Esquel Expands Capabilities to Ensure Better Quality
September 18, 2011 If you want something done right, the old adage says, you need to do it yourself. Few companies have taken that sentiment to heart more than the Esquel Group, a vertically integrated multi-national textile manufacturing company based in Hong Kong.
In 2005, Esquel’s internal supply chain had covered all the main steps in the garment-manufacturing process, from cotton farming to manufacturing final garments and accessories. The bulk of the operations were located in Gaoming, Guangdong Province, in Southern China. While cotton farming, ginning and most of the yarn spinning took place in Northwestern China, the fabric mills and several garment and accessories factories were located in Gaoming. Garment making also took place in Changzhou (near Shanghai), as well as in a number of overseas locations. All of the garment factories, including those overseas, were supplied with fabric made in Gaoming.
In general, most operations (except for cotton farming and spinning of gray yarn) were conducted based on actual customer orders. When needed, portions of the manufacturing process were outsourced when internal capacity was insufficient to meet all customer demands.
Following is a more detailed description of each part of the company’s supply chain, the reasons that led the company to bring each of these activities in-house, and some of the means the company put in place to ensure high quality.
Cotton Farming. To obtain the highest quality of fabric, Esquel used mainly extra-long staple (ELS) cotton for its high-count products, sourcing the majority of its supply from Xinjiang and purchasing additional cotton from the United States or Egypt only when local supply was insufficient or when there were specific requirements.
To gain sufficient knowledge that would ensure successful collaboration with local farmers, Esquel expanded its operations and in 1998 entered cotton farming by forming a joint venture in Xinjiang. As of 2005, about 10 percent of the company’s total ELS cotton supply was provided by its own farm. Esquel also gave purchase commitments to the farmers before the cotton was planted, to secure the cotton supply and to ensure that the cotton was grown according to the company’s specifications. In addition, Esquel organized training sessions to educate the farmers on seed selection, cotton farming practices, ways to improve yields and reach the desired quality, and techniques to eliminate impurities during picking and storage. The company also provided incentives to the farmers based on cotton quality rather than purely based on quantity to encourage them to grow ELS cotton that met the required quality.
Ginning. By 2005 Esquel operated three ginning mills, all of them located in Xinjiang, in close proximity to cotton farms. Operating its own gins provides Esquel with the means to better control quality through means such as the use of rollers rather than saw/blades. High Volume Instruments (HVI) are used to inspect each bale of cotton and a radio frequency identification (RFID) Cotton Bale Management System is used to keep track of the quality of the cotton at the bale level. Interestingly, this was the first time RFID was used anywhere in the world for managing cotton during ginning.
Spinning. Esquel also decided to bring yarn production in-house due to difficulties experienced in purchasing consistently high quality yarn from the outside. Xinjiang was the perfect region to establish spinning mills due to the close proximity to high quality cotton and the low cost of energy. Esquel also invested in compact spindles to produce higher-quality yarn. Quality was tested at a quality assurance lab located in each spinning mill. After spinning, the yarn was transported to Gaoming for weaving and knitting into fabric. Esquel also operates a smaller spinning mill in Gaoming that specializes in heather and fancy yarn, which is used for making fabrics with a more random color pattern.
Knit Fabric. After purchasing an order of cotton shirts that did not meet shrinkage requirements, Esquel made the decision in 1984 to invest in its own knitting mill. In December 1987, Eastern Knitters (EK) was set up in Penang, Malaysia, to produce yarn dye items but was relocated from Malaysia to Gaoming in 1996. By 2004, it had 179 knitting machines that provided the capacity to satisfy the majority of Esquel’s internal demand for knit fabrics.
Woven Fabric. As Esquel moved up-market, it found that customers demanded higher-quality products, so the company set up its own woven fabric mill in Gaoming with the capability to produce more than 40 million yards of the highest-quality woven shirting fabric. During the second half of 2004, various quality assurance sections were consolidated into a single Corporate Quality Assurance Department to align the overall company strategy. The department structure, responsibilities and quality definitions were standardized across all garment manufacturing operations.
