Posts in Supply Chain Research

Unearthing Opportunity in the Linear Approach Toward Clothing

Executive Summary

This analysis examines the interconnectivity between human behavior, industrial elements, and natural elements across the linear processes in the textile and clothing system. Using a systems-level perspective, it shows how biological and technical resources are wasted in material extraction and harvesting, the production of goods, and consumption or use by humans. The analysis of waste focuses on the material flows of non-energy related materials.  The impact to natural systems and energy-related materials is not emphasized.

System Introduction

The linear economy adopts an approach of take, make, use, dispose without considerations to comprised systems, each containing an interconnected set of elements organized around some purpose (De Vries, 2013). A broad understanding of system behavior explains the dependencies, influences, and potential consequences of each decision as it relates to the whole (Holling, 2001). Though the textile and clothing system is primarily concerned with the design, production and distribution of yarn, cloth and clothing, the intricacies and system dynamics specific to the fashion industry are far from basic (Amed, Berg, Brantberg, & Hedrich, 2016). The fashion industry fuels a linear economy with waste greater than $460B of value each year through unsustainable disposal of clothing (Ellen MacArthur Foundation, 2017). This analysis will explore the system described as textile to garment through depiction of linear process, flow of materials, and types of waste by each actor across the supply chain (Franco, 2017).

Read More

Human Perspective

With a population projected to reach 1.2B by 2025, consumerism has played an integral role in the evolution of industrialization, mass production, and values that marry progress and prosperity with compulsive acquisition (Goodwin, Nelson, Ackerman, & Weisskopf, 2008). Consumption signals a supply chain, and it responds through the acquisition of materials, manufacturing, and distribution of goods, creating inefficient use of natural resources, pollutants, and waste (Shah, 2014).

Abraham Maslow, renowned professor of psychology and human behavior, classifies all human efforts as an attempt to fulfill one of five needs. Humans require clothing to fill basic physiological and safety needs. However, the dynamics and influences that connect the linear economy and textile and clothing system are complex because economic performance is tied to human behavior, assessed by the growth and level of real output per person (McAlphin, 2014). Reciprocally, employment is a vital means to realize the income necessary for consumption, both individually and in aggregate terms (McAlphin, 2014). Over twenty-seven million people worldwide are employed in the textile and clothing industry (Amed, Berg, Brantberg, & Hedrich, 2016). Moreover, the system represents seven per cent of the world’s exports in terms of sales: a combined two thirds in North America and Western Europe, and one quarter in China (Cardoso, 2013).

Linear Process

The linear economy embodies a linear process because materials flow in one direction, with sub-optimal utilization of materials and energy, and a shortened life cycle (Varney-Wong, 2016). The textile and clothing system is a linear process as depicted in Figure 1, in which 53 metric tons of fibre are extracted annually to produce clothes that are often used for a short time, after which 73% of the materials are mostly sent to landfill or incinerated (Ellen MacArthur Foundation, 2017). Actors in the textile and clothing system supply chain include: supplier in the extraction and harvesting of raw materials, manufacturer in the production of goods, distribution and transportation as a conduit to the customer, and lastly the consumer who uses and disposes the goods, sustainably or unsustainably (De Vries, 2013). Although design and product commercialization are inputs to the linear process, it is not in the scope of this analysis.

In the United States, clothes are worn one quarter of the global average (Ellen MacArthur Foundation, 2017). The global average life cycle of a garment is two years (WRAP, 2017). The system is characterized by a complex supply chain and is considered to be one of the most polluting industries in the world, with more than 1.2B metric tons a year in greenhouse gas emitted during production alone which is greater than the emissions of end-to-end logistics (Ellen MacArthur Foundation, 2017).

 

Figure 1: Linear Process Model in Textile and Clothing System (Varney-Wong, 2016)

Biological and Technical Resources

The first actor, the supplier, is responsible for raw materials that are categorized as natural and manmade fibres as shown in Figure 2. Raw materials are inputs to processing and manufacturing using the biological resources sun, water, energy, and land to produce non-toxic materials that can biodegrade and safely feed environmental processes. Key biological resources are cotton and wool where yields are more than 26 mega tonnes and 2 mega tonnes respectively (Cardoso, 2013). Manmade or technical resources are not suitable for the biosphere and cover synthetic materials such as nylon, a polyester derived from petrochemicals, or regenerative cellulose materials that are manufactured from wood fibres (Cardoso, 2013). Technical resources include design, equipment and machinery, capital, data, and labor as inputs to create manmade fibers (Maia, Alves, & Leao, 2013). Blends are also used to give the fabric desirable qualities like breathability,

 

Figure 2: Raw Materials, Biological, and Technical Resources (Cardoso, 2013)

The volume of the world’s fiber production for the textile and clothing system in 2012 was approximately 88.5 mega tonne, from which 56 mega tonne were manmade, of which 40% was polyester, and 32.5 mega tonne natural fibre, of which 80% was cotton (Cardoso, 2013). The use of manmade fibre represents 64% of overall production, primarily by low cost clothing or fast fashion, and propensity to consume in developed countries (Cardoso, 2013). It is predicted that by 2030, the fashion industry will use 115 million hectares, a 35% increase in land for cotton, forest for cellulosic fibers, and grassland for livestock (Snoek, 2017).

The second actor comprises production and manufacturing, that includes processing to fibre raw materials, spinning, weaving, knitting, coloration, finishing (cutting, sewing, quality, pressing), packaging materials, and staging delivery to the consumer. This step uses technical resources of machinery, labor, capital, technology, and data with biological resources like water, energy, and land, yielding a thirty-six percent loss of material waste as a percent of total production as depicted in Figure 3 (Varney-Wong, 2016). Across the industry, only 13% of the total material input is in some way recycled after clothing use (Ellen MacArthur Foundation, 2017).

 

Figure 3: Material Waste as a Percent of Total Production (Varney-Wong, 2016)

The third actor, the consumer, is responsible for use and disposal. Use is defined as washing, drying, ironing, and utilizes biological resources of raw materials, water, and energy. The disposal of clothing has the largest impact on the natural environment via landfill or incineration (Rosa, 2016). While natural fibers like cotton and wool produce methane gas, polyester, the most common non-biodegradable synthetic fiber used in the clothing, can remain in landfill soil for several decades (Rosa, 2016).

