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9/18/2015(

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GM0501(INTEGRATED(LOGISTICS(TEACHER:(LAMMGÅRD,(CATRIN(

Group 1:

Bashiri, Peyman

Haraldsdottir, Helga

Khoshaba, Peter

Wu, Tommy

Table%of%Contents%1.( Background .......................................................................................................................... 1(2.( Theoretical framework ........................................................................................................ 2(

1.1( Logistics ......................................................................................................................... 2(1.2( A Supply Chain .............................................................................................................. 2(1.3( Supply chain management (SCM) ................................................................................. 2(1.4( Supply chain strategy ..................................................................................................... 3(1.5( Logistics strategy ........................................................................................................... 3(

1.5.1( Quality ..................................................................................................................... 3(1.5.2( Time ......................................................................................................................... 3(1.5.3( Cost .......................................................................................................................... 4(

1.6( Changing demands within the clothing industry ........................................................... 4(1.7( Agile supply chain ......................................................................................................... 4(1.8( Lean supply chain .......................................................................................................... 4(1.9( SAP Apparel and Footwear ........................................................................................... 4(1.10( Internationalization ...................................................................................................... 5(

1.10.1( Outsourcing ........................................................................................................... 5(1.10.2( Offshoring .............................................................................................................. 5(

1.11( Collaboration ................................................................................................................ 5(1.12( Industrial districts ......................................................................................................... 6(1.13( Corporate social responsibility .................................................................................... 7(

2( Marche shoe district ............................................................................................................. 8(3( Different examples of logistics models ............................................................................. 10(

3.1( Watch valley in Switzerland ........................................................................................ 10(3.2( Zara .............................................................................................................................. 10(3.3( Hennes and Mauritz (H&M) ........................................................................................ 10(

4( Analysis ............................................................................................................................. 11(4.1( Strengths and weaknesses with the current logistics model ........................................ 11(

4.1.1( Strengths ................................................................................................................ 11(4.1.2( Weaknesses ............................................................................................................ 11(

4.2( Implications from outsourcing ..................................................................................... 12(4.3( Discussion .................................................................................................................... 13(

5( Recommendations ............................................................................................................. 15(

References .................................................................................................................................. 16(

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1.!Background

An industrial district can be described as a concentration of specialized industries in a certain local area (Marshall, 1922). Morosini (2004) further elaborates three reasons why similar firms continue to localize in the same area. Firstly, it is because it allows them to easily access specialized and skilled labor for different needs. Secondly, they can experience economies of scale together by sharing and using the same technology and capital infrastructure. Finally, they are able share and exchange the knowledge of product, market and technology, a reason also supported by Morosini (2004). There have been many different industrial districts throughout the years and within various industries ranging from automotive to more craft industries. Today maybe one of the most famous industrial district is Silicon Valley which is located in California. Silicon Valley shows the powerfulness of a well-functioning industrial district by being the birthplace for many high-tech companies and innovations such as Facebook and Google. In this paper the Marche Shoe District will be analyzed. Italy has been well known for excellent craftsmanship organized in small clusters consisting of suppliers, tanneries, designers and manufactures who have managed to produce high quality crafted goods ranging from clothes to ceramics. These industrial districts has put Italy on the map and helped the economy to grow over recent years but are now facing challenges due to the internationalization. The district composes of small family businesses with less than 20 employees, combined with a few larger firms with more than 3,000 firms and sales over €3 billion. The Marche Shoe district is the largest industrial district in Europe when it comes to shoes and accessories. The district is very export oriented where the major goods go abroad to different parts of the world (Harrison, et al., 2013). The purpose of this report is to look into the depth of the Marche shoe district and how they manage their supply chain due to the increased competitiveness and challenges that arise from the current state of internationalization. It is supposed to map out the strengths and weaknesses of their current logistics model and see what implications outsourcing has ad on the supply chain management as well as corporate social responsibility and finally, come up with a new logistics model for the district.

