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IJOPM 24,12

Achieving an optimal global versus domestic sourcing balance under demand uncertainty
Byoungho Jin
Oklahoma State University, Stillwater, Oklahoma, USA
Keywords Garment industry, Sourcing, Demand management, Uncertainty management, Distribution and inventory management Abstract As manufacturers face demand uncertainty and new retailing practices, such as lling frequent, small replenishment orders, agility has become an important competitive tool. By sourcing globally, manufacturing rms can reduce production costs, but may not be agile enough to meet retailers needs on a timely basis. To minimize the cost/agility trade-off, many rms are combining global and domestic sourcing. However, factors to be considered for mixed strategies have not been suggested. Based on Bucklins concepts of postponement and speculation, this study tried to nd the ideal point, I, at which the optimal amount of global and domestic sourcing can be formulated considering the total cost and delivery time simultaneously. In mixing domestic and global sourcing to reach the optimum prot, this study provided four conditions under which the larger portion of domestic sourcing can be formulated: greater level of demand uncertainly, information and manufacturing technology, local subcontractor clusters, and long-term relationship with a subcontractor.

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International Journal of Operations & Production Management Vol. 24 No. 12, 2004 pp. 1292-1305 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570410569056

Global sourcing has become an increasingly important part of a rms competitive strategy and is considered a critical tool of rms seeking to achieve competitive advantages (Frear et al., 1992). As rms are more interrelated than ever before, todays competitive advantage is not solely attributed to competencies of a single rm. Manufacturers, therefore, have to be keenly aware of the current practices of retailing, under which their strategies should be developed. Traditionally, manufacturers lled infrequent bulk orders from retailers by carrying out assembly in the least costly plant, as long as its quality was adequate for the market. Under this system, the retailer bore the risk of holding inventory. To minimize the risk of holding inventory, many retailers are beginning to request frequent, small replenish shipments based on real-time sales information provided by the information technologies of bar coding and EDI (electronic data interchange). This practice, pioneered by Wal-Mart, has been introduced as lean retailing (Abernathy et al., 1999) and adopted by mass merchandisers, specialty retailers, and, most recently, automobile dealerships. In a lean retailing world, agility, the ability to respond quickly to changing consumer needs, has become a critical factor in sustaining a competitive advantage. Lean retailing makes manufacturing rms that utilize a global sourcing strategy face the dilemma of balancing the benets of cost effectiveness with the benets of agility, the inherent limitations of offshore production (Abend, 2000). That is, by sourcing globally, manufacturing rms can reduce production costs, but may not be agile enough to meet retailers needs on a timely basis. To minimize the cost/agility trade-off, many rms are using global and domestic sourcing simultaneously. However, even though the optimal balance of global and domestic sourcing

is signicant to protability, there has been little attention paid to this topic by academia. This study identies relevant factors for rms seeking the proper global versus domestic sourcing balance in order to optimize performance (i.e. prot) while maintaining agility. For this purpose, the author reviews US apparel manufacturing rms. The apparel industry, one of the oldest sectors of manufacturing in the world, has been a classical example for economists going back to David Ricardo. An understanding of the responses of apparel manufacturers to global sourcing opportunities and challenges may provide insight for other industries considering global sourcing under lean retailing practices. The author has chosen to review US apparel manufacturing practices because the USA is one of the countries in the world that source globally. For example, US apparel manufacturers source 88 percent globally for domestic consumption (Levaux, 2000). While the purposes of global sourcing go beyond cost savings, such as better quality, this study focuses on the rms using global sourcing primarily for cost advantage. This study consists of four parts. It begins with the characteristics of apparel products and production in a global commodity chain and explains why agility has become a new competitive advantage under lean retailing. The next section deals with principles of postponement and speculation conceptualized by Bucklin (1965) as a theoretical background in order to understand the optimum mix of sourcing strategies. By combining a review of the literature with empirical case studies, the author identies various factors apparel manufacturers consider when making the balanced sourcing decision. Finally, implications for research and practices are presented. Apparel products and production in the global commodity chain Unlike the car and electronic industries, which have often been favorite examples for prior studies in production, apparel product manufacturing has unique features (Suh et al., 2002): . Market instability: Due to seasonal and fashion factors, demand of apparel product uctuates. Even though a retailer may not sell all electronic items in one season, this does not create difculties because it has stable product life cycle. However, the apparel retailer loses the selling period if the season or the fashion is over, making forecasting demand critically important. . Numerous SKU (stock keeping unit) in a season: SKU is the most detailed level of product specication. The SKU is a unique product code identifying a specic manufacturer, color, fabric, style and size. Unlike other manufacturers, an apparel company develops numerous SKUs in a season, with an average of 15,000 SKUs in its collection (Abernathy et al., 1999). Most manufacturers coordinate their seasonal lines so the retail customer can mix and match. The combination of different sizes, colors, styles, fabrics, and price lines for the consumer forces retailers to carry an enormous range of different products. The product assortment is critical to maximizing selling opportunities. Thus, effective merchandising management begins at the SKU level, not the product level. . Subjective criteria: While we can evaluate the features of a computer based on ram, hardware capacities, etc., evaluation of apparel items is extremely