Wastes

There are eight types of wastes common to Lean Six Sigma methodologies, a widely adopted best practice in efficient production of goods (Maia, Alves, & Leao, 2013). Across a linear process, T.I.M.W.O.O.D.U. characterizes wastes in transportation, inventory, motion, waiting, over production, over processing, defects and underutilizing knowledge management and people (iSixSigma, n.d.). Additional wastes include untapped human potential, poor design, inappropriate systems, and wasted natural resources (Maia, Alves, & Leao, 2013). All of these wastes are present in the linear process of the textile and clothing system.

The textile and clothing industry relies predominantly on 98 million tonnes per year in non-renewable resources; this includes oil in synthetic fibres production, fertilizers to grow cotton, and chemicals to produce, dye, and finish fibers and textiles (Ellen MacArthur Foundation, 2017). During the growing and extraction of raw materials, 93 billion cubic metres of water annually are consumed, contributing to water scarcity  (Ellen MacArthur Foundation, 2017). During the ‘take’ process step, other wastes include: transportation (energy in picking, extraction to production), inventory (use of land, pesticides, water, energy), motion (inefficient utilization of human labor), waiting (watering takt time, equipment, and human labor), over processing (excessive pesticides, preservatives), defects (waste water pollution, air emissions, poor demand forecast biased by mass-consumption, data quality, poor design), and underutilization (poor bio-design and poor use available technology to aid in harvesting and extraction) (Maia, Alves, & Leao, 2013) (Cardoso, 2013).

Textile and clothing manufacturing demands huge amounts of energy and water, particularly in wet processing. Wastewater must be properly treated from discharge to remove hazardous chemicals, including mutagens, carcinogens, and teratogens, that cause serious environmental damage including exhaust gases, waste water, and the fabrics (Franco, 2017). Also, synthetic fibers, mainly out of petrochemical base, lead to resource use and GHG emissions from processing fossil fuels (Cardoso, 2013). Poor labor standards and conditions pervade global textiles supply chains including ethical issues of child labor, poor safety infrastructure, forced labor, in addition to low wages and extended work days (Franco, 2017).

During the ‘make’ process step, other wastes include: transportation (energy moving products and information, distribution to consumer), inventory (use of land, chemicals, water, energy, fibre, parts, safety stock, working capital, packaging), waiting (between processes, and for human labor execution), over production (water, energy, noise pollution, dust emissions), over processing (water, energy, excessive chemicals, preservatives), defects (waste water pollution, air emissions, poor demand for energy and water, scrap, data quality), and underutilization (poor leadership making unsustainable decisions, unethical treatment of trading partners, poor bio-design, poor use available technology to aid in smart manufacturing) (Kupsala, 2013).

The consumer may send a waste-ridden demand signal that feeds the linear process during use and disposal. Underutilization of information pertaining to sustainable purchasing, sustainable disposal methods, and total costs of ownership in proper care for clothing, can lead to waste in water, energy, and use of chemicals in washing. Less than 1% of material used to produce clothing is recycled into new clothing, denoting a loss of more than $100B worth of materials each year (Ellen MacArthur Foundation, 2017). High costs are associated with disposal and land filling clothing and household textiles; in the UK the annual cost is approximately $108M (Ellen MacArthur Foundation, 2017). Other wastes include: transportation (energy moving products for early disposal and in landfill), inventory (use of land, water, energy, fibre, working capital tied to having too many garments), and defects (waste water pollution, air emissions, synthetic fibre impact in landfill)(Franco, 2017).

 

Conclusions

The large and growing global population has a predisposition to mass-consume with systems in place to inefficiently manufacture clothing, placing an extreme strain on materials, resources, and natural systems (Funkhouser, 2012). Emphasis is needed to highlight the extent that supply chains can contribute to global sustainability improvements and waste reduction in textile and clothing systems. As pressure for natural resources and price volatility intensifies, system focus must shift to recovery of materials and blends, water and energy usage, reducing hazardous chemical use, and ensuring ethical human rights (Franco, 2017). Ultimately, industry must leverage more efficient and sustainable practices through material lifecycle management, including shrinking or decreasing use, slowing, or closing material loops (Ellen MacArthur Foundation, 2015).

 

References

Amed, I., Berg, A., Brantberg, L., & Hedrich, S. (2016, December). The State of Fashion. Retrieved February 19, 2018, from McKinsey & Company: https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion

Bove, A., & Swartz, S. (2016, November). Starting at the Source: Sustainability in Supply Chains. Retrieved February 15, 2018, from https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/starting-at-the-source-sustainability-in-supply-chains

Cardoso, A. (2013). Life Cycle Assessment of Two Textile Products: Wool and Cotton. Universidade Do Porto, Environmental Engineering.

Chan, T., & Wong, C. (2012). The Consumption Side of Sustainable Fashion Supply Chain: Understanding Fashion Consumer Eco‐fashion Consumption Decision. Journal of Fashion Marketing and Management, 16(12), 193-212.

De Vries, B. (2013). Sustainability Science. Cambridge: Cambridge University Press.

Ellen MacArthur Foundation. (2015, December 9). Towards a Circular Economy: Business Rationale for an Accelerated Transition. Retrieved February 13, 2018, from https://www.ellenmacarthurfoundation.org/assets/downloads/TCE_Ellen-MacArthur-Foundation_9-Dec-2015.pdf

Ellen MacArthur Foundation. (2017, January 12). Retrieved February 13, 2018, from https://www.ellenmacarthurfoundation.org/publications/a-new-textiles-economy-redesigning-fashions-future

Franco, M. (2017). Circular Economy at the Micro Level: Dynamic View of Incumbents’ Struggles and Challenges in the Textile Industry. Journal of Cleaner Production, 168, 833-845.