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2.!Theoretical framework

To understand the challenges Marche Shoe District are facing, an understanding of the challenges in the fashion industry as a whole is essential. Changing demands together with the recent financial crisis have had a major impact on supply chain management (Danese, et al., 2015). Improvements in transportation, navigation and communication has made it easier to move goods from one part of the world to another which has enabled companies to internationalize their activities (Harrison & van Hoek, 2011). This chapter defines a few concepts and theories for understanding the logistics function in a business context.

1.1! Logistics Logistics is a vital part of the supply chain management. Logistics is an enabler for the supply chain to meet customers by managing the material flow and information flow (Harrison & van Hoek, 2011). The Council of Supply Chain Management Professionals (CSCMP) has defined Logistics as the following quote:

“The process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods including services, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements. This definition includes inbound, outbound, internal, and external movements.” (Council of Supply Chain Management Professionals, 2013)

1.2! A Supply Chain A supply chain is a series of processes that is connected together. A complete supply chain would be from the point of gathering raw material to selling a finished product to the end-customer. For example, from gathering aluminum ores in a bauxite mine and through different refining processes via different companies, the finished product would be a can of cola. The flow of water in a river is used to illustrate the organizations in the supply chain. This means that organizations that are in the beginning of the chain are defined as upstream and downstream is referred to those who are closer to the end-customer. A supply chain is often linked through different companies and all involved parties are considered as partners (Harrison & van Hoek, 2011).

“A supply chain is a network who collectively convert basic commodity (upstream) into a finished product (downstream) that is valued by end-customers, and who manage returns at each stage.” (Harrison & van Hoek, 2011)

1.3! Supply chain management (SCM) Supply chain management has the role of planning and controlling all the processes in the supply chain. The planning part is to specify the amount of material that should be purchased, how many products should be made, distributed and sold during a specific period, which can be a day, week or month. The second part is controlling which is to make sure the plan works as planned even though there may be problems during the process. The goal with supply chain management is to meet customers’ needs correctly by planning and controlling each processes in the supply chain as mentioned in the beginning of this paragraph (Harrison & van Hoek, 2011).

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“SCM encompasses the planning and controlling of all processes involved in procurement, conversion, transportation, and distribution across a supply chain. SCM includes coordination and collaboration between partners, which can be suppliers, intermediaries, third party providers, and customers. In essence, SCM integrates supply and demand management within and between companies in order to serve the needs of the end-customer.” (Harrison & van Hoek, 2011)

1.4! Supply chain strategy The supply chain strategy is a plan for the whole supply chain about how to operate in order to stay competitive. This plan is a continuous process that evaluates the cost-benefit trade-offs of operational components in the chain. A supply chain strategy shall support the business strategy which is a plan to reach the company’s goal or vision. It includes for example what to offer to the market (i.e. product or services) and when and where it should be offered (i.e. markets and segments). Another aspect of the supply chain strategy is that it also focuses to reduce operational costs and maximize efficiencies. Due to the fact that markets have become more competitive, it is important to have a supply chain strategy that also includes strategies for how to work with your partners (i.e. supplier and distributor) in the supply chain. In other words, establishing good relations in your supply chain is critical to stay competitive (Happek, 2005).

1.5! Logistics strategy The logistic strategy is responsible for the material flow within the firm and is formulated to support the company’s business strategy and goal. A well planned logistics strategy helps the company to exploit its internal resources to create value and meet customers’ needs (Jonsson & Mattsson, 2011). In order to satisfy the customer, the logistic function has to collaborate with other functions in the focal firm, e.g. marketing (Harrison & van Hoek, 2011).

The marketing strategy or a firms marketing mix consist of four P’s (product, price, promotion and place) (Kotler, et al., 2011). Logistics contribute to one of these P’s, place and it helps to make decisions about factors regarding channel selection, market coverage, distribution systems and dealer support, product decisions (i.e. product variety) and promotion activity (Harrison & van Hoek, 2011).

1.5.1! Quality When the supply chain decides to compete through quality, the chain has to make sure the unit the end customer is going to receive has the correct amount and is of the right kind. Also the most fundamental aspect to compete via quality is to deliver a functional product to do what it’s supposed to do (Harrison & van Hoek, 2011).

