to strengthen its value proposition: Product merchandizing and design

Several months prior to the beginning of the season, the merchandising group started working with their customers’ designers to decide on yarn finish, color collection, and patterns for each of the product lines for that season. When needed, Esquel also provided design services and information regarding the latest colors, fashion styling and material trends. Customers who visited the Hong Kong headquarters also had access to show rooms with a selection of garments made by Esquel, and a fabric library that included more than 200,000 knit and woven fabrics that Esquel developed.

If a customer was interested in a new type of fabric or finish, the query was passed on to the cross-functional Technical Team comprising experts from R and fabric mills to determine whether it would be possible for Esquel to make such a fabric. Once garment specifications were defined, Esquel’s Technical Development Center (TDC) developed proto-samples, which combined the fabric pattern and styling elements in a garment form and sent it for approval to the customer. The TDC then prepared fit-samples, which were used to fine tune the way the garment looked on a fitting mannequin or live model.

In addition, the TDC prepared a complete set of detailed manufacturing instructions, including machinery adjustment and sewing instructions, and transferred it to production. A similar process took place to determine the washing effects for each garment. Following this process eliminated almost completely any problems that might occur once mass production began. Any changes made by the customer to the product requirements were followed by an update to the manufacturing instructions. Total duration of the development cycle-time varied among customers, ranging from a few weeks to a few months.

To maintain close direct contact with customers, Esquel opened offices in the U. S. , U. K. and Japan, and supported customers through merchandising services. As an added service, customers could work directly with TDC when preparing samples, to avoid information distortions that could occur when the information was transferred through the sales department. In those instances where customers preferred to be highly involved in the product design and selection of accessories, Esquel sometimes assigned employees to be based at the customer site.

Overall, customers were very pleased with Esquel’s product design services, and with the resulting consistent quality that was maintained when moving from sample to bulk production. Consequently, the company experienced very little customer complaints. Product innovations In addition to responding to customer requests, Esquel also took the initiative to develop and provide customers with samples of new innovations. The merchandising group developed samples of new products based on inputs received from external resources such as trade shows, retail trend consultants, vendors, etc. combined with the company’s own capabilities. Technical know-how was used to improve the yarn and fabric so as to achieve the desired product characteristics. Esquel customers were happy to see samples of new innovations before deciding to apply them to their product lines. Management of customers’ inventory Around the year 2000, a special knit program was put in place to replenish Nordstrom’s Polo shirt offerings. Nordstrom offered high quality 100% cotton knit polo’s but in a large color assortment.

Rather than take the risk of stocking inventory that may not sell, Nordstrom asked Esquel to find a way to deliver the correct color and size assortment on short notice. Esquel responded with a garment dye program where greige shirts were made in advance, then dyed to order given the color assortment. Using overnight shipping, the garments were in store 16 days after receiving the order. Previously, Nordstrom ordered piece (fabric) dyed polo shirts; after the color assortment was confirmed, fabric would be dyed and then made into garments.

Total lead time in the previous process was around 45 days. The new program worked very well, allowing Nordstrom to focus on those colors which were selling well. Consequently, overall color assortment was reduced, with the customer ordering larger quantities from each color. This program was later copied by other customers as lead time was much shorter and both parties did not have to take on an undue amount of extra inventory risk. Another form of collaboration aimed to improve customer’s inventory management was with Lands’ End.

Esquel had been engaged by Lands’ End in a Net Position Management (NPM) program, which focused on the management of Lands’ End inventory and was similar in nature to the concept of Vendor-Managed-Inventory (VMI). Under this arrangement, Lands’ End expected Esquel to manage the replenishment of its inventory, so as to ensure that the net inventory maintained its target level. Lands’ End provided a rolling 52 week forecast which Esquel used as the basis for production planning. After that, Lands’ End provided Esquel updated forecasts and sales figures on a weekly basis.

Esquel was committed to make to forecast within 10 weeks. Land’s Ends would place actual orders on a monthly basis and Esquel would ship the goods in 4 week time. To achieve this response time Esquel relied on a control management system, which allowed the company to continuously monitor inventory and anticipate demand. Esquel expected more customers to move in this direction and engage in a similar type of service arrangement, which transferred some of the risk from the customer to Esquel.

Here, again, Esquel viewed its size as a competitive advantage, since only large garment manufacturers could afford the risk burden of providing a VMI type of service. Internal Operations Management Over the years, Esquel had taken multiple major initiatives in an effort to improve the efficiency of its internal operations. One of these initiatives was the development and adoption of a central production planning process that aimed to provide the best response time to customer orders while simultaneously optimizing production capacity loading at the different production facilities.