Funkhouser, D. (2012, April). Population, Consumption, and the Future State of the Planet. Retrieved February 15, 2018, from http://blogs.ei.columbia.edu/2012/04/27/population-consumption-and-the-future/

Goodwin, N., Nelson, J., Ackerman, F., & Weisskopf, T. (2008, January). Consumption and the Consumer Society. Retrieved February 19, 2018, from http://www.ase.tufts.edu/gdae/education_materials/modules/Consumption_and_the_Consumer_Society.pdf

Gracey, F., & Moon, D. (2012, October 7). Valuing Our Clothes: The Evidence Base. Retrieved February 19, 2018, from http://www.wrap.org.uk/sites/files/wrap/10.7.12%20VOC-%20FINAL.pdf

Gutierrez, L. (2010, October). Retrieved February 19, 2018, from PelicanWeb Journal of Sustainable Development: http://www.pelicanweb.org/solisustv06n10page1supp3.html

Holling, C. (2001, August). Understanding the Complexity of Economic, Ecological, and Social Systems. EcoSystems, 4(5), 390-405. doi:10.1007/s10021-001-0101-5

iSixSigma. (n.d.). 8 Wastes of Lean. Retrieved February 20, 2018, from https://www.isixsigma.com/dictionary/8-wastes-of-lean/

Kupsala, H. (2013). Eco-Effective Fashion Theory: How to Implement Cradle-to-Cradle Concept Into Fashion and Clothing Design. University of Lapland.

Liu, J., Dietz, T., Carpenter, S., Alberti, M., Folke, C., & Moran, E. (2007, September 14). Complexity of Coupled Human and Natural Systems. doi:10.1126/science.1144004

Maia, L., Alves, A., & Leao, C. (2013). Sustainable Work Environment with Lean Production in Textile and Clothing Industry. International Journal of Industrial Engineering and Management , 4(3), 183-190.

Marino, A., & Pariso, P. (2016, May). From Linear Economy to Circular Economy: Research Agenda. International Journal of Research in Economics and Social Sciences , 6(5), 270-281.

McAlphin, D. (2014, September 10). U.S. Population and Its Impact on the Environment: Why Curbing Per Capita Consumption Is Not Enough. Retrieved February 15, 2018, from Progressives for Immigration Reform: http://progressivesforimmigrationreform.org/publication/u-s-population-and-its-impact-on-the-environment-why-curbing-per-capita-consumption-is-not-enough/

McAuley, I. (2007, February). Behavioural Economics and Public Policy: Some Insights. Retrieved February 9, 2018, from http://www.ianmcauley.com/academic/bepubpol.pdf

Rosa, A. (2016). Circular Economy in the Clothing Industry: Challenges and Strategies. KTH Industrial Engineering and Management.

Rydberg, A. (2016). Circular Economy Business Models in the Clothing Industry. Uppsala University, Department of Earth Sciences.

Sandvik, I. (2017). Applying Circular Economy to the Fashion Industry in Scandinavia Through Textile-to-Textile Recycling. Monash University, School of Social Science.

Shah, A. (2014, January). Consumption and Consumerism. Retrieved October 10, 2017, from http://www.globalissues.org/issue/235/consumption-and-consumerism

Shankar, A., & Pavitt, C. (2002, July). Resource and Public Goods Dilemmas: A New Issue for Communication Research. The Review of Communication, 251-272.

Snoek, S. (2017). Circular Economy in the Textile Industry. Sweden: Environmental Policy Group.

Strahle, J., & Muller, V. (2017, October 30). Key Aspects of Sustainability in Fashion Retail. Retrieved from Springer Link: https://link.springer.com/chapter/10.1007/978-981-10-2440-5_2

Varney-Wong, J. (2016). The Circular Economy. Retrieved February 16, 2018, Retrieved from http://ingienous.com/sectors/economy/a-new-economic-paradigm-of-prosperity-without-growth/circular-economy/

WRAP. (2017, July). Valuing Our Clothes:The Cost of UK Fashion. Retrieved February 19, 2018, from http://www.wrap.org.uk/sites/files/wrap/valuing-our-clothes-the-cost-of-uk-fashion_WRAP.pdf

Yawson, D., Armah, F., & Pappoe, A. (2009, November). Enabling Sustainability: Hierarchical Need-Based Framework for Promoting Sustainable Data Infrastructure in Developing Countries. Sustainability, 946-959.

.

 

The Social Dilemma of Human Behavior & Sustainable Choices in the Fashion Supply Chain

Introduction

Although the premise of clothing characterizes a rudimentary need (Yawson, Armah, & Pappoe, 2009), the intricacies and system dynamics specific to the fashion industry’s supply chain are far from basic (Amed, Berg, Brantberg, & Hedrich, 2016). The current state of the fashion industry is challenging because factors contributing to its complexities are uncertain and constantly changing (Amed, Berg, Brantberg, & Hedrich, 2016). From the acquisition of raw materials, to manufacturing and distribution for purchase by the consumer, the fashion industry can influence sustainable practices across the global supply chain (Strahle & Muller, 2017).

Sustainability involves changing environmental dynamics that affect dimensions of ecology, economy, socio-politics, and human behavior (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). Research shows an inherent dissension among some fashion consumers (McNeill & Moore, 2015), who “often share a concern for environmental issues even as they indulge in consumer patterns antithetical to ecological best practices” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). An emerging concept in industry is fast fashion, which refers to “low-cost clothing collections that mimic current luxury fashion trends and helps sate deeply held desires among young consumers in the industrialized world for luxury fashion, even as it embodies unsustainability” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012).

Globalization and competition create increased financial and operational pressures in industry to reduce costs (Christopher, Lowson, & Peck, 2004). When paired with growth in human population (Strahle & Muller, 2017), scarcity of natural resources (De Vries, 2013), growth in industry (Amed, Berg, Brantberg, & Hedrich, 2016), advances in technology, consumer trends (Education Bureau, 2017), and human behavior in social dilemmas, the participants in a fashion supply chain may partake in unsustainable business practices (Chan & Wong, 2012). At the intersection of globalization, market competition, fast fashion (Joy, Sherry, Venkatesh, Wang, & Chan, 2012) and sustainability is the social dilemma of fashionable versus durable clothing. This analysis will explore the social dilemma of human behavior and sustainable choices in the fashion supply chain using the context of a pay-off matrix (De Vries, 2013).

