Speaking with style: Andrew Lo, CEO, Crystal Group
"You have to stay ahead of your competitors," says Andrew Lo, CEO of Crystal Group
Hong Kong based Crystal Group is one of Asia's largest apparel manufacturers, producing more than 230m garments a year for customers including Victoria's Secret, Levi's, A&F, H&M, M&S, Uniqlo, JC Penney and Gap. Here CEO Andrew Lo talks to just-style about supply chain consolidation, productivity, setting up offshore factories, and why big is better when it comes to building a competitive edge.
Appropriately during a summer dominated by sporting events, Andrew Lo, the CEO of Hong Kong based Crystal Group, one of Asia's largest garment manufacturers, turns to a sporting analogy to sum up the changes and challenges being faced by today's apparel suppliers.
"We faced a lot of issues before [the lifting of quotas in] 2005, and in the last seven years we've faced even more pressure. But we don't really look at this as a problem; we see it as more as a challenge. Its hurdles we have to go through, and running over hurdles is a race. You have to stay ahead of your competitors."
Among the seemingly constant barrage of obstacles that have to be overcome he notes: "Customers are always challenging us on cost, always challenging us on speed, and always challenging us to do more for less."
Indeed, he describes the relationship between retailers and brands and their suppliers like a marriage. "Customers are consolidating and they're trying to find good partners and develop a strategic relationship. The question is, how can you make yourself attractive enough to make the customer choose you?
"You have to be cost competitive, speed is definitely key, and in the last two to three years there has been a move from basics to better and best products, so you have to be able to handle these.
"The customer is looking for suppliers who can help them improve their competitiveness, either by reducing their inventory costs, improving their sales, or reducing their sourcing costs. So we'll find ways to provide what they need to improve their competitiveness without incurring too much cost from our end."
Building strategic relationships
It's a formula that has helped generate annual sales revenues of over US$1.2bn and build long-standing relationships with customers including Victoria's Secret, Levi's, Uniqlo, H&M, M&S, Gap, JC Penney and Abercrombie & Fitch.
"Our top ten customers account for around 85% of our business, and most of our customers have been working with us for 15-20 years or even longer," Lo explains, adding: "Building a strategic relationship to our scale takes a good ten years, so we can't afford to have ever-changing customers."
With a business that produces more than 230m garments a year, Crystal Group operates 10 factories in China, Vietnam, Bangladesh and Sri Lanka employing around 40,000 workers producing T-shirts, denims, sweaters and intimates.
Of all its facilities, "right now my most profitable factories are all in China," Lo says. "If you had asked me two years ago, I would not have believed this."
A combination of productivity improvements - "every year I have to find at least 8% to 10% in productivity improvements in order to balance rising costs" - and a shift upscale into more complicated styles, has helped maintain, and in some cases actually improve, margins in China.
Lo also questions reports that suggest China is losing its competitiveness. "The export data shows a small reduction in export levels in 2011 and 2012, but it is still higher than 2009 levels, so there are still a lot of competitive garment companies in China."
But he warns Chinese factories will only maintain this edge if they keep moving into higher value added products - and that manufacturers should be prepared to move or set up offshore factories as well to produce volume and opening price point products.
"My strategy is to reduce [cap-ex] growth in China but [focus instead on] productivity improvements so we will actually be doing more sales from China," Lo explains.
When it comes to offshore investments, "right now my biggest investment is in Vietnam, and will continue to be so for the next three to five years. Later on, probably Bangladesh."
Crystal Group first invested in Bangladesh three years ago, but Lo admits the learning curve here has been "really slow" and the company has had to rein in the rapid expansion that had initially been planned.
A shortage of land on which to build the large production complexes essential to reaching "critical mass", intermittent and unreliable energy supplies (especially problematic when it comes to the operation of textile plants), and ongoing problems with labour unrest are among the challenges faced in Bangladesh.
Lo also notes the company's Crystal Martin division "is rapidly expanding activities in Cambodia whilst amending the product mix in our Sri Lankan manufacturing operations with a greater focus on true lingerie."
