Question: As a consultant to the Balagny Clothing Company, advise them as to whether it would be a better idea for them to keep their domestic operations or not.
Must include Section Headings for:
@Analysis of relevant information
@Implications for the company if your recommendations are followed
BALAGNY CLOTHING COMPANY OUTSOURCES DOMESTIC PRODUCTION
Balagny Clothing Company Inc. is a major apparel manufacturer in the United States. It makes
men’s, women’s, and children’s casual wear such as denim jeans, cotton slacks, skirts, and
sweaters. Balagny Clothing has taken the lowcost provider strategy and is constantly trying to
find ways to cut costs and maintain their 4 percent profit margin while maintaining a competitive
advantage over its major competitors. Because direct labor makes up approximately 65 percent
of the total cost of an apparel item, Balagny Clothing closed all of its domestic manufacturing
facilities and outsourced the production to contractors in China. In the United States, Balagny
Clothing was paying an average hourly wage of $8.65 per hour. The Chinese labor rates average
about $1.18 per hour, depending on the location of the factory. The company felt that relocating
their production to China was a viable change for the long-term life of the company. Not only
could it reduce labor costs by 86 percent, but it would no longer have to deal with labor unions;
plant maintenance; and government regulatory offices such as the Occupational Safety and
Health Administration (OSHA), the Fair Labor Standards Act (FLSA), and the Equal
Employment Opportunity Commission (EEOC).
It took Balagny Clothing almost two years to complete the transition. After startup costs in
China, domestic plant closings, and the associated costs, Balagny Clothing was ready to reap the
benefits of its decisions. It slashed wholesale prices for the upcoming season to undercut the
competition and planned for a 6 percent profit margin. Balagny Clothing had increased sales by
more than 20 percent, garnering the majority of the business.
There were, however, a few discoveries that limited its cause to celebrate. It had relinquished
almost all control over the manufacturing processes and product development after the initial
designs were transmitted to their China contractors. Production was set up to be delivered in four
batches per season (eight batches per year) with orders transmitted approximately four months in
advance. These contracted production amounts were firm and, later that year when business
slowed, Balagny Clothing could not lower the production rate nor refuse shipments. This
resulted in large inventories of finished goods.
An additional and unexpected problem was caused by longer-than-expected transportation times
from China to the Balagny Clothing distribution center. Balagny Clothing had originally planned
for two-week in-transit inventory and customer delivery dates based on the import agents’
estimated travel time across the Pacific, but the company had not foreseen an additional two- to
three-week delay caused by the backlog at the port of Los Angeles. This pushed back shipment
dates to Balagny Clothing’s customers, resulting in a shorter selling period at retail and
nullifying Balagny Clothing’s expected refill orders, further enhancing already high finished
goods inventory levels. The holding costs associated with these high inventory levels negated a
large amount of the forecasted savings Balagny Clothing counted on for its profits.
In addition, customers were complaining that the fit and feel of the garments were different. The
Chinese production facilities had altered the Balagny Clothing product to fit their production
processes. The Chinese had their own raw material suppliers and their products were slightly
different than Balagny Clothing’s domestic suppliers.
Another problem that became evident was the producer’s lack of flexibility. Because of the high
inventories, model changes became more expensive because more inventory had to be marked
down to clear the way for the new product. Balagny began to see a decline in sales and became
concerned for the future of the company.
The CEO called the top management team together and charged each one of them to find ways to
improve the situation. William Duncan, vice president of operations, felt that he had an answer to
the company’s problems. After investigation, he proposed that they immediately buy or construct
a wholly owned manufacturing subsidiary in Mexico in one of the border maquiladora parks.
Finished goods could be transported from the maquiladora to the Balagny Clothing distribution
center within 72 hours of completion. The plan would call for the maquiladora to produce the
rapid turnover product needed for quick replenishment. The China contractors would be given
the seasonal products that were not a part of the replenishment system and that could be
produced and shipped in batches. The plan called for approximately 40 percent of the production
to be moved to the Mexican maquiladoras while 60 percent would remain with China, yielding
an average labor cost of $1.72 per hour. Duncan calculated that this change would decrease
Balagny Clothing’s on-hand and in-transit inventory dramatically, yielding a much higher profit.
1. Identify specific concepts in the case found in this chapter, and discuss their relevance to the
problems facing the company.
2. Considering all of the problems incurred in China and the immense effort and capital needed
to start up the Mexico operation, would it have been a better idea for Balagny Clothing to keep
its domestic operations? Why or why not?