1.5.2! Time Customer lead time is the amount of time a customer has to wait in order to receive the ordered product. However, there are customers who doesn’t want to wait and are prepared to pay more to get their product as quickly as possible. Companies who have learned this, will try to satisfy the mentioned customers demand and try to compete through time and this is done by speeding up the whole supply chain as much as possible by for example reducing none value adding processes (Harrison & van Hoek, 2011).

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1.5.3! Cost To have the lowest costs as possible is something every supply chains are striving for since low costs means lower market price for the customers which can lead to more sales or simply higher margins. From the the supply chain aspect, lower costs can be achieved via decreasing the manufacture, distribution and servicing costs etc. (Harrison & van Hoek, 2011).

1.6! Changing demands within the clothing industry The supply chain starts from the end-customers demand. Customer demands within the clothing industry is characterized by being short lived since new trends constantly outdate old ones. Furthermore, it is difficult to predict which trends will succeed and which ones that will not since they are highly volatile due to changing external influences such as media and weather for example. These goods are also a subject to impulse purchases (Christopher, et al., 2004) and variations between different segments such as high cost, to medium cost to low cost market (Caniatoa, et al., 2015). Today when customers generally have higher education and more alternatives to choose from, their expectations on the product, service and brand have risen (Harrison & van Hoek, 2011). Altogether these features make it extremely hard to forecast sales. This puts pressure on the supply chain which must adapt to the changing buyer behavior (Tsan-Ming, et al., 2014).

1.7! Agile supply chain An agile supply chain is market sensitive e.g. designed to easily adapt to changes in demands and instead of looking at miscalculated forecasts as mistakes it sees it as new business opportunities. It is necessary that the processes within the company are integrated to reduce inventory costs and collaboration with all actors of the supply chain is essential so that a change in demand immediately affects the whole chain. In addition the supply chain should use a real time data system to withhold the competitiveness of fast response to customer demands (Harrison, et al., 2013).

1.8! Lean supply chain The concept of lean is about focusing on what creates value for the end customer and about reducing waste. The main principles are to identify what adds value and what get rid of what doesn’t. Waste can be producing too much, bottlenecks, inefficient transportation, defected goods, wrong operations, unnecessary inventory and unnecessary actions. In addition, the end customer should always be in focus and nothing will be produced unless there has been an order, in other words the supply chain is pulled from the end customer instead of pushed from the supplier. When the company is acting lean, it should always seek perfection through constant improvements (Harrison, et al., 2013).

1.9! SAP Apparel and Footwear Enterprise resource planning (ERP) is a system that integrates a company’s business functions together. SAP Apparel and footwear is an ERP system solution developed by SAP, this system is produced to help companies in the footwear industry to have full control of their supply chain that stretches from procuring raw materials to delivering finished shoes. The system also lets the companies monitor the whole supply chain (SAP, u.d.).

Radio frequency identification devices (RFID) is a technology for product tracking and is frequently used in today’s supply chains. The RFID device is a tag that can be attached to the

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product and send information to a reader. The information could consist of where the product was made, where its components came from, what kind of product it is and also where it is located in the supply chain (Harrison & Hoek, 2004).

By combining the RFID technology and ERP system, the company can benefit from better management in areas of material control, monitoring the production, order tracing, storage, logistics, recording the sales data etc. (Hui , et al., 2010).

1.10! Internationalization The four main reasons for going international is cheaper labor, land and material costs, being able to serve customers all over the world, sourcing new markets to enter and for learning reasons. In the fashion industry, all of these reasons are viable even though cheaper labor and material costs are the dominating ones. There is always a trade-off between cost and benefit in decisions regarding going international. Implications on this matter are that longer distances reduces time-to-market and differing regulations about handling and transports can be complicated and expensive. The more break points and consolidations, the more complex and sensitive the whole supply chain becomes. There are multiple freight modes with different benefits and costs that must be taken into account when deciding. Price and currency fluctuation are also a big challenge (Harrison & van Hoek, 2011).