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subjective because it depends on a persons taste, culture, and aesthetic standards. This makes it difcult to estimate demand. For the same reason, price has a relatively unimportant role in apparel products compared to electronic products (Leigh and Gabel, 1992). This leads consumers to rely more on extrinsic cues (i.e. brands) to assess an apparel item. Limited automation and computerization: Apparel is made of exible materials (i.e. fabrics) and the intricate nature of cutting and sewing apparel makes it difcult to introduce laborsaving technology. CAD and CAM technology systems have been developed and introduced at the most sophisticated levels, but are not yet practical for the majority of apparel manufacturers. Since apparel production requires more labor than other industries, production in lower-wage countries can save a signicant portion of production costs compared to other industries. Combination of high-and low-technologies: The large number of product combinations (identied by SKU code) in a season, together with limits on selling prospects, requires the planning and coordination of far-ung production units and retail merchandising outlets. Highly developed communication and integrated tracing systems are required to respond to changing market demands in a timely manner. Therefore, the image of the apparel manufacturing industry as entirely low-tech is false. While the entry barrier of apparel production tends to be low compared to other industries, it requires the highest level of management technologies. Wide variety of products from basic to fashion items: Apparel items can be classied into three categories: fashion, fashion-basic products, and basic products (Abernathy et al., 1999). Depending on the product characteristics, some items, like socks, can be treated as a commodity that allows standardized volume production. Other items, like business suits, lend themselves better to small batch instead of volume production. Therefore, economies of scale cannot be applied to every apparel item.

These unique features of apparel products require a different approach to global sourcing than that used by the automobile and semiconductor industries. Automobile and semiconductor manufacturing, typical producer-driven chains, primarily relies on technology (Geref, 1994, 1998). It is important, therefore, that producers keep technology within their control. That is why the production system of the producer-driven commodity chain is centralized and vertically integrated. Prot can be enhanced through economies of scale and volume production. In contrast, apparel production, a typical buyer-driven commodity chain, cannot rely primarily on volume production to ensure protability. Since prot comes from brand name (which includes design, marketing), apparel manufacturers must rely on efcient decentralized and horizontal production systems. Unlike the producer-driven chain, the entry barrier of apparel production tends to be low, so production itself can be performed anywhere as long as quality is acceptable. The main job of the core company in a buyer-driven commodity chain is to manage these production and trade networks and to make sure all the pieces of the business come together as an integrated whole (Geref, 1994, 1998). Under lean retailing