Read More

Social Dilemma Assessment

A social dilemma is where interdependent participants face a conflict between the maximizing personal gain and/or a collective interest (Dawes, 1980). As noted by Dr. Robyn Dawes (1980), leading psychologist and researcher, “public goods dilemmas occur when individuals can choose whether to contribute to a common pool that benefits both contributors and non-contributors alike, as long as enough choose to contribute”. Resource dilemmas are slightly different because individuals can decide how much to withdraw for personal use from a common pool that will only be maintained if withdrawals are kept to a minimum (Dawes, 1980). Public goods and resource dilemmas encompass “many of the most critical problems facing humanity, most notably those regarding resource shortages caused by overuse and failures to contribute to the common good” (Shankar & Pavitt, 2002). Moreover, research demonstrates that communication between participants has a significant effect on cooperation rates in these two types of social dilemmas (Shankar & Pavitt, 2002).

Overview of the Pay-Off Matrix

The pay-off matrix offers a way to analyze human behavior in situations of interdependence and conflict (Yawson, Armah, & Pappoe, 2009). As depicted in Figure 1, interdependent positions can range from virtuously cooperative, wherein a gain for one is a gain for the others, to a win-lose competitive position (Dawes, 1980). A decision to maximize individual gain is known as a defecting choice (Dawes, 1980), depicted as “you are the free rider” in Figure 1 (De Vries, 2013). Conversely, a win-win decision (De Vries, 2013) to maximize the gain of the collective is known as a cooperative choice (Dawes, 1980). Furthermore, “at any given decision point individuals receive higher payoffs for making selfish choices than they do making cooperative choices regardless of the choices made by those with whom they interact” (Weber, Kopelman, & Messick, 2004). The cost of the dilemma is that everyone involved receives a lower payoff by making a selfish choice (Dawes, 1980).

 

Figure 1: Pay-Off Matrix in a Social Dilemma (De Vries, 2013)

Pay-Off Matrix Participants in a Fashion Supply Chain

While enduring substantial growth over the past two decades (Strahle & Muller, 2017), the fashion industry has drastically evolved due to retail consolidation, globalization and e-commerce (Amed, Berg, Brantberg, & Hedrich, 2016). It is considered to be one of the most polluting industries in the world (Strahle & Muller, 2017). Industry and trading partners often request for participants to act sustainably (Strahle & Muller, 2017). Participants in a fashion supply chain include suppliers, manufacturers, distributors, retailers, and consumers (Strahle & Muller, 2017).

Theory and Influence in Consumer Fashion Decisions

Martin Christopher, thought leader in supply chain theory and best practice, defines fashion markets as typically exhibiting the following characteristics: short life cycles, high volatility, low predictability and high impulse purchasing (Christopher, Lowson, & Peck, 2004). A key concept in understanding the impulses of consumer purchasing is Maslow’s theory of human motivation (Chan & Wong, 2012). The theory classifies all human efforts as an attempt to fulfill one of five needs (Yawson, Armah, & Pappoe, 2009, p. 951). Figure 2 shows the hierarchical order in which these needs are connected, specifically in decisions that involve buying clothes.

Figure 2: Adaption of Maslow’s Motivational Theory in Fashion-Based Decisions (Yawson, Armah, & Pappoe, 2009, pp. 952-953)

Consumer decisions to purchase fashionable or durable clothing are also influenced by body type, age, family, lifestyle, peers, society, and consumer socialization (Yang, Song, & Song, 2017), or amount of disposable income that allows for considerations of quality and durability (Education Bureau, 2017). Other influences include values from one’s culture, environment, and value orientation (Education Bureau, 2017, p. 16). Lastly, frequency of wear and care instruction (McNeill & Moore, 2015) may influence the need for fashionable, inexpensive, and of lesser quality clothing versus durable clothing (Education Bureau, 2017, pp. 47-51).

Perspectives in the Pay-Off Matrix

Using the interdependent participants in a fashion supply chain, the over-arching perspectives and the decision to cooperate or defect in sustainable practices are shown below in Figure 3.

Figure 3: Pay-Off Matrix in a Fashion Supply Chain (De Vries, 2013)

Cooperate, Cooperate: A Win-Win Solution

When all participants cooperate, all are aligned in sustainable practices (Yang, Song, & Song, 2017). Because all parties benefit from this scenario, resolutions to the conflict are likely to be accepted voluntarily (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). In this scenario, the supplier uses ethical growing conditions, labor practices, and pricing mechanisms that are passed onto the manufacturer (McNeill & Moore, 2015). The product is manufactured with considerations in sustainable design, efficient use of water and energy in textile process, chemical-free treatments, and lean waste reduction (Shankar & Pavitt, 2002). Distributors and retailers respect considerations of packaging waste, energy use in transportation and logistics (Christopher, Lowson, & Peck, 2004) and the ethical treatment of trading partners. Most importantly, the consumer uses sustainable participation across the supply chain to guide purchasing decisions. After purchase, the consumer limits the use of chemical detergents, water and energy use in care, early disposal and landfill waste, and shares the experience with others in his or her circle of influence (Yang, Song, & Song, 2017). The costs of quality and sustainable considerations are shared and accepted by each participant (Jung & Jin, 2014).

Cooperate, Defect

In this scenario, the consumer adheres to sustainable practices while the supplier, manufacturer, distributor, and retailer defect. The consumer receives a small positive individual outcome that is immediate and a large negative collective outcome (the depletion of future resources) is delayed (Shankar & Pavitt, 2002). The defectors receive a higher payoff in the short run no matter what decisions all other individuals make (Dawes, 1980). The result is that the consumers suffers or loses (Dawes, 1980). The defecting choice is known as the “dominant strategy” (Dawes, 1980). Because the dominant strategy produces less preferred outcomes, it is known to be a deficient outcome (Dawes, 1980). The costs of sustainable considerations are born by the consumer and common resource pools (Jung & Jin, 2014).

Defect, Cooperate

In this scenario, the consumer defects and is “a free-rider” (De Vries, 2013), while the supplier, manufacturer, distributor, and retailer adhere to sustainable practices. The consumer pursues individual short-term interest regardless of the impact to common resource pools in the long run (Chan & Wong, 2012). Common pool resources are available to all participants such as air, water, energy, and are increasingly in short supply (Shankar & Pavitt, 2002). When the consumer defects, resources are still available without any personal cost borne. The collective actively participates in aforesaid sustainable practices across the supply chain.