In addition, the company put in place dedicated teams that looked for ways to improve operational efficiencies. Esquel also adopted a set of global and local metrics to monitor actual performance and identify opportunities for improvement. Furthermore, significant investments were made in IT applications to support internal operations, enhance supply chain management capabilities, and further improve operational efficiency. The following paragraphs describe these initiatives in more detail. Production Planning

In the past, production planning was conducted in a decentralized manner: sales people received orders from the customers, and decided how to distribute them among the factories. Their decisions were based on criteria such as customer preferences, quality, price, and lead-time. This resulted in sub-optimized operations and in extreme cases, in factories competing with each other for orders. Starting in 2002 the process was revised, and a centralized Production Planning Control (PPC) group, based in Hong Kong, was put in charge of decision making.

The process started when sales bookings and orders were placed in the production planning system at the Esquel head office. The PPC Group reviewed the bookings and orders and allocated them to the most appropriate garment factories so as to balance capacity utilization and production time. The orders were transferred automatically, on a real time basis, from the PPC group to the Factory Production Planning Group in each factory. A central procurement team was in charge of ordering all the accessories that were purchased from external suppliers.

The orders for accessories were placed based on their expected lead-time, which could be much longer than the one-week average lead-time provided by the internal EAP factories. Any changes customers made to their orders followed the same process. In addition to actual production planning based on customer orders, PPC used sales forecasts to generate a rough plan for each factory on a weekly basis. This was used for planning capacity utilization, estimating material needs, and determining expected lead-times.

Esquel made an effort to maintain a sufficiently flexible production process to accommodate last-minute changes in customer orders, but nevertheless, these could still be problematic and affect capacity planning. Based on the bookings and orders received from the Central PPC Group, the local planning system determined production plans and alerted a local production planning team to any scheduling conflicts such as inability to complete an order by the specified due date. The local planning team was in charge of this process and resolved any potential scheduling issues.

All factories used the same production planning tool, which was integrated into the central production planning and ordering and tracking systems. Furthermore, the Central planning system linked not only garment but also fabric production planning processes to ensure fabric capacity, and that lead-time was matched to garment demand. On average, total order-to-ex-Factory cycle time was about 60 days. However, actual cycle time could be as low as 45 days, usually if all production took place in China, or as high as 90 days, for instance, when fabric and trims needed to be shipped to Mauritius.

As for purchase orders placed by customers for non-garment goods, such as heather yarn and accessories, those orders were placed directly with the local plants rather than with the central sales organization. Production plans for these orders also took place locally, with the help of the local planning system. Some of the benefits that Esquel achieved from the centralized, automated production planning system included improved capacity utilization and balanced workload, and increased profitability through better selection of the production location for each order.

In some instances the improved processes also resulted in reduced lead-times to customers. Still, Esquel saw further opportunities for improvement, for example through automation at the line-planning level. Improving Operational Efficiency A common practice among many garment manufacturers is to solve operational inefficiencies by hiring more people. Esquel, on the other hand, used organizational approach, advanced technology, and management discipline as means to improve productivity and operational efficiency.

A central Technical Engineering Department (TED) determined the standard time for each task in the garment manufacturing process, information that was used for production planning and line balancing. In addition, TED worked with the factories on productivity improvements and standardization to ensure consistent quality across the different factories. Within each factory, local TED groups looked for various ways to improve efficiency. For example, the company trained different groups of employees, each with a different set of skills and associated compensation level.

The local TED group determined how to balance the number of employees in each level, so as to maintain the high quality of end products while not incurring excessive wage expenses. In addition to on-going tasks conducted by TED, the company also tested from time to time various ways to revise and improve its production processes. Technologies such as Unit Processing System (UPS) were used to maximize efficiency. This was a move away from the traditional batch mode of operation, where a worker completed one task on a batch of 50 or so pieces of garment before sending it to the next operator.

With UPS, the batch size was reduced to one unit. WIP moved in real time and there were far fewer in-process garments in the sewing lines at any given time, significantly reducing cycle times. In addition, not piling up the garments during production made them less prone to wrinkles, which in turn made the finishing work at the end of the process easier and faster to complete. Performance Measurement The actual performance of the organization was measured through a combination of global metrics as well as local metrics for each operation.

As of 2004, metrics at the corporate level included financial Key Performance Indicators (KPIs) such as return on operating assets, profit, revenue, overhead expenses, and inventory levels. Esquel also measured garment sales performance at the corporate level by using such KPIs as garment sales revenue, claims and airfreight expenses, sales process performance, and customer satisfaction. A number of local KPIs were in use to measure the performance of each of Esquel’s spinning, fabric, and garment facilities.