practices, however competitive advantage seems to come from agility, as well as brand name. Table I summarizes the characteristics of these two commodity chains. New competitive advantage of global production under lean retailing: agility Lean retailing developed as a result of the customers appetite for variety, increased rates of product introduction, product proliferation, and shortened product cycles. These factors increase demand uncertainty, requiring retailers to respond much faster to rapidly changing and unpredictable markets. Information technologies, such as bar codes and EDI, permit the tracking of customer demand in real time. Retailers use these technologies to respond to demand uncertainty while procuring products at a cost low enough to make a prot. Real time sales information permits retailers to place frequent ongoing replenishment orders with delivery requested in as little as three days. Manufacturers, however, cannot virtually ll these orders if they either hold more nished goods in inventory or shorten production time (Abernathy et al., 2000a). Increasing nished goods inventories to allow for quick replenishment incurs additional storage costs and the risk of excess supply due to changing demand. Since the demand for apparel products is hard to predict due to fashion and season changes, and large variation in style preferences, large quantities of unsold inventory is unacceptable to the manufacturer. Thus, it follows that reducing production time is more efcient than holding large quantities of nished goods. As a result, manufacturers compete not only on the basis of price, but also on their ability to meet rapid replenishment requirements by retailers. Thus, agility becomes a competitive advantage under lean retailing practice. Agility in the fashion business also includes the ability to quickly cancel product lines that do not sell, avoid markdowns, operate with small stockrooms, and lower inventory holding costs (Mcguire, 2001; Vitzthum, 2001). Agility has two components: speed and exibility. Speed is a measure of the time it takes to ship or receive goods (Prater et al., 2001, p. 824). Speed is the competitive tool used by Zara of Spain to achieve its success. Zara, launched in 1975 as a local store, is now the worlds third largest clothing retailer with US$2.6 billion total sales per year. Zara has stores in 34 countries with 80 percent of its 1,160 stores in Europe. There are 70 stores in Latin America, 65 in Turkey, Cyprus and the Middle East, four in Canada, six in the USA (all in the New York City area), and 15 in Japan. It takes less than two weeks for a skirt to get from Zaras design team in Spain to a store in Paris or Tokyo.
Commodity chain Buyer-driven Producer-driven Capital and Technology intensive industries such as: automobiles, semicondustors, computers aircraft Transnational corporations or other large integrated industrial enterprises Centralized and vertically integrated Economies of scale, volume and technological advances

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Typical example industry Labor-intensive industries such as: apparel, footwear, toys, consumer electronics, handcrafted items Who take the pivotal Large retailers, brand-named role merchandisers, and trading companies Production system Decentralized and horizontal Source of prot Design, value, services and marketing Source: aDeveloped by the author based on Geref (1994)

Table I. Characteristics of two global commodity chainsa

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This is as much as 12 times faster than the competitors. With shorter lead-times, Zara can ship twice a week (compared with once every 12 weeks for some competitors) to each store (Mcguire, 2001). Flexibility is the degree to which a rm is able to adjust the time in which it can ship or receive goods (Prater et al., 2001, p. 824). Hong Kongs success as an OEM (original equipment manufacturing) producer can be attributed to its exibility. That is, Hong Kongs established subcontracting networks facilitate a form of exible production designed to meet the diverse needs of overseas buyers. The rms know where to nd new sources of orders and how to assemble new, trendy products (Lui and Chiu, 2001). Manufacturing exibility is positively correlated with a rms performance in both uncertain and stable environments (Swamidass and Newell, 1987). These two components of agility reinforce each other. Speed cannot be achieved without a exible production system, and a exible production system is no use if the product is not delivered in a timely manner. However, agility is very difcult to achieve as far as global sourcing is concerned. The dilemma is that global sourcing can reduce the production cost, but cannot simultaneously ensure agility. Therefore, apparel manufacturers need to establish strategies that optimally mix global sourcing and domestic sourcing to achieve agility and cost benet simultaneously. Principles of postponement and speculation This study uses the concepts of postponement and speculation as a theoretical background to explain the factors for an optimal balance in the fulllment of the mixed strategies of global sourcing and domestic sourcing. The concept of postponement, delayed product differentiation, was originally introduced by Alderson (1950) and later expanded by Bucklin (1965). The basic logic of postponement is that differentiation (form, place, and time) of goods occurs during manufacturing and logistics operations. Bucklin (1965, p. 27) states, savings in costs related to uncertainty would be achieved by moving the differentiation nearer to the time of purchase, where demand, presumably, would be more predictable. For example, a car manufacturer could wait for a customers order before assembly and forward distribution of an automobile in the channel (place or geographic postponement). A car dealer could add accessories in the dealers lot at the customers request (form postponement). Postponement strategies offer the potential to reduce inventory risk arising from market uncertainties. A study found that this strategy is particularly valuable for managing short-life products (Johnson and Anderson, 2000). The practice of lean retailing, which postpones the replenishment orders at the latest possible time to reduce inventory risk, parallels the concept of postponement. However, the benets of postponement must be balanced against other costs arising in the channel such as the risk of lost sales. The concept of speculation, the opposite concept of postponement, holds that changes in form and the movement of goods to forward inventories should be made at the earliest possible time in the marketing ow to reduce the costs of the marketing system (Bucklin, 1965, p. 27). Speculation makes it possible to gain economies of scale in manufacturing and logistics operations, reduces the costs of sorting and transportation, and limits the number of stock outs. The global sourcing practice of apparel manufacturers, which is close to the speculation concept, which secures the products at the earliest possible time and holds the inventories until the products are sold to retailers. In a similar context, domestic