Defect, Defect: The Commons Tragedy

In this scenario called the commons tragedy (De Vries, 2013), all participants in the supply chain defect causing unsustainable outcomes in decision making as depicted in Figure 4. The concept echoes that “open-access common resource pools are exploited until the very last unit as long as someone else pays for it” (De Vries, 2013, p. 390). In a widely cited paper entitled The Tragedy of Commons (1968), the biologist Hardin suggested there is an inherent tendency amongst humans to overexploit such a shared, common, or collective resource” (De Vries, 2013, p. 390). Research related to the commons tragedy “emphasizes the role of factors that may predispose people to take risks in social dilemmas” including aforementioned theory and influence in consumer fashion decisions (Weber, Kopelman, & Messick, 2004). As Figure 4 suggests, participants may differ systematically in the way each arrives at the same decision to defect.

 

Figure 4: Unsustainable Outcomes of Decisions Made by Participants in the Fashion Supply Chain (Strahle & Muller, 2017)

Conclusion

Sustainability and ethical conduct has gained increasing importance in the fashion industry (Joy, Sherry, Venkatesh, Wang, & Chan, 2012). Many fashion companies are focusing on tactical efficiencies, implementing changes to their core operations “from shortening the length of the fashion cycle to integrating sustainable inno­vation into their core product design and manu­facturing processes (Amed, Berg, Brantberg, & Hedrich, 2016). However, although companies realize that trendy, affordable fashion raises sustainable concerns, the pressure to meet consumers demands is still influencing industry behavior (Amed, Berg, Brantberg, & Hedrich, 2016).  As demonstrated in this analysis, sustainable decisions in the textile and fashion industry can be controlled along the supply chain (Strahle & Muller, 2017). Specifically, “retailers are the link between the supplier and the consumers. They could be the ecological gatekeepers and help the relevant partners along the supply chains incorporate sustainability into the business” (Yang, Song, & Song, 2017). While the fashion supply chain and consumers continue to evolve in the progression of whether to make and/or consume fashionable or green products, the challenge to connect and meet “deeper elements of value, such as high ethical standards in sourcing, efficient use of materials, low-impact manufacturing, assembly, and distribution,” (Joy, Sherry, Venkatesh, Wang, & Chan, 2012) will remain challenging for decades to come.

References

Amed, I., Berg, A., Brantberg, L., & Hedrich, S. (2016, December). The State of Fashion. Retrieved October 29, 2017, from McKinsey & Company: https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion

Chan, T., & Wong, C. (2012). The Consumption Side of Sustainable Fashion Supply Chain: Understanding Fashion Consumer Eco‐fashion Consumption Decision. Journal of Fashion Marketing and Management: An International Journal, 16(2), 193-212. doi:10.1108/13612021211222824

Christopher, M., Lowson, R., & Peck, H. (2004). Creating Agile Supply Chains in the Fashion Industry. International Journal of Retail Distribution Management, 32(8), 367-376. doi:10.1108/09590550410546188

Dawes, R. M. (1980). Social Dilemmas. Annual Review of Psychology, 31, 169-193.

De Vries, B. (2013). Sustainability Science. Cambridge: Cambridge University Press.

Education Bureau. (2017, November 13). Consumer Behavior in Clothing Choices and Implications. Retrieved from www.hkedcity.net/res_data/edbltr-te/1-1000/…/2_Consumer_eng_Oct_2011.pdf

Joy, A., Sherry, J., Venkatesh, A., Wang, J., & Chan, R. (2012). Fast Fashion, Sustainability, and the Ethical Appeal of Luxury Brands. Fashion Theory, 16(3), 273-296. doi:10.2752/175174112X13340749707123

Jung, S., & Jin, B. (2014). A Theoretical Investigation of Slow Fashion: Sustainable Future of the Apparel Industry. (D. E. Kempen, Ed.) International Journal of Consumer Studies, 38(5), 510-519. doi:10.1111/ijcs.12127

McNeill, L., & Moore, R. (2015, May). Sustainable Fashion Consumption and the Fast Fashion Conundrum: Fashionable Consumers and Attitudes to Sustainability in Clothing Choice. International Journal of Consumer Studies, 39(3), 212-222. doi:10.1111/ijcs.12169

Shankar, A., & Pavitt, C. (2002, July). Resource and Public Goods Dilemmas: A New Issue for Communication Research. The Review of Communication, 251-272.

Social Dilemma. (n.d.). Retrieved November 7, 2017, from Wikipedia: https://en.wikipedia.org/wiki/Social_dilemma

Strahle, J., & Muller, V. (2017, October 30). Key Aspects of Sustainability in Fashion Retail. Retrieved from Springer Link: https://link.springer.com/chapter/10.1007/978-981-10-2440-5_2

Sustainable Apparel Coalition. (2017, November 7). The Higg Index. Retrieved from Sustainable Apparel Coalition: https://apparelcoalition.org/the-higg-index/

Weber, J. M., Kopelman, S., & Messick, D. M. (2004). A Conceptual Review of Decision Making in Social Dilemmas: Applying a Logic of Appropriateness. 8(3), pp. 281-307.

Yang, S., Song, Y., & Song, S. (2017). Sustainable Retailing in the Fashion Industry: A Systematic Literature Review. Sustainability, 9(7), 1266. doi:10.3390/su9071266

Yawson, D., Armah, F., & Pappoe, A. (2009, November). Enabling Sustainability: Hierarchical Need-Based Framework for Promoting Sustainable Data Infrastructure in Developing Countries. Sustainability, 946-959.

Sourcing Complex Professional Services in a Competitive Supply Chain

 

A Review of GlaxoSmithKline Case Study  

Quality is one of the most important factors for companies in the relationship between suppliers and customers (Ackerman, 2007). It requires integration of processes and data harmonization in a complex, global environment. Critical processes and strong relationships develop mutually beneficial outcomes, trust, strength and competitive advantage. We live in a time where globalization has forced industries to adopt cost efficiency strategies in order to compete. Top-line spend is being scrutinized and the legal industry is no exception to the new normal. In 2012, more than 25% of companies in the U.S. and UK spent over $5 million annually on litigation costs, and among healthcare companies that proportion was estimated to be 30%–40% (Gardner, H., & Silverstein, 2016).