As it expands its business overseas, Crystal Group is also trying to build a local supply chain too "to enhance the competitiveness of our offshore facilities" and eliminate the extra time it takes to source materials and trims elsewhere, more likely than not China.
As well as its core garment making, this strategy has so far taken it into value-added processes like printing, embroidery and denim washing.
But the next exciting move sees the company teaming up with Pacific Textile Holding Limited to set up a US$180m joint venture textile and garment facility in Vietnam - the largest vertically integrated project of its kind in the country.
This is Crystal Group's first move into textiles and is due to open in 2014. The complex will employ around 20,000 local workers and carry out everything from knitting to dyeing, cutting, sewing and finishing products.
It also ties in with Lo's conviction that large-scale facilities are the way forward. They're more cost efficient, offer faster production and styling flexibility, "and in larger plants you can put in-house denim washing facilities, printing, garment dyeing and, if it is big enough, you can also work with a fabric mill to set up next door.
"Getting critical mass is important and could help develop a good offshore base that sets you apart from your competitor next door."
Supply chain consolidation
Andrew Lo believes the trend for retailers and brands to consolidate their sourcing across bigger and stronger suppliers could take another ten years before it matures or settles down, and that thanks to its size Crystal Group sits at the better end of the equation.
Even so, he explains it's a continuous juggling act to ensure a balance is achieved between cost and speed, with "every customer now looking to reduce their lead times." While this obviously varies between different products and materials, "eight weeks including fabric is now the norm, although the quickest order can be as fast as four weeks."
However, "there are a lot of trade-offs," Lo notes.
For example, for the back-to-school season customers need products delivered in store by mid-June at the latest, but this means the loading on the factory will be more erratic because orders come in at the same time for the same delivery.
"But I need to keep my factory running flat," Lo says. "The more idle time I have in the year the higher the cost I will incur. So balancing production capacity, and therefore cost, is the biggest issue I have in achieving speed."
Another challenge is that while factory productivity has been boosted, "the issue of speed is not just on the factory side; quite a big chunk is beyond our control. A lot of speed is stuck in the whole supply chain with customers and suppliers, like design, materials development, materials ordering, trims development," Lo explains.
"Right now the million dollar question is 'How can we work with our customers and the whole supply chain to improve speed?'"
One realistic compromise when it comes to product introduction strategies is to have some items shipped more quickly or replenished faster, rather than the entire range. For example, Crystal Group can replenish the styles, colours and prints that are selling well - which gives retailers the flexibility to focus on the styles the customer actually wants.
Another area where Crystal Group is bolstering its competitiveness is through efforts to improve the sustainability of its business and fashion supply chain.
But sustainability is not purely an altruistic move, and comes with a strong business case too, as Lo emphasises.
"We are embracing sustainability because we are reducing our CO2 emissions, our energy usage, our effluent discharge, our material waste - but we are also reducing our costs, making us more competitive. We cannot be green if we cannot sustain our margins."
As well as these tangible gains, the intangible benefits are coming to the fore too - not only in recognition from the industry, but also when it comes to customers choosing a strategic vendor. "We don't really see this as an absolute edge, but it has improved our competitiveness relative to our peers."
Over the next five years Crystal Group has targeted a 10% reduction in fresh water consumption per garment, sending zero production waste to landfill and reducing the carbon footprint per garment by 6%.
Indeed its Yida denim factory in China's Pearl River Delta has already won numerous awards for its efforts on this front, which are also being rolled out to other facilities. Yida makes 1m pairs of jeans a month for Levis, Gap, Target and JC Penney, as well as the Asian market, and is the second-largest bottoms exporter in China.
And four of its manufacturing facilities - two in China and two in Sri Lanka, producing lingerie and sweaters - have gained eco-factory status under Marks & Spencer's Plan A ethical and sustainability programme.
But Lo also admits the pressure to stay ahead of the pack is relentless. "We always have to keep on our toes. Every day we have to be better than yesterday, and also the speed of improvement has to be increased.
"We have to be so much better tomorrow than today, and the day after that, because the competition will be getting fiercer as the consolidation continues."
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