sourcing is related to the postponement principle. That is, delay in product differentiation, in this case in the form of products, happens nearer to the retailers selling time. While global sourcing lowers the production costs owing from low wage and economies of scale, this advantage needs to be justied to the extent that the inventory-holding cost is acceptable. Due to the high demand uncertainty characteristics of apparel goods, large holding of speculative inventories may incur loss of prots. Global sourcing may also result in poor customer service due to slow or lack of replenishment. Domestic sourcing can lower inventory costs and increase customer service, but it can incur high production costs. Cost and agility: the combined effect To achieve benets of both global and domestic sourcing methods, successful apparel companies tend to combine global sourcing with domestic or regional sourcing to optimize protability. For example, The VF Corporation, a major US jean manufacturer, operates two plants in the USA to maintain a four-day turnaround for replenishment orders placed by Wal-Mart. Most of the other VF plants are located outside the USA and handle the bulk of the routine manufacturing demand (Tan and Gershwin, 2001). Zara of Spain spends 15 percent more to produce garments in Spain and Portugal to achieve agility (production and delivery within two weeks). Production in China would save this percentage, but would require signicantly longer delivery times (Mcguire, 2001). The essence, then, is how to balance domestic sourcing and global sourcing for optimum protability. Which items should be sourced globally and which domestically? Are there any factors or conditions under which optimal combinations of global and domestic sourcing can be maintained? Based on Bucklins (1965) conceptualization of combined principles, Figure 1 illustrates how the postponement-speculation principle can be applied to the understanding of an optimal balance of global and domestic sourcing. This scenario assumes that trade happens between a set of manufacturers and a set of retailers, with both sets being large enough to insure active price competition. It also assumes that no middleman is involved. While manufacturers source globally for many reasons, this scenario assumes that cost is a primary reason of global sourcing and that manufacturers do not know exact demand. Agility should be achieved within the relevant cost structure. Therefore, the optimal balance is explained with two axes, cost and agility (Figure 1). Cost denotes total costs incurred from production to delivery of goods to retailers, such as unit production cost, inventory handling, storage, transportation, interest, etc. Agility is explained by delivery time from manufacturers to retailers. Since all of these costs will further be affected by the particular location of the inventory, it is assumed that the inventory is in the manufacturers distribution center located in the US. In Figure 1, two graphs show the delivery of goods to retailers at the various possible delivery times. The curve CD indicates the case of global sourcing using speculative inventory, while the curve AB indicates the case of domestic sourcing without using speculative inventory. If a manufacturer uses only global sourcing (CD), the cost will be higher than using domestic sourcing (AB) as the delivery time increases because of the cost associated with speculative inventory. Therefore, CB is the minimum average cost achievable by either using global or domestic sourcing. The ideal point, I, needs to be reached, where optimal cost and agility can be achieved through simultaneous use of global

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Figure 1. Trade-off between agility and cost

and domestic sourcing. In a mixed sourcing strategies environment, understanding the conditions under which I can be reached is important. Next are the propositions that explain the conditions. Propositions for mixed sourcing strategies Nature of demand Depending on the characteristics of a products demand, the ideal point, I, will vary. Demand varies by the product itself and by the stability of demand by SKU. Fisher (2000) classies products based on their demand patterns: primarily functional (predictable demand) or primarily innovative (unpredictable demand). Differences in demand between the two product categories are summarized in Table II. Fisher (2000) contends that, to be most effective, supply management must be tailored to the specic type of demand. That is, functional products require a physically efcient process while innovative products require a market-responsive process. For innovative products, the economic gain from reducing stock outs and excess inventory is so great that rms should concentrate on increasing market responsiveness (i.e. reducing lead-time and increasing speed and exibility). The two processes by product category are presented in Table III. Fishers concept can be applied to combining domestic and global sourcing. An apparel-maker, for instance, may assemble basic socks (functional products) in other countries, but apparel with style variation (innovative products) may be produced within the country to provide fast turnaround for retailers and lower exposure to inventory risk. Shepheard-Walwyn (1997) further classies apparel products according to seasonal changes and fashionability: commodity-low fashion, seasonal low fashion regular color/style change, seasonal medium/high fashion, and high fashion. He suggests that