1.10.1! Outsourcing Outsourcing is an activity where a company transfers the responsibility for a part of its business function to another firm (Zhu, et al., 2001). The reason behind why companies choose to adapt the outsourcing strategy is to enhance their competitiveness. For example, by outsourcing the manufacture part to an external party, the manufacturing costs can be reduced. A lower fixed cost means that the break-even point will also be lowered which is considered as a cost improvement. Some authors also motivate that outsourcing a part of a firm’s business to another company that specializes in that kind of task, the original firm can focus on the business functions that they are good at which will result to increased competitiveness. However, there are other authors that are saying otherwise, they point out that outsourcing may reduce the innovation in the organization, transfer knowledge over to the other firm and reduce the control over the focal firm’s activities. These arguments points to the fact that outsourcing is a bad idea for the company itself (Gilley & Rasheed, 2000).

1.10.2! Offshoring Offshoring means that companies transfers or relocates parts of their business operations to another country due to different reasons such as labor arbitrage, less corporate tax to improve the profitability, and jobs added in destination country. A low-cost country has fall under the grouping of “developing nations” or “emerging nations” (Carmel & Tjia, 2005).

1.11! Collaboration Shortening lead times to meet demands as well as outsourcing to cut costs are two issues that are in constant conflict and collaboration is said to be the key to overcome these difficulties (Danese, et al., 2015). Small companies often lack the resources to manage a complex supply chain involving many actors on different places. For these companies to survive in the long run, they need to collaborate with actors of their supply chain which is said to enhance performances and competition since new contacts can open up their mindsets to new ideas (Mucelli, et al., 2015). Collaboration can exist in many different forms, Strategic partnership

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is one form of long-term collaboration between companies which requires trust and openness. If well functioned, the partnership can enhance productivity, shorten lead times and infuse economies of scale. There are also costs related to engage in a partnership. There are lots of work that needs to be done before entering into a partnership, when settled, it can be hard to set correct internal prices between the partners since the companies are dependent on each other and it can also be hard for companies to be open and trust others with important information (Harrison, et al., 2013).

1.12! Industrial districts The phenomena of industrial districts were brought forward by Marshall (1922) already back in the early 1900s where he described. Industrial districts as concentrations of specialized industries in certain local areas. Marshall (1922) point out that several of the reasons for why they localize is that then they can easily access specialized and skilled labor also share and exchange the knowledge of product, market and technology. A report written by Mallika Shakya (2009) has defined an industrial district as “an agglomeration of enterprises, suppliers, service providers and different kinds of institutions such as financial providers, universities and various levels of the government”. The mentioned firms and institutions are a complement to one another in some way and also they are connected to each other via externalities. Due to their proximity by geography and similar activities, the members in the district exploits the benefits (e.g. economic benefits) which has been arisen from the externalities and synergies. The advantages can be that the firms in the area has access to specialized human resources, suppliers, knowledge spillovers and a higher performance due to competition. The following quote by Piero Morosini (2004), share a similar definition as above;

“An industrial cluster is a socioeconomic entity characterized by a social community of people and a population of economic agents localized in close proximity in a specific geographic region. Within an industrial cluster, a significant part of both the social community and the economic agents work together in economically linked activities, sharing and nurturing a common stock of product, technology and organizational knowledge in order to generate superior products and services in the marketplace.” (Morosini, 2004)

Morosini (2004) also pointed out that it is important to note that the activities within the industrial district are rational and not random interactions between firms. These actions can be described as deliberate, socially constructed and crucial for their survival.

Industrial districts have several key distinctions. Firstly, the companies that are located in the district are involved at different stages and ways in the production of a homogenous item. A second distinction is that the proportion of the involved firms are very small. It is important to note that every industrial district specializes in different products. For example, the district in Sassuolo City, Italy, specializes in ceramic tiles or the industrial district that is related to this report, Marche in Italy, produces shoes.

Another key factor to point out is that, an industrial district should be considered as a social and economic whole, this means that there is a close interrelationship between the social, political and economic field. This has led to the fact that each field’s shape and function has been influenced by the other fields. Adaptability and innovativeness are often associated to the industrial cluster due to its capability to satisfy the fast changing demand from the market (Frank Pyke, 1990).