Because professional services have become such a prominent cost of business, executive leadership has pressured the supply chain function to enhance the efficiency of spending. Professional services like legal counsel have historically been defined as too complex to transition to alternative billing arrangements that were ordinarily reserved for predictable, simple items. Complex legal services hinge on quality and explicit expertise that are determined on a case-by-case basis.

This case study examines an organization’s process for introducing competition and alternative billing arrangements for complex professional services using innovative sourcing techniques and Six Sigma methodology to monitor and control performance.  The goal of this analysis is to: 1) evaluate alternative sourcing and the utilization of reverse auctions, 2) examine the successes and gaps of the GlaxoSmithKline (GSK) sourcing and procurement model for legal services, 3) determine if the GSK model can be applied towards other complex services, and 4) recommend improvements using the case study of GlaxoSmithKline: Sourcing Complex Professional Services (Gardner, H., & Silverstein, 2016).

Read More

Situation Audit

In recent years, the legal industry has experienced a global paradigm shift in the delivery model for legal services (Kane, 2017). This includes a consolidation among law firms, change in size, culture, and regulatory policies that encourage more competition and new entrants. While legal expertise is a necessary expense of organizations, it is historically viewed as a cost center. The 2008 economic downturn created additional competition among law firms as pressure to reduce costs increased and inadvertently diminished client loyalty. As described in the business case, “the size of the legal services market in the U.S. had increased by 4%–5% annually in the years preceding the economic crisis, it contracted by 3% in 2009” (Gardner & Silverstein, 2016).

In September 2008, the GSK law department appointed a new General Counsel who was a proponent of change and believed that the hourly-rate billing system inherently promotes inefficiency. His goal was simple: to reduce costs while increasing quality and value creation. The department’s focus scaled to include a Global External Legal Relations Team (GELRT) and an Outside Counsel Selection Initiative (OCSI). GELRT moved over three-fifths of outside counsel assignment to value-based fees (VBF) which is an incentive based payment structure that encourages integrity and six sigma efficiency in billing monitored and controlled through defined KPIs. Within 2 years it achieved a savings of nine figures (Silverstein, 2014). The over-arching message was that “if firms are willing to put some ‘skin in the game’ to help us meet cost savings goals” they should be rewarded with the value they provide to GSK (Salopek, 2012).

The focus of OCSI was to leverage best practice in e-Sourcing and Procurement using an e-reverse auction program. Based on case-specific criteria, GSK uses a mini-RFI tool that allows it to view an outside firm’s qualifications for the intended case. GSK Legal can then aggregate KPIs to ascertain the firms’ quality as well as their ability to adhere to VBFs. Additionally, the OCSI reverse auction process or “Sourcing Room,” attempts to neutralize aggressive fee competition among the qualified law firms by elevating value creation and fit per case assignment (Salopek, 2012).

In the context of this analysis, GSK has been served with a complaint wherein “A patient, Catherine Whitmore, died of an aortic aneurysm while on our blood pressure medication,” and the responsive pleading is due in just 20 days; an extension allowing more time to prepare a response is unlikely (Gardner & Silverstein, 2016).  A recently hired attorney must act quickly and within the defined processes adopted by GSK including preparing for a reverse online-auction as part of the OCSI process. Throughout the case and while awaiting responses from the “Sourcing Room”, she questions the purpose, process, integrity, and intended outcomes of GSK’s way of working:

“This system reminds me of buying office supplies or landscaping services. Can it really be applied to a complex legal case like this one? Why can’t we just engage the same firm that we worked with last time? Why would this new system encourage firms to use their best lawyers and ask for less? How could law firms suddenly afford to devote more work from their top brass for less money? Where would all of these savings come from? Even if the reverse-auction system saves money, we are paying it back in increased risk as we sit on our hands and watch our response date inch closer. I thought I’d return as the hero who doles out work, not the villain who pushed the legal industry into online bidding wars.”

Problem Identification

The fundamental questions that must be answered are: 1) does the reverse auction system reduce costs while ensuring quality,  2) what are the risks in using reverse auctions for sourcing and procuring professional services, and 3) can reverse auctions be applied to complex legal cases and yield successful outcomes? To better understand the framework of reverse auctions, the impact of compensation models on cost savings will be examined. This includes the impact on supplier relationships and how GSK’s processes may be applied to other complex services.

Alternatives

  1. Competitive Pressure

The legal industry presents complexities in procurement requiring sophisticated coordination of suppliers based on specialized criteria. Competitive pressures are forcing traditional law firms and corporate legal departments to minimize costs, increase flexibility and expand their in-house capabilities. Participation in legal process outsourcing (LPO) has become vital to controlling costs (Kane, 2017). It transfers the work of attorneys, paralegals and other legal professionals to external suppliers, both onshore and offshore. Therefore, “supplier and customer relationship management processes can enhance or inhibit competition” (Sadikoglu, 2014). Using a more agile e-sourcing and procurement strategy, GSK has achieved price advantages by leveraging a Six Sigma approach to managing costs and quality, and using alternative fee agreements, reverse auctions, and VBF to form value-add partnerships. Within lean constraints and a “buyers market”, GSK must quickly respond to changing market needs with no room for error. Overall efficiency increases because “each firm in the supply chain can maximize its competitive advantage through strategically focused resource allocation” (Christopher, 2011). Lastly, competitive pressure introduces a need for increased awareness and intelligent, real-time information flow.

  1. Operational Pressure

The aforementioned process coordination of procuring firms with highly specialized areas of expertise adds a layer of complexity that makes quality and cost control more difficult. In a time-sensitive environment, using a reverse auction process may contradict the need for greater speed and efficiency. GSK must support powerful mobile devices, software-as-a service, and secure, web-based technology to facilitate its way of working and global infrastructure. Advanced communication solutions that align with the “virtual firm” are becoming increasingly necessary in the legal market (Gehrke, 2007). The efficiency of process management emphasizes activities not results, where “proactive approaches to quality management to reduce variations in the process and improve the quality of the product” comes with a cost (Littlefield, 2012). Balancing the costs of operational efficiency can create pressures for GSK in obtaining quality legal services.

  1. Financial Pressure

The stability of the Pharmaceutical Industry and Financial Institutions can affect the financial health of GSK and its supply chain. Competing in a global environment has forced many companies to closely monitor their suppliers’ economic viability (Littlefield, 2012). GSK depends on timely responsiveness and counsel from suppliers. If in the event firm deadlines are missed due to disruption, GSK is left vulnerable.