Aspects of demand Product life cycle Contribution margin* Product variety Average stockout rate Average forced end-of season markdown as percentage of full price Lead time required for made-to-order products

Functional products (predictable demand) More than 2 years 5% to 20% Low (10 to 20 variants per category) 1% to 2% 0% 6 months to 1 year

Innovative products (unpredictable demand) 3 months to 1 year 20% to 60% High (often millions of variants per category) 10% to 40% 10% to 25% 1 day to 2 weeks

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Note: *The contribution margin equals price minus variable cost divided by price and is expressed as a percentage Source: Fisher (2000)

Table II. Functional versus innovative products

Aspects of supply Primary purpose

Physically efcient process (functional products) Supply predictable demand efciently at the lowest possible cost

Market-responsive process (innovative products) Respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory Deploy excess buffer capacity Deploy signicant buffer stocks of parts or nished goods Invest aggressively in ways to reduce lead time Select primarily for speed, exibility, and quality Use modular design in order to postpone product differentiation as long as possible

Maintain high average utilization rate Inventory strategy Generate high turns and minimize inventory throughout the chain Lead-time focus Shorten lead time as long as it doesnt increase cost Approach to choosing suppliers Select primarily for cost and quality Product-design strategy Maximize performance and minimize cost

Manufacturing focus

Source: Fisher (2000)

Table III. Physically efcient versus market-responsive process

developing economies, such as India and Africa, may be good sourcing locations for the commodity-low fashion category, while domestic sourcing may be preferable for high fashion goods that require short run production, on-time delivery, and immediate response to trends. A relevant example would be World Company, a leading Japanese apparel manufacturer. The rm produces basic styles in low-cost Chinese plants, but sources high-fashion styles in Japan where the advantage of quick response to emerging fashion trends more than offsets the disadvantage of high labor costs (Fisher, 2000).

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Depending on the SKUs in a product, along with the products demand itself, the nature of demand varies. Some SKUs within a product line have more unstable demand than other SKUs. For example, even within a specic line such as mens suits, certain sizes and colors require more frequent replenishment because of popularity. Abernathy et al. (2000a, b) suggest classifying products based on weekly demand, rather than on product line. An apparel maker can combine popular items from diverse product lines and produce them in domestic plants for rapid replenishments. According to Fisher (2000), an innovative item should be produced within country to reduce lead-time. However, Abernathy et al. (2000a, 2000b) suggest that even within an innovative product line (i.e. mens suits), certain units with less demand (i.e. extra small sizes) can be sourced globally. An effective approach would be to allocate high-variance SKUs close to markets and produce low-variance goods offshore. Under this assumption, a manufacturer has to pay somewhat more to make certain units (those with high weekly variation in sales) in more expensive, but faster, domestic plants, but would reap a better return than if the entire product line was made in a less expensive, slower plant located out of country. The simulation by Abernathy et al. (2000b) reveals that the mixed allocation of sourcing yields the highest prots while reducing exposure to total inventory risk. Lean retailers like Home Depot and Wal-Mart already incorporate some SKU-level analysis (Abernathy et al., 2000b) in their production. Demand analysis can be done by product item, SKU (color or size), etc. The essence is that items with a high uctuation of demand need to be produced with agility, even if cost is sacriced a little. In contrast, stable and predictable demand can take advantage of cost benet, such as through global sourcing. Therefore, depending on a rms thorough analysis of its demand, the amount of global and domestic sourcing can be formulated. For example, if a rm has high unstable demand, the ideal point, I, could be reached with a small portion of global sourcing and a large portion of domestic sourcing. From this logic, we provide the following proposition. P1. The greater the demand uncertainty, the higher the portion of domestic sourcing required in a mixture of global and domestic sourcing strategies.