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1.13! Corporate social responsibility Corporate Social Responsibility (CSR) is a self-acting technique where the business itself watches and ensures that it operates in compliance with the law, ethical standards, national and international norms. CSR intends to have positive impacts on the environment and to act responsible in corporate actions. The Bruntland report explains sustainability as ‘development that meets the needs of the present without compromising the ability of future generations to meet their needs’ (Harrison & van Hoek, 2011). Sustainability appears as a way of considering the environmental, social and economic value of each and every business decision. On the environmental level firms are concerned with issues such as, reducing the use of non-renewable energy and materials. On the social level firms should for example choose suppliers who manufactures its product under socially responsible conditions. For instance with minimum wages, health and safety, remuneration, restricted working hours, no child labor, well-functioning management systems, no discrimination and no forced labor (Casalegno, et al., 2014).The economic gain comes after the focal firm has taken the social and environmental values into account (Harrison & van Hoek, 2011). CSR plays an important role in improving businesses internally and it also has a positive impact on our environment. In the supply chain management, corporate social responsibility works with the social and environmental outcomes of supply chain operations due to global accessibility and involvement of different companies. Therefore, CSR has a vital role in the supply chain. When considering the size of the focal firms, there is a great distinction in the opinion towards corporate social responsibility and sustainable progress. The bigger the size of a firm, the easier it is for them to deal with the problems that arises from their business activities. ‘‘Big companies are more willing than smaller companies to be sustainability embracers’’ (Casalegno, et al., 2014). Large firms have greater assets to finance researches in developing knowledge and innovation, in addition, they have more experienced human resources to assist them to deal with individual corporate social responsibility matters. Finally massive companies can effortlessly spot the gains of CSR attempts, which is great transparency and increase in profitability (Casalegno, et al., 2014).

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2! Marche shoe district

The shoe industry in Marche has combined sales of over 3 billion euro and employs almost 50000 workers in the 3000 shoe firms, 500 shoe component firms and 100 leather firms. The district exists of mainly small family owned companies with less than 20 employees but there are a few big players as well. The district itself has all the knowledge and skills that are required to make shoes of high quality. What historically has made the companies in the region successful is that they are located close to each other, they trust each other and they have a flexible network which has a fast responsiveness to customer demands. The Marche shoe districts competitive advantage is “Made in Italy” which stands for product quality and innovation. Now times have changed due to the trend of outsourcing parts of the supply chain to cut costs and the logistics model has become a tangled web that is difficult for the companies to manage (Harrison, et al., 2013).

Design, marketing and distribution are seen as high-value adding activities and are therefore kept in the district for all shoes produced, then there are different strategies for low cost and medium-high cost shoes. Production of low cost shoes are almost fully outsourced to Asia since it is cheaper (Harrison, et al., 2013).

Production of medium-high cost shoes is more complex since it is important to be cost effective as well as keeping the product quality high. The latter goes through a complex chain where the production starts in Asia where leather is processed before transported to the district where it is checked, cut and prepared before transported to Eastern Europe where it is further processed. Then it goes back into the district for assembly and finishing, then it will be distributed mostly abroad. More than 75% of the products are exported, the main importers are Germany, USA, Russia and increasingly Asia (Harrison, et al., 2013).

Now lead times and transportation costs have increased and the companies cannot longer keep the same responsiveness to customer demands as they used to. To avoid large inventories, the firms only order about 25-30 % of the forecasted base demand and then they produce after order. The larger companies have tried to deal with these issues through increasing capabilities to process information and providing logistics services from other companies. Fornari, one of the biggest brands, has taken action to improve their logistics function. They have:

•! Installed an ERP system to follow up on the supply chain •! Outsourced outbound logistics

They are thinking about investing in a logistics platform that would:

•! improve information flow •! improve responsiveness through RFID •! manage sales in China through a logistics network

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Small companies don’t have the resources nor the knowledge to make investments to improve their supply chain management. Many of them don’t know the benefits of having a well-functioning logistics model since they don’t have the tools to follow up the costs from their activities. Collaboration amongst the actors in the district is not something considered (Harrison, et al., 2013).