They included such KPIs as inventory holding days, capacity utilization, first-pass yield (FPY), cycle time, on-time arrival (to an internal customer downstream)/on-time delivery (ex-factory to external customers), productivity, unit cost, and quality (for a complete list of global and local KPIs, see Exhibit 7). All the performance indicators were reviewed and analyzed by cross-functional teams on a weekly or monthly basis as appropriate, with corrective action taking place as required. Supporting IT Applications In the past, Esquel used a decentralized IT system that focused on order management and fulfillment.

Information was captured only during order processing, and was used mainly for initiating shipments and payments. Over time, however, the company realized the potential of a more sophisticated system as a means to increase productivity and improve efficiency of internal operations. Consequently, in 2003 the company started implementing a new system that had several major advantages compared to the old one. First, information was captured much earlier, starting with information collected or generated by the merchandizing and product development teams during the design process.

All the information regarding each garment, such as manufacturing instructions, paper pattern, fabric and accessory information, and historical customer comments, was stored in three libraries (style, fabric, trims), and was used for production planning, procurement, and other operational activities. Since the system used a single input point and the information was stored in a central IT system, the same database was accessible by all parts of the organization, which left less space for errors and improved operational efficiency.

Furthermore, style information captured during product design could be re-used for future products, which improved knowledge management. In addition, the switch to automatic processing resulted in productivity gains(for example, with the new system the time required for generating a purchase order was reduced from one week to as little as 15 minutes, and the cycle time to transform a designer’s drawing into an actual bulk garments was reduced from five months to as little as 45 days.

The system also provided Esquel with the means to plan and monitor production and inventory, including supporting execution of VMI programs. As one can imagine, the information required for each step of the orders for Esquel’s 50 million garments sold annually can be enormous. By the end of 2006 many key information systems had already been integrated, but the work continued. Esquel had already seen productivity gains from the work done by that time, and it expected further efficiencies, such as reduced production lead time, to be realized as the integration continues.

In addition to internal benefits realized within Esquel, the new IT system improved customer service in multiple ways: • It allowed customers to place orders electronically • It provided inventory information to those customers with whom Esquel had a VMI agreement. • It significantly shortened the duration of the development cycle if customers used the system to electronically connect with Esquel during product development. • It allowed customers to see what the fabric would look like before an actual sample was made. It allowed customers to connect with Esquel as early as at the beginning of the product development stage. To realize the most benefits from this capability, Esquel worked with customers to integrate the process and system at this early stage. Some of the characteristics of Esquel operations were common in the apparel industry, such as three-dimension SKUs (for color, size, and style), and a built-to-order environment that resulted in a process flow with almost no finished goods inventories or safety stocks.

At the same time, Esquel also had a strategic value proposition in its strong merchandising and product development cycles, which fit the needs of each customer and required communication through the whole order management process. Due to these special characteristics, many of the IT solutions available in the market did not meet the needs of the company, and so eventually Esquel decided to develop the new IT system internally. The system was based on Web and Client/Server technology, and was connected to an Oracle system that provided such modules as finance and procurement.

Another major technology initiative was the implementation of RFID in parts of its operations. As of 2005, the company used RFID to track cotton quality at the bale level, which was a major improvement compared to the past, when cotton quality could only be recorded at the batch level (each batch is made up of 250 bales). The information was used for cotton blending and during production planning, so as to ensure consistent yarn quality in the spinning process. In addition, RFID was used for cotton warehouse management and to control the delivery of cotton orders (see Exhibit 8).

Some of the benefits Esquel realized after implementing the Bale Cotton Management System included improvements in warehouse efficiency, logistics, and the efficiency of the blending process, as well as better information and processing control at the cotton level. In addition, it improved the quality and consistency of the yarn coming out of the spinning mills by allowing more accurate blending methodologies and cotton selection. Replacing all legacy systems in the entire organization was a daunting task, which was expected to take years to complete.

By 2005, Esquel’s ambition was to at least achieve system integration within its core businesses, which would already be a big improvement. One of the major areas Esquel intended to focus on was optimized capacity utilization. The plan was to use the information already available in the system to optimize the planning process, while considering local vs. global optimization. In addition, the company could benefit from automating the pricing process for new products(information that could later be used during negotiations with customers.

As for RFID adoption, Esquel planned to use it to capture information throughout its entire supply chain, and to utilize it in local production monitoring and planning, inventory control, and overall optimization planning. One example is using it on the garment sewing floor for real-time production tracking. This would replace barcode or written records and allow almost real time tracking of individual orders. This is expected to be implemented in all garment factories by 2007. Internal Adoption of Esquel Vision and Culture

As with most cultures, Esquel’s company culture and