Additionally, GSK faces pressure not only to reduce costs, but it must transform the perception of a corporate legal department from a cost center to value-add activity. As the cost of legal services continues to rise, GSK faces pressure to innovate legal delivery models, while closely monitoring their efficiency.  Utilizing e-sourcing and reverse auction techniques can provide “higher cost efficiency, larger scale, and possibly lower financial costs such as borrowing costs and tax rates” (Fishell, 2012). However, setup and ongoing costs, any skilled labor costs, and the total costs of quality and risks should be considered, which may increase GSK’s total costs for legal services.

  1. Regulatory & Ethical Pressures

“Domestic law firms are expanding across borders, collaborating with foreign counsel and forming intercontinental mergers, erasing traditional boundaries on the geographic scope of law practice” (Kane, 2017). Technology and globalization are disrupting the speed at which automation of legal processes and emerging e-sourcing and procurement tools are being adopted to remain competitive.  This exposes GSK to a broader Regulation of the Pharmaceutical Industry and legal sector, including quality and safety, ultimately increasing pressure for the company. As referenced in the case, “new governmental policies favoring deregulation and liberalization, such as the Legal Services Act 2007 in the UK, encouraged more competition in the legal market and provided a new route for consumer complaints about lawyers” (Gardner & Silverstein, 2016). GSK faces ethical pressure by engaging in foreign territories with suppliers that may have differing business practices. Moreover, GSK must have full-disclosure of possible defects in its products, some of which may be unknown at the time of release. The catalyst for the complaint in this case is the possibility that a GSK product contributed or caused a patient’s death. While GSK can use legal contracts to try and shield itself from any financial liability due to product implied guarantees or misuse, it still has a regulatory and ethical obligation to ensure product conformance to protect human life including all costs associated with auditing, monitoring, and ensuring product quality compliance

Critical Issues

A critical component of GSK’s success not only lies in its processes and use of DMAIC, but in its creation of a framework in which institutional change can thrive. This takes leadership, vision, structure, and engagement. Despite the assurance from GSK staff that the OCSI approach drives down costs and improves the quality of work by systematically increasing the rigor in the procurement process, the new attorney insisted on analyzing and comparing the competing firms’ bids. Her uncertainty speaks to the critical issues in this case: 1) organizational leadership in institutional change, 2) the utilization of reverse auctions in complex services, and 3) qualitative analysis of cost savings, supplier value, and risks.

Leadership is a critical component of Sourcing & Procurement because it influences, directs, and manages the resources of a supply chain, ultimately impacting a firm’s profitability. The problem for many organizations is that procurement is often perceived as a tactical function rather than a strategic function. For example, even in the P2P process, procurement professionals begin sourcing after a need has been identified. As quoted by GSK’s new General Counsel in 2008, “Before I came to GSK, legal spend had not been managed centrally, and individual lawyers responsible for the matters often didn’t have budgets. The firms often knew more about what GSK spent with them than GSK knew about what it spent at the firms, so GSK was not leveraging its spending power” (Gardner & Silverstein, 2016).  The transformation of how professional services were managed involved detailed planning and managing through process and KPIs. Resistance to change can make it difficult for organizations to adopt new strategies such as redesigning work processes, adopting new organizational reporting structures or establishing new pricing strategies. In addition, many firms are set in the “we’ve always done it that way” mentality that inhibits creative alternatives to procuring professional services.

Analysis

In the context of sourcing and procuring professional services, the GSK model for strategic action and leadership involved promoting a vision, setting strategies, defining goals, providing direction, and adopting a Six Sigma approach to performance management. A scorecard was thoughtfully crafted for each matter, weighting key firm selection factors including matter-specific credentials, experience in jurisdiction, along with pricing (Salopek, 2012). GSK’s e-reverse auctions involve a competitive bidding process where multiple law firms compete for the same project. This can drive price competition for large-scale legal projects such as mergers and tax filings. While there are risks of collusion and price tampering amongst competing firms, the over-arching mantra is that if the prices are expected to be lower, then firms “need to be increasingly savvy with their resources in order to compete” (Clarke, 2015). GSK viewed reverse auctions as an opportunity to create value and govern productive partnerships, not focus just on price which is seldom representative of total cost. The lowest bid was not always selected (Salopek, 2012).

e-Reverse auctions can be used to source and procure any complex professional service. It takes leadership (aforementioned), framework and process, and robust analytics. Using the GSK model, the RFI tool provided conditions around expertise and quality performance, where suppliers derived clear scope to propose solutions to an expected and known end result. When coupled with performance measures to help drive delivery value, satisfaction, and opportunities for improvement, these internal control mechanisms – by design- minimized mistakes, promoted sound decision making backed by data, and rewarded good performance both within and outside the organization (C.I.P.S., 2017).

By the end of 2011, more than 68 percent of GSK’s external spend was through VBFs, resulting in major savings. “One reason for this success was Dan Troy’s <new General Counsel> tone from the top,” (Salopek, 2012). He backed his VBF directive by connecting the annual bonus objectives of law department personnel to GELRT’s quantifiable cost savings. He also participated in global broadcasts to the Law Department communicating progress toward goals. This level of engagement was crucial to OCSI’s success, where the willing participation of all parties was needed in the e-reverse auction process. Since its launch, 57 OCSI events have been completed to date, resulting in total estimated savings of over $32.6 million when the winning firm’s budget (based on hourly rates) is compared to its final VBF offer, and over $21 million in savings when the winning firm’s initial VBF offer in the Sourcing Room is compared to its final VBF offer. These savings are a subset of overall, even more substantial VBF savings” (Salopek, 2012).

While the qualitative analysis of cost savings appears favorable, one must consider the supplier value and risks in using reverse auctions. The two most commonly voiced criticisms directed against reverse auctions are that they do not support strategic goals and do not encourage long-term supplier engagement.  In fact, many might argue that suppliers do not like them. Typically, reverse auctions are designed for routine or predictable purchases that “feature little collaboration, shorter term contracts, products with common specifications and little complexity, and purchases where there are savings opportunities” (Gehrke, 2007). Some view reverse auctions as transactional in nature and, contrary to GSK’s mindset, highly focused on obtaining favorable pricing where “strategic relationships with suppliers rarely meet these criteria” (Clarke, 2015). However, at some point, particularly in the search for specific know-how and execution, price will cluster and a baseline will emerge. If consistent pricing at market-value is assumed, I’d offer that reverse auctions are the perfect forum to steer focus toward expertise and value-add services. This would, for all intents and purposes, be the perfect marriage for e-sourcing complex services.