Garment Manufacturing. Trade policy has been one of the most important factors when choosing manufacturing locations for the garment industry. From the Multi Fiber Agreement (MFA) to the General Agreement on Tariffs and Trade (GATT), countries had used quotas to regulate the level of textile and apparel imports from other nations. The use of Outward Processing Arrangements (OPA) is an example where quotas shaped Esquel’s manufacturing setup. OPA was an arrangement endorsed by the United States, where a garment could be manufactured in two countries while still be legally labeled as being originated in the place where the critical manufacturing steps were performed. Esquel’s Malaysia factory partnered with a Chinese factory, which carried out the upstream production processes, while the Malaysia counterpart completed the rest of the downstream production. That way, the garments could be legally labeled as being of Malaysian origin.
Accessories. Esquel entered this business mainly because it was unhappy about poor trade practices and quality issues, and the high margins associated with outsourcing this part of the business. In 1985 the company formed a joint venture with Rochester Button Corporation, and five years later it bought Rochester’s share of the company. Over the years Esquel expanded this business, and by 2004 the Esquel Accessories & Packaging division was making about half of all the accessories required for the company’s garments.
Esquel’s premium PYE Brand. In the early 1990s, Esquel created its own retail network to sell its own shirts in China, at one point operating more than 100 stores. Due to circumstances outside of its control, Esquel was unable to provide consumers with the desired shopping experience so the company closed the stores to re-position itself. Esquel re-launched the PYE brand in 2001 at a higher price point with a range of cotton shirts and tops for men and women that retailed at $75 and higher. As of 2010, PYE has 4 boutiques in Beijing, Gaoming and Urumqi and has scheduled to open another store in Guangzhou in 2011.
Research & Development Activities. Esquel conducts R&D activities across the company, from cotton farming to new garment finishes. R&D activities provided a significant competitive advantage for Esquel and helped the company to distinguish its products from its competitors. R&D activities were conducted by production specialists in each function as well as the scientists in the R&D Center, Merchandising and Sales. Examples of these activities include:
Cotton. A research team in Xinjiang looked for ways to modify the cotton seeds to achieve higher-quality cotton, with better strength and fiber length. Higher quality led, in turn, to better yarn and fabric, which allowed the company more flexibility to make finer fabric or apply special finishes to the fabric while still maintaining its quality. Research projects included conventional and zero-gravity cotton breeding. In addition, the research team studied irrigation methods in order to conserve water, a scarce resource in Xinjiang. A dedicated team worked with local farmers in Xinjiang on sustainable farming techniques and advised them on ways to grow and collect the cotton so as to improve cotton quality while at the same time increase the farmers’ income.
Fabric. Research activities focused on special processing, dyeing, and finishing techniques, which aimed at improving the process and/or the end product, or at adding new performance features. Process improvements included increased efficiency, lower cost, environmental issues, and lower energy/water/chemical consumption. In product development the focus was often on fabric, but many times also included modifications to the cotton, yarn, or garment production.
Some of the new innovations were initiated by the R&D group and required the sales and marketing people to analyze their profitability. Other research initiatives were triggered by requests from Esquel customers.
One such example was Nike’s request for Esquel to re-engineer the collar of its golf shirts. In April 2002, Tiger Woods won his second consecutive Masters Tournament in Augusta, Georgia. Executives at Nike were pleased with the victory but horrified by the looks of his shirt (by the 18th hole, heat and humidity laid waste to the collar of his signature Nike golf shirt). Nike had always been very concerned with performance, so they contacted Esquel, asking the company to re-engineer the golf-shirt collar from scratch and create one that would not buckle in sweat and heat. Esquel tried different technologies, and within weeks already had multiple prototypes ready to be tested. By October 2002, Esquel was already mass-producing the new line of shirts – a big win for the company, because the previous version of Nike golf shirts were made by one of its competitors.