Information and manufacturing technology Depending on the contribution of technology in the manufacturing process, the sourcing balance may need to be modied. For instance, while basic shoes can be globally sourced without sacricing quality, new innovations, such as Air Nike which uses a new technology that compresses gas and stores it in the sole, should be sourced domestically or exclusively to protect their technology. According to Proposition 1 above, basic or functional items should be sourced in low-wage countries. However, basic items can be efciently sourced domestically if the rm invests in information (e.g. EDI) and manufacturing (e.g. CAD, Modular system) technologies. That is, with standardization through manufacturing technologies, high-wage countries like the USA can maintain low cost and agility at the same time. Benetton has presence in 110 countries and insists on using domestic subcontractors rather than using low wage countries, contrary to the sourcing trend, and investing in manufacturing technologies. This rm believes that technology will permit it to match the lower costs of competitors who source their goods globally (International Management, 1993). Manufacturing technology can ensure cost savings, but it cannot ensure agility. Agility requires more than just productivity; it requires an integrated channel through

which rms doing business together can share sales information. For this reason, Uniqlo, a leading Japanese apparel brand that recorded US$3 billion in sales for the scal year ending August 2001, invested $5.3 million to link all of its retail outlets and management ofces in China (Onozuka, 2002). Rather than sourcing entire manufacturing phases in one country, some phases can be efciently separated into domestic versus global sourcing, depending on the contribution of technology in the phases. For example, a manufacturing phase to which technology can be applied, such as fabric cut using an automatic cutter, can be performed internally or outsourced to expert domestic subcontractors, while the phases to which technology cannot easily be applied, such as assembly (seaming) and pressing, can be efciently done in low-wage countries (Bolisani and Scarso, 1996). In summary, it appears that even in the production of basic items, apparel rms with high information and manufacturing technologies can increase the domestic sourcing portion, achieving low cost and agility at the same time. If other things are equal, therefore, our next proposition follows. P2. The greater the contribution of information and manufacturing technologies to the manufacturing phase, the higher the portion of domestic sourcing that may be used.

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Clusters of local subcontractors Depending on the presence or absence of local subcontractor clusters, an apparel rm may have a different formulation of global and domestic sourcing. For example, if an apparel rm is located where apparel subcontractors and related industries (such as trims and fabrics) are geographically concentrated, the rm could produce faster and at lower costs using locally available resources than a rm located distant from the clusters. Therefore, a rm located in high local subcontractor clusters may benet more from domestic sourcing than a rm with low subcontractor clusters. As with Prato in Italy, geographic concentration allows apparel makers to emulate each other, improving their production and marketing dynamics. As a result, an individual company becomes competitive and the area collectively creates more prot. In the USA, Los Angeles ranks rst and New York City second in terms of clothing manufacturing facilities (Moore, 1995). The author posits that apparel manufacturers in these areas can source labor and related materials locally at relatively lower cost than manufacturers in other areas because of the abundance of local subcontractors. Therefore, if other things are equal, a rm with high local subcontractor clusters should use a larger portion of domestic sourcing than a rm with low local subcontractor clusters to optimize prots. P3. The higher the local subcontractor clusters a rm has, the higher the portion of domestic sourcing in its balance of global and domestic sourcing strategies.

Long-term relationships with subcontractors Many examples exist of large rms sourcing domestically using long-term relationships with subcontractors. Benetton, for example, performs the major part of its manufacturing in Italy, where a wide network of domestic subcontractors assures high productivity and exibility. About 92 percent of Benettons total production in 1993 remained in Italy (Bolisani and Scarso, 1996). As at Benetton, the production of

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Stefanel, a well-known Italian informal wear producer, is also primarily based on a large network of domestic subcontractors. Another Italian informal wear producer, Diesel, prefers Italian subcontractors who are motivated and have participated in their continuous technological improvement. If a rm has long-term relationships with subcontractors, they could save transaction costs and/or other costs related to inventory and delivery based on mutual trust. Therefore, if other things are equal, the author posits the following proposition. P4. The higher the long-term relationships with subcontractors a rm has, the higher the portion of domestic sourcing in its balance of global and domestic sourcing strategies.