Amighini & Rabellotti (2003) have come up with some ideas that could help the companies in Marche to be more competitive. According to the authors, the firms should focus on becoming subcontractors and join a supplier association. Brenta, which is an area within the district, accepted a functional downgrade by abandoning design and sales and focused more on production while the supply chain leaders focused on their key competencies (design & sales). The study by the authors showed that the subcontractors performed better than other local producers in terms of sales and profits as well as process and product upgrading. Large high-end brands have almost fully outsourced their production and only keep the final touch in the district as a cost-cutting strategy to counter competition from low cost countries.

Low cost brands on the other hand, experience more rough competition from competitive markets which implies a need for repositioning in new supply chains or market segments. Delocalization is not enough and they need to establish linkages with other producers in high end segments of the market (Amighini & Rabelotti, 2003).

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3! Different examples of logistics models In this chapter, different examples of logistics models that are used within the clothing industry are presented.

3.1! Watch valley in Switzerland The industrial district specialized in watchmaking is located in Switzerland alongside the French border and has its origins from the year 1500. The district has historically been very successful with all the knowledge and skills that are embedded in the region. Swiss craftsmen within this industry have a high reputation and 95% of everything that is produced is exported. The district has been challenged though. When competitors started to outsource functions to cut costs, many of the small companies in the districts either disappeared through bankruptcy or was acquired by a bigger company. The number of companies in the district fell from 1600 in the 1970´s to 572 in 2013 (Federation of the Swiss watch industry FH, 2014).

Watches in all price ranges are made in the district but it is in the luxury segment that the district has its leading position in the world. The logistics model derives from the need of high quality. Almost everything is made within the district which gives the final product the label “made in Swiss”. The supply chain is tight and controlled thanks to the close distances and collaboration amongst competitors and supply networks. The district has been successful in integrating companies into a vertical chain where each company still specializes in its own product. In addition, the watchmakers have made long-term investments to improve the competitiveness of the region. This way of working together makes the companies able to reduce transaction costs and increase profits without losing quality. Closeness to the whole supply chain also enhances the companies’ responsiveness to market demands (Anwar, 2012).

3.2! Zara Different from its rivals in the textile industry who emphasize on outsourcing Zara keeps half of its high quality production in-house. Zara produces and distributes products in small batches instead of going for economies of scales. Moreover, the company controls design, warehousing, distribution, and logistics functions to itself. Zara’s aim is to close the information circle between the end users and the upstream operations of design, procurement, production, and distribution as quickly and directly as possible. Moreover, Zara invests massively on anything that increases speed and responsiveness of the supply chain. Zara has made crucial capital investments in production and distribution facilities and use them to boost the supply chain’s responsiveness to new and random demands. Therefore, Zara produces complicated products in-house and outsources the simple ones. Its methodology is to be in charge of the whole supply chain operations by itself to secure the profit (Ferdows, et al., 2004).

3.3! Hennes and Mauritz (H&M) The Business concept of H&M is offer fashion for women, men, teenagers and children at the best price in a sustainable way. H&M doesn’t own their own factories for making the clothes, instead they are buying products from independent suppliers. (Hennes and Mauritz, u.d.). H&M’s work in CSR is called “H&M Conscious” and it consist of seven commitments that is built on passion, long-term thinking and teamwork.

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4! Analysis 4.1! Strengths and weaknesses with the current logistics model

Table 1

4.1.1! Strengths The strengths with the current logistics model are pointed out in table 1 and those are quality and lower manufacturing costs.

4.1.1.1! Quality This strength only applies for the medium-high cost segment where one of the major strengths with the current logistics model is that the Marche Shoe district keeps the final assembly within the district. By keeping the final touch within the district they do not risk to lose what they are known for which is the quality that the craftsmen in the district have. Even though parts of the production takes place in different areas of the world, the most value adding activities still takes place in the district. 4.1.1.2! Lower overall manufacturing cost We have learned that outsourcing is a cost-cutting strategy which is required to be competitive when emerging markets offer cheaper labor and lower production costs. So even if one implication of outsourcing leads to higher transportation cost per unit the overall manufacturing costs decreases since the transportation is not an expensive activity in relation to manufacturing (Bergqvist, 2015).

4.1.2! Weaknesses The weaknesses with the current logistics model are shown in table 1 and those are longer lead-times, lack of skilled labor, reduced control of supplier network and decline in responsiveness.

