1. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Supply Chain Opportunities for Integrated Manufacturing and Distribution in El Salvador Jack Peck April 2006

2. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 References & Sources Harvard study – The Future of the Textile and Apparel Industries –www.hctar.org/pdfs/GS10.pdf China Competitiveness & the Future of the Textile Sector in Latin America –www.iadb.org/laeba/downloads/Annual%20Conference%202004/PPT_ArturoCondo.pdf The post-MFA in El Salvador – The Future is Now and It is not Pretty –www.iadb.org/csramericas/doc/researchinelsalvador.pdf Numerous experiences & conversations

3. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Overview of Presentation The T hreat to El Salvador Current US supply chains Future supply chain model for store-direct replenishment without using a DC in the US Future supply chain model for consumer- direct order fulfillment Why this is important to El Salvador

4. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Threat to El Salvador

5. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Threat to El Salvador The textile/apparel industry employs 75,000 people in El Salvador This represents 65% of all industrial jobs Maquilas represent 65% of all exports Maquila jobs are formal and generally provide for social security Most jobs are held by women - often single with children

6. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Threat to El Salvador On January 1, 2005 quotas were removed on all textile and apparel products in WTO countries China & other Asian countries began dumping low-labor produced products China’s exports to the US grew by an average of 85% during the first 8 months of 2005 (cotton shirts by as high as 250%). The Maquila industry in El Salvador is being seriously threatened

7. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Threat to El Salvador China’s labor rates are much lower China’s electricity rates are much lower China has government subsidies that are masked as loans China has invested in more technology The burdened cost of producing a men’s shirt with 20 standards minutes: –China$1.12 USD –El Salvador$1.85 USD

8. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Reality of the Threat The Multi-fiber Agreement (MFA) ended in January 2005 During 2004 exports from El Salvador fell by 5.2% and 6,000 jobs were lost During the 1 st quarter of 2005 exports fell by 3.8% During the 1 st quarter of 2005 twelve Maquilas folded Edgar Moreno (Economic Assistant at the US Embassy in San Salvador) predicted 40,000 – 50,000 jobs will be lost in 2005.

9. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 What advantages does El Salvador have? Closer proximity to the US market China has a 17% average tariff while CAFTA drops this for El Salvador CAFTA allows fiber to originate from any CAFTA country, without tariffs Unfortunately, apparel products manufactured in El Salvador will still cost more than those from China

10. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763

11. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763

12. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 So what is the answer? El Salvador must exploit its geographical advantage over China 29% of the cost of a men’s shirt is unrelated to raw materials and labor – i.e. in other parts of the supply chain El Salvador must help to reshape the supply chain, from fiber to retail, to reduce this 29% El Salvador can help to reduce the total inventory in the supply chain by more than 50% - a huge savings The parts of the supply chain that cause companies to hold inventory are those of transportation and distribution

13. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Current Supply Chain Example

14. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Current Supply Chain Example Orders originate in the US Textiles are often cut and sent to El Salvador Products are manufactured in El Salvador Finished products are returned to the US and placed in a Distribution Center (DC) Products are pulled from the DC and embellished or prepared to customer needs Products are shipped to customers in the US

15. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 El Salvador Current Supply Chain Example 1

16. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Current Supply Chain Example 1 Raw materials are cut and shipped from the USA to El Salvador Products are sewn, packed and shipped (3-5 days) Products are warehoused in the USA (120 DOS) Products are pulled from the primary warehouse to a secondary warehouse close to an embellishment facility (2 days) Embellishment is performed before shipping (3 days) Shipping to the customer in the USA is made in small quantities via small package carrier (1-3 days)

17. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Problems Cycle time from manufacturing to customer –3 days to make patterns, cut and pack raw materials –7 days to ship cut parts –5 days to sew –7 days to ship finished goods –4 days to embellish product –3 days to ship Minimum of 29 days for backordered products to reach the customer Most companies are more than 60 days!

18. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Problems Costs – –US labor rates for Cutting fabric Handling & Shipping Raw Materials Receiving of Finished Goods Inventory movement in DC prior to use Embellishment Handling & Shipping Finished Products

19. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Problems Costs – –Excessive shipping costs to and from USA –Excessive inventory costs to protect against stock outages And the biggest costs of all: –Mark downs on excess inventory at end of season – Mark downs on excess inventory when styles change

20. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Future Supply Chain Model 1 Store Direct Replenishment from Distribution Center in El Salvador

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23. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Future Supply Chains Integrated Manufacturing & Distribution with Store-direct Replenishment Orders originate in the US Textiles will be created and cut and in El Salvador Products are manufactured in El Salvador Finished products are stored in a Distribution Center in El Salvador Stores send Point-of-Sale (POS) data to El Salvador Products are pulled from the DC and embellished Products are shipped directly to stores in the US

24. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 El Salvador Future Supply Chains Integrated Manufacturing & Distribution

25. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Expected Advantages Integrated Manufacturing & Distribution Raw materials are acquired locally –Lower cost –Faster deliver –Lower raw materials inventory required Fabric will not be cut until the production order is obtained electronically from the USA Only small quantities of finished goods need be warehoused to eliminate delays in manufacturing Quick response manufacturing lines will address cases in which finished goods are out of stock

26. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Integrated Manufacturing & Distribution Finished goods will be warehoused next to manufacturing Finished goods will be pulled from inventory for embellishment prior to packing Embellishment and packing will be performed with low-cost labor Transportation time to most customers is almost the same as within the USA – thus backorder replenishment time can be less than 5 days (not 60 days) Shipping costs to the US from El Salvador may be lower cost than cost within the US

27. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Advantages Summary Closer proximity of manufacturing to distribution Lower inventory levels Lower cost labor Greater availability of labor Extension of “full package” model

28. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Example 2 Incassa C.V. de S.A. El Salvador Contract sewing company with US ownership Manufactures knitted apparel products for multiple clients in the USA Highly skilled, low-cost labor force 2000 employees (mostly sewing operators) Traditionally did not integrate Mfg & Distribution

29. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Future Supply Chain Model 2 Customer Direct Distribution

30. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Example MyGarb, Inc. El Salvador Manufactures and distributes using the web to more than 300 Universities & Organizations across the US and to sell directly for promotional events

31. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 MyGarb, Inc. El Salvador Co-located with and uses Incassa for manufacturing Produces knitted garments –Long/short sleeve tee shirts –Golf shirts –Long/short sleeve sweats –Pants –Baby bibs –Mouse Pads –Others

32. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 MyGarb, Inc. El Salvador Manufacturing is at the extreme end of “Lean” Finished Goods inventory turn time can be less than 8 hours (inventory turns can be more than 350 per year!) Quick response manufacturing is used to replenish inventory during manufacturing

33. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763

34. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763

35. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 MyGarb, Inc. El Salvador Orders accepted in quantities as small as one unit Garments can be embellished by –customization (logos & slogans chosen from predefined set) or –personalization (using customer uploaded pictures & slogans) Embellishment types –Decals –Embroidery –Screen printing –Sublimation printing

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42. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Your Company’s Logo

43. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Your Grandkid’s Pictures!

44. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Customer Direct …

45. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Summary Integrating manufacturing and distribution can produce significant savings by –Reducing supply chain participants (chain length) –Reducing transit costs –Reducing handling costs –Reducing inventories –Reducing stock-outages –Increasing inventory turns –Reducing labor costs (particularly if manufacturing is conducted in other countries)

46. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Why this is Important to El Salvador

47. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 The Choices for El Salvador Lower labor rates El Salvador can offer something of value that Asia cannot offer to maintain current labor rates Asia will never get any closer to the US than it is today If this can be done then the movement of manufacturing from El Salvador to Asia can be stopped, and in fact, reversed (NO!)

48. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 How can the exodus of manufacturing be stopped? El Salvador must offer distribution to US companies to integrate with manufacturing Both store direct and customer direct distribution must be offered

49. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Why this is important to El Salvador Proximity to the US FactorEl SalvadorChina Cost of Replenishment Shipping to US via DHL?? $4,300 (via sea container) Replenishment Lead Time 1 week10 weeks Inventory in the Supply Chain 3 weeks20 weeks Asia will never get any closer to the US

50. Foxfire Technologies Corporation www.foxfiretechnologies.com (678) 445-7763 Why this is important to El Salvador There is a window of opportunity that may close if no action is taken –Relationships with manufacturers in Asia are difficult to break once they have been made –Once Asia invests in expensive factories, their governments will likely subsidize the companies to keep them