Recommendations

This case illustrates a deep-seated challenge for procurement departments: how to strike the subtle balance between quality, cost and managing complexity. GSK considered new ways to generate efficiency by integrating leadership, DfSS processes and rigorous control systems, and by improving the way it leads interaction with global suppliers and trading partners. GSK’s integrated processes ensure quality specifications are met on a per-case basis. With active management, it can assume best practice processes and guarantee a process control system (measure, analyze, improve, monitor, control) and favorable outcomes based on a proven track-record.

Communication and connectivity are a vital component of its strategy. A challenge specific to GSK’s legal department is to maintain its success through the necessary conduit of infrastructure…SRM, CRM, voice, data centers, and connectivity. Before GSK makes this investment, I’d recommend prioritizing where the highest percentage of interaction takes place and where a solution can have impact across multiple areas (cost savings, revenue growth, and increased productivity). For example, GSK can consume communications services on a utility pricing model or proven lower TCO with leasing, deferring a pricey capital investment. This would provide scalability and faster expansion of infrastructure as needed and give GSK advanced communication technology to sustain competitiveness.

GSK leadership should continue to support initiatives with its suppliers that promote teamwork, close internal communication, and developing a cooperative culture that fosters trust and collaboration. As supply chain complexity and off-shore outsourcing continues to increase, the need for visibility will require even more enhanced collaboration and real-time data to measure GSK’s performance. This may be difficult for GSK to achieve because relationships, particularly across global and cultural boundaries, are the most difficult to manage (Fishell, 2012).

Lastly, I’d recommend GSK scale its methodology for all professional services. It should continue to embody procurement best practice as described by the Chartered Institute for Purchasing & Supply where, “The supplier-buyer relationship between supply chain members requires that quality start at the top. That is, it is imperative that company visions, goals and strategies be aligned for the betterment of both companies. Joint projects, shared technology, buyer-supplier councils, and collaborative relationships can enhance the relationship. The end result is a culture of continuous improvement throughout the supply chain, and as a result, a highly effective, competitive one.” (C.I.P.S., 2007)

Conclusion

The sourcing and procurement of complex professional services continues to be an on-going area of development for many organizations. Evolving market demands, the shifting legal marketplace, deregulation, and cost reduction are all contributing to the need for innovative solutions in a digitized world. With increased competition across the legal landscape, utilizing e-reverse auctions is a way to achieve cost savings, but not at the expense of service and value differentiation.  In this fair forum, clients like GSK are empowered with the pricing of legal matters, where previously these decisions were dictated by law firms. Just like globalization of other goods and services, “a ‘buyer’s market’ for legal services is bringing increasing demands from clients,” and forcing the legal firms to evolve into a “more nimble, leaner competitors with greater pressures for efficiency” (Abbott, 2016).

 

References

Abbott, M. (2016, January). Georgetown Law Review: 2016 Report on the State of the Legal Market. Retrieved April 19, 2017, from h https://www.law.georgetown.edu/news/2016-report-on-state-legal-market.cfm

Ackerman, K. (2007).  Relationships for Supply Chain Success. Retrieved April 19, 2017, from http://www.supplychainquarterly.com/topics/Strategy/scq200704book/

Christopher, M. (2011).  Logistics and Supply Chain Management, 4th Edition. Harlow: Pearson Education Limited.

Clarke, P. (2015, June). Reverse Auctions are Here to Stay for Law Firms. Retrieved April 19, 2017, from http http://blogs.findlaw.com/strategist/2015/06/how-to-deal-with-a-competitive-bidding-process.html

Fishell, J. (2012, May 31). Maintain Quality in a Complex Supply Chain With Better Information Management. Retrieved April 22, 2017, from http://www.supplychainbrain.com/content/general-scm/sc-analysis-consulting/single-article-page/article/maintain-quality-in-a-complex-supply-chain-with-better-information-management/

Gardner, H., & Silverstein, S. (2016). GlaxoSmithKline: Sourcing Complex Professional Services. Harvard Business Review, Harvard Business School. 9-414-003.

Gehrke, A. (2007, January). Reverse Auctions: Crusade or Curse? Retrieved April 19, 2017, from http://www.appliedclinicaltrialsonline.com/reverse-auctions-crusade-or-curse

Ideson, P. (2016, May). Crack the Code to the Successful Procurement of Legal Services, with Silvia Hodges Silverstein. Retrieved April 19, 2017, from http://artofprocurement.com/legalservices/

Kane, S. (2017, April). 10 Trends Reshaping the Legal Industry. Retrieved April 19, 2017, from https://www.thebalance.com/trends-reshaping-legal-industry-2164337

Littlefield, M. (2012, April). Supplier Quality Management: A Risk Based Approach. Retrieved April 19, 2017, from http://blog.lnsresearch.com/bid/136869/Supplier-Quality-Management-A-Risk-Based-Approach

Sadikoglu,  E.  (2014). The Effects of Total Quality Management Practices on Performance and the Reasons of the Barriers to TQM Practices. Retrieved April 23, 2017, from https://www.hindawi.com/journals/ads/2014/537605/

Salopek, J. (2012). ACC Value Challenge: Committed Leadership Combined With Technical Innovation. Retrieved April 22, 2017, from https://www.acc.com/valuechallenge/valuechamps/2012champ_profile61.cfm

Silverstein, S. (2014, May). Buyers, Influencers, and Gatekeepers. Retrieved April 20, 2017, from http://www.silviahodges.com/wp-content/uploads/2011/09/2014-NYLJ-Legal-Procurement-.pdf

The Chartered Institute for Purchasing and Supply (2007). Contract Mangement Guide. Retrieved April 22, 2017, from https://www.cips.org/documents/CIPS_KI_Contract%20Management%20Guidev2.pdf

 

 

 

.