4.1.2.1! Longer lead-times Obviously, processing the raw material and dividing up the production between countries increases the lead-time as the goods are transported back and forth between different manufacturing sites. This is considered as a weakness due to the demand in the fashion industry where it is crucial to get the product to market as fast as possible.

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4.1.2.2! Lack of skilled labor This weakness applies to the low-cost segment since the more companies outsource to other countries the more they lose in terms of their competitive advantage which is quality. That is why it is important to keep the value adding activities within the district because it’s hard to find that kind of craftsmen in other places. 4.1.2.3! Reduced control of supplier network With outsourcing the network of suppliers become bigger and more complex. To be able to control suppliers in different parts of the world, a firm needs to develop new tools and systems for that. It is a challenge for both large and small firms but the difference is that large firms have the funds to invest in such systems and tools. Smaller firms and especially the small firms in the Marche Shoe district cannot invest that amount of money into these systems which puts them in a weak position where they cannot control the activities abroad. 4.1.2.4! Decline in responsiveness The decline in responsiveness is related to the fact that they experience longer lead-times due to outsourcing. They lack the ability to quickly respond to changing demands from the market and end-customers which also is crucial within the fashion industry.

4.2! Implications from outsourcing In the case of Marche shoe district, outsourcing was an important move to cope with the challenges from competitors in emerging markets who could offer lower manufacturing costs. Cost savings are not the only consequence though. In the case of the firms in Marche shoe district, by moving the production to Asia the result has been longer lead times and higher transportation costs per unit and this has led to reduced order quantity and increased markdowns. Within the fashion industry where seasonal products and fluctuations in demand are common features, a well-functioning logistics model is vital. The district works in two different segments, low cost and medium-high cost, which have faced different consequences from outsourcing.

In the low cost segment, where the production is almost fully outsourced to Asia, the companies benefit from the lower costs which makes them more competitive on the mass market. On the other hand, outsourcing the low value adding activities has made the supply chain a much more complex network than it used to be when all the suppliers lived in the same region. Consequences because of this is that lead times and transportation costs have increased. Longer lead times has also made the companies’ less responsive to market demands since the flexibility has been restricted. The problem with the current logistics model is that the companies are not very efficient in terms of logistics. In the medium-high cost segment, quality is the competitive strength and should not be compromised. Therefore, it is good that they’re trying to keep as much of the production as possible within the district. This is positive since they can keep the “made in Italy” legacy. Today it is very hard to survive without outsourcing though, since the labor and material costs within the district are much higher than in the low cost countries. This segment is also suffering due to poor logistics efficiency. The goods are transported in a very inefficient way, which has increased transportation costs and lead times where the complexity also makes it hard to keep control of the supply chain as well as customers changing demands.

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4.3! Discussion The large companies are likely to survive since they have invested in their logistics function but if the small companies will not join into strategic partnerships to share logistics platforms, the future looks difficult. Small companies have a hard time competing against the big ones that has the knowledge and resources to create an efficient logistics model. In Watch valley, the small companies disappeared either because of bankruptcy or because they got acquired by bigger companies (Federation of the Swiss watch industry FH, 2014), therefore this is a likely scenario for the small companies in Marche.

If the companies in the medium-high cost segment will be put under more stress to reduce their costs, they could consider to outsource more functions which in the end could destroy the competitive advantage they have, which is “made in Italy and is associated with high product quality. Watch valley is similar to the medium-high cost segment in Marche since they also prioritize high quality before time and cost. They have managed to keep the production of luxury watches within Switzerland and are now the largest manufacturers of these items in the world (Anwar, 2012).

Strong collaboration through vertical integration has been a big contribution to this success which is something that the companies acting in the medium-high cost segment in Marche could learn from. The companies that are competing through price on the other hand, can benefit a lot from outsourcing. H&M is a good example of this since they are competing through low production costs. In that case, outsourcing is a good idea since the companies have put quality and time secondary. In the fashion industry, time-to-market is very important and Zara has been putting all its efforts into becoming extremely responsive to the market. The supply chain is tight and controlled where much is produced in-house since cost and quality are not the most important factors. Zara is very good at focusing on what creates value which is something that Marche also could benefit from. In the Marche case, amongst medium-high cost shoes, product quality is the competitive advantage which must be protected.