Conclusions This study identies the conditions under which an optimal domestic and global sourcing balance is formulated in the context of the U.S. apparel manufacturing industry. As the industry experiences a high level of demand uncertainty and lean retailing practice, manufacturers have sought solutions through the wise use of mixed sourcing strategies. By utilizing Bucklins (1965) concepts of postponement and speculation, this study tried to nd the ideal point, I, where an optimal amount of global and domestic sourcing can be formulated considering both total cost and delivery time. In mixing domestic and global sourcing to reach maximum prot, this study provided four conditions under which a larger portion of domestic sourcing can be formulated: greater level of demand uncertainly, information and manufacturing technology, local subcontractor clusters, and long-term relationship with a subcontractor. While these conditions are individually explained, it is apparent that they are not mutually exclusive. For example, when a rm produces basic items, if it has a higher level of information and manufacturing technology, a long-term relationship with subcontractors, and is located near high subcontractor clusters, a rm can efciently source most of its production domestically. However, application of the conditions may not be simple since other, interrelated factors also need to be considered. The rst factor to consider is production volume. If the volume of production per item is small, it would be more economical to source domestically regardless of its demand nature or variability. If the volume is large enough (e.g. Nike or Benetton), rms can reap prot from technology investment and it may be protable to separate the manufacturing process into different countries. The second interrelated factor to consider is price (value) of products. A high-end clothing item, for example, is not mass-produced and implies high raw material costs in comparison with labor. High-fashion Italian rms prefer to maintain in-house production (Bolisani and Scarso, 1996) because the cost savings from using cheap labor is relatively small and quick response to the market is more important than saving production costs. Therefore, when applying thepropositions, interrelationships among them, as well as with other factors, needs to be carefully considered. This study has signicant implications for theory, business, and policy-making decisions. From the theoretical perspective, the author utilized Bucklins (1965) postponement and speculation principles and applied the concepts to understand mixed sourcing strategies. In addition, this study presents four propositions that

provide a better understanding of the important trade-offs rms face in various sourcingscenarios. The author expects these propositions to add valuable insights to the extant literatures and to initiate active research in this important area. Empirical testing of these propositions presents research opportunities for academia. For business applications, this study presents the conditions under which optimal global and domestic sourcing mix can be formulated. Although this study focuses on global versus domestic sourcing for the sake of simplicity, it is understood that the concept of domestic sourcing also applies to regional sourcing. Regional sourcing infers sourcing in a country that is proximate to the market, such as sourcing in Mexico for the US market. For the realistic application of the propositions, the factors should be viewed in a holistic nature since they are all interrelated. In this sense, computer software designed to consider all the factors relevant to determining the optimum sourcing mix will benet the apparel industry, as well as the individual business involved. It is also important, however, to consider the sourcing decision at a macro perspective, rather than limiting the evaluation to the product line level. Sourcing decisions should be made at top managerial levels as a part of long-term strategic planning since sourcing involves nancial investments. The factors that relate to an optimal sourcing balance are suggested to eventually achieve a competitive edge. The author posits that achieving and maintaining a competitive edge may be heavily dependent on the soft-side factors that competitors cannot easily copy. A strong, mutually supportive relationship between a manufacturer and retailer is an example of a signicant soft-side factor. Hard-side factors, such as investment in production facilities or ultra-high technologies may not ensure long-term competitiveness. These factors are easily imitated by competitors, thus eliminating the competitive edge. As Hayes and Pisano (1994) noted, strategic exibility becomes the strategic goal in this turbulent environment. Therefore, the sourcing decision should be made from a long-term perspective and focus on achieving and maintaining a competitive edge. From a policy-making perspective, the factors presented in this study can be reviewed as a means for retaining the domestic job market. Because of the labor-intensive nature of apparel production, global sourcing in most advanced countries results in domestic labor issues. While global sourcing can increase the availability of high quality products at a lower cost, the loss of domestic jobs can be a political, as well as an economic, issue for the manufacturer. The U.S. apparel industry has developed technologies and systems to improve the efciency of retail-apparel-textile channels in an attempt to retain apparel production within the country. Quick response, a strategy developed during the 1980s was designed to protect the domestic apparel industry from drastic increases in apparel imports. Policy makers in economically advanced countries seeking to minimize loss of local production jobs due to global sourcing can build strategy based on the factors in this study. For example, clusters of local subcontractors can be developed to retain jobs, thereby boosting the local economy. Small companies in many developed countries may have difculty sustaining competitiveness individually. The companies can, however, cluster with other rms, suppliers, and subcontractors to improve agility. Although this study seeks to integrate the factors, it has some limitations to be pursued in further studies. First, this study appropriately tries to nd factors related to the trade-off between agility and cost, while acknowledging both are important to

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achieve performance in the long run. Therefore, the results of how the trading off between these factors can affect a rms performance should be examined. This study relies on case studies and literature reviews in the retail-apparel supply chain to integrate the factors. Looking into more diverse case studies in various supply chains would be interesting for future study. Efforts on integrating those results with extant literature are needed for further universal applications. Another opportunity for further research lies in determining optimal interrelationships among the factors. Mathematical models that optimally estimate each factor would be an appropriate start.

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