An annual plan determined the group’s development activities (both proactive internal innovation and input from market) for the following year based on market needs as specified in conjunction with the sales and marketing departments.
In addition, the R&D group was encouraged and provided with the time and tools to generate and test new ideas for product and process innovations. Each of the new prototypes was first developed in the lab. Then, the R&D group started working with the Technical Development Center to determine the best way to work with the new fabric when making garments. In parallel, the R&D group worked jointly with the relevant factories, to help stabilize the process and bring it to mass production. Once the process was stabilized, marketing teams started promoting the new products.
Costs and Benefits of Vertical Integration
Esquel’s vertically integrated operations are designed to ensure the highest quality at every step of the manufacturing process … quality that could not be easily imitated by other non-vertically integrated garment manufacturers. Other advantages Esquel gained from being vertically integrated include:
• shorter cycle time,
• the ability to maintain better control of the operations, and
• improved response time to new trends in the market.
In addition, the company took advantage of the fact that the earlier in the supply chain quality was assured, the easier it was to reach a certain level of quality. Vertical integration also enhances the company’s R&D capabilities, allows for new ideas to be explored throughout the supply chain in a relatively short time, and makes it easier for each separate operation to learn from and share knowledge with other operations along the whole supply chain.
It also makes it easier for Esquel to devote the required resources throughout the supply chain to develop samples for customers, which resulted in fast response to customer requests. Vertical integration also helps Esquel to better absorb fluctuations in cotton prices relative to smaller companies and yarn manufacturers, which might have to immediately transfer the price increases to the customer, making it harder for them to plan and to control margins. Esquel, on the other hand, can improve efficiencies throughout the supply chain to absorb part of the price shock.
Still, such advantages did not come without cost. Having a vertically integrated and geographically dispersed supply chain has had some negative implications, such as higher financial burdens, increased operating costs, and inflexible capacity that was hard to fully utilize at all times (and required high capital investment to maintain and upgrade).
The company had its hands full ensuring that each operation was competitive enough (in terms of quality/cost/delivery/flexibility) according to market standards. Furthermore, production planning and coordination of internal operations was also a challenge, requiring the company to make significant investments in IT capabilities in order to improve the efficiency of these tasks.
Mills Take Different Paths
to Find Success
In a country as huge as China – in terms of its geography as well as its population – it’s not surprising that there will be a lot of variety, regardless of what the subject is. For example, according to www.ethnologue.com, there are no fewer than 292 living languages spoken there!
While not to that extent, no small amount of variety can be found in China’s textile industry as well. Some Chinese mills have been eyeing the profits that merchants enjoy and are working to open their own trading companies. The Esquel Group is one of the most vertically integrated companies found anywhere, with textile capabilities that range from production through retail storefronts. Yet another approach found in China is to expand not just vertically, but in every direction possible. A great example of that model can also be found in China: The Weiqiao Textile Company Ltd.
Located in Shandong Province – the third-largest cotton producing province of China – Weiqiao Textile Company is the biggest cotton textile producer in the world. According to the statistics of China Chamber of Commerce for Import & Export of Textiles, Weiqiao Textiles ranked first among the country’s textiles and clothing export enterprises in terms of export value in 2010.
No Time to Waste
Weiqiao operates 24 hours a day, 365 days a year … and needs every one of those hours to reach its incredible output levels. In 2010, the company produced approximately 720,000 tonnes of cotton yarn, 1.3 billion meters of grey fabric, and 102 million meters of denim. Obviously, Weiqiao is in a good position in the market because of its enormous economies of scale and can produce more than 2,000 kinds of cotton textile products.
In 2010, Weiqiao served 9,000 domestic customers across 30 Chinese provinces, with 900 overseas customers in 20 countries. Those figures represent a growth of 5.9% and 8.4%, respectively, over 2009 performance.
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