Like in the Zara’s case where almost all efforts are made to cut time, in Marche, all efforts should be made to keep high quality. Therefore, cost savings should be made where they’re needed. In Marche it is in the logistics function where the material flow as well as the information flow needs to be coordinated in a much efficient way to meet the customers’ needs (Harrison & van Hoek, 2011). In the current model each company takes care of its own business with suppliers and carriers and since most companies are small and family owned, they’re not receiving economies of scale. Supply chain management is about planning and controlling the supply chain (Harrison & van Hoek, 2011) which is not happening today since the companies are lacking knowledge and resources in that area. The companies in the district would benefit a lot if they collaborated with each other (Mucelli, et al., 2015). This collaboration could involve sharing of IT-system, transportations and suppliers etc.

Due to the different characteristics of the firms in the industrial district there are two broad pathways that they could choose from. Overcoming the implications of outsourcing in line with Amighini & Rabellotti (2003) ideas includes that smaller firms in the district should focus on becoming subcontractors. A firm can become a subcontractor when it accepts a functional downgrade by for instance abandoning design and sales and put more emphasis on what they are good at, processing. The second choice is to collaborate together with other

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firms in the district and create an association or umbrella organization, that will increase their power and they can then achieve much more together than on their own. The goal should be to reach economies of scale together by integrate their logistic model with other actors up streams as well as down streams.

The individual small firms in the Marche district are not using CSR in their business strategy due to not having enough resources. Therefore, if these small firms start to collaborate with each other this will lead to increase their accessibility to larger funds therefore they can embed CSR in their business model.

By investing in CSR, they could for example choose better suppliers and control working conditions for the employees through out the whole supply chain network. They can reduce their impact on environment, for instance using environment friendly transportation, using fair trade material in their products, and try to reduce energy and material waste in their manufacturing processes. By taking the social responsibility and environmental issues into account, they will receive legitimacy from the costumers which improves the brand image. The economical impact will be increased sales.

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5! Recommendations

In the low-cost segment, the only way to survive is to focus on cost-savings in the manufacturing as well as in the supply chain. They should focus on becoming more lean, where they reduce all the waste that is currently affecting their competitiveness for instance long lead-times and that leads to time-waste. When the companies have reduced their wastes, it will be easier for them to see the whole picture and have a quick response to their customers’ needs. When the logistics is well-functioning they could start to act as a “pull” supply chain. Then they should use their resources on constantly improving the supply chain. To achieve this, collaboration between the small-medium sized companies is necessary to be able to invest in their supply chain operations together. By having an alliance between these small- medium sized shoe manufacturers, it is possible to behave as one firm and reaping the benefits of economies of scales which otherwise mainly takes place in big firms. Together they should invest in systems such as RFID and for example SAP Apparel, which will improve the effectiveness of the supply chain network. With SAP Apparel the companies can monitor the supply chain and stay in control of the operation. RFID will help to track and trace the products during the process from sourcing to sales.

Moreover, by using real-time data system like RFID in combination with SAP Apparel, they improve the information flow which then enhances the material flow so that the flow of goods up streams and down streams of the chain occur effortlessly. For example, if a retailer is running out of a product, the system will react and let the managers know that they should make a new order to the suppliers.

In the medium-high cost segment, the small-medium sized companies need to collaborate in the same way as the companies in the low-cost segment. This includes investing together in for example SAP Apparel and RFID. This segment should mainly focus on product quality and branding and cut costs within logistics. They need to keep the label “Made in Italy” to stay competitive and only outsource simple activities. In this segment, quick response is essential since they’re not producing for a mass-market. This makes an agile supply chain suitable for the companies.

An agile supply chain needs all functions to be integrated so that a slight change in demand will affect the whole chain immediately. In addition, the shared platform between the small-medium sized firms, with SAP Apparel and RFID, will enable the agile supply chain to work.

In the future, the district should consider implement CSR activities in their business operations to improve the brand images.

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