Question: The National Association of Italian Footwear
The National Association of Italian Footwear Manufacturers (Assocalzaturifici – http:// www.assocalzaturifici.it) explains, The success of the footwear sector in Italy is linked to an enterprising spirit and to the structure of the sector. The structure is a “web†of raw material suppliers, tanneries, components, accessories, machinery manufacturers, model makers and designers. This has resulted in a territorial - of firms and the formation of shoe manufacturing districts such as Marche, Tuscany, Venetia and Lombardy. The leading position of the Italian shoe industry is due to superior product quality and high levels of innovation and the fact that 85 per cent of its production is exported.’
The Marche shoe district is the largest concentration of producers of shoes and a ccessories in Europe, spanning between the Provinces of Macerata and Fermo. There are more than 2,500 shoe firms, almost 500 shoe components firms and more than 100 leather firms employing almost 50,000 workers, with combined sales of almost €3 billion. The district is export-orientated, with more than 80 per cent of production going abroad – mainly to Germany, the USA, Russia and increasingly to Asia, including China.
District firms are mostly small family businesses with fewer than 20 employees, but there are also a few larger firms with internationally recognised brands. The district leader, Della Valle Group, produces high-quality shoes and bags, matching a classic style design with comfort and a sporty look. Traded on the Milan Stock Exchange, it has sales close to €1 billion (not only in footwear and not only in the Marche district), and has developed strong international brands – such as Tod’s, Hogan and Fay, plus a growing network of directly owned stores. Leading positions in specific market niches are occupied by Fornari (focused on trendy female teenager shoes with its brands Fornarina and Akibiki), by Falc (specialising in children’s top-quality shoes under Falcotto and Naturino brand names) and by Santoni (focused on top-quality handmade shoes with prices up to €1,500). Top fashion firms such as Prada, Dolce & Gabbana and Hugo Boss have signed licensing agreements with Macerata district firms for the production of their shoe collections. Figure 8.23 shows two products from the Santoni website.
Figure 8.23
Italian style from the Santoni Collection
The shoe district has developed as an integrated supply network, offering the vast and competitive range of components and equipment required for making shoes – from leather processing to soles moulding or laser cutting. Logistics is simplified by the geographical concentration of firms in the district and the personal knowledge and trust that characterises relationships amongst district entrepreneurs. Flexibility by the small firms’ supply network enables the ups or downs of fashions to be met.
Since the 1990s, however, the district network has had to come to terms with an outsourcing trend to low labour-cost countries that is always a threat to mature and labour-intensive industries in developed economies. As a result, production of low-cost shoes has been outsourced almost fully, first to Eastern Europe and then to the Far East. In low-price product ranges, district companies retain only high-value activities of design, marketing and distribution in the Macerata district.
Outsourcing has also affected the core district products in medium- to high-quality footwear. Here, however, foreign partners are involved in only less complex tasks to preserve Italian style and quality. The result is an increasingly widespread network. Processed leather is brought into the district after initial processing in Asia (mainly India and China). The leather is then checked, cut and prepared to be sent to Eastern Europe for further processing (mainly to Romania and the Balkans area for sewing and hemming). Prepared leather is returned to the district for finishing and assembly. Such partial outsourcing – called outward processing traffic – preserves the high-quality standards of district shoes whilst cutting down on costs. The shoe manufacturers’ offshoring has triggered the international expansion of the largest shoe component manufacturers who have been following their ‘industrial customers’. For instance, Finproject – the largest sole producers of the district – opened production plants in Romania, India and Mexico, and has established a logistics and commercial company to trade with China (https://www.finproject.com/en/footwear/).
This makes logistics a critical activity. Transportation costs per unit have increased, and responsiveness has been put at risk. This is of particular concern to a business that is linked to fashion, where season collections and sales campaign deadlines cannot be missed. Whilst offshore sourcing has led to significantly longer lead times, increasing inventories and lot sizes are not an effective answer. Most district firms offer differentiated products based on fashion trends, and therefore would face a high risk of mark-downs at the end of season. Therefore, firms normally order only 25–30 per cent of requirements for a seasonal collection from their suppliers on the basis of forecasts, and these are mainly carry-over models and ‘classic’ leather. Orders for the rest of the collection are made in line with incoming orders from fashion fairs, distributors and boutiques.
Most of the companies are finding that their new international network (including a sales network that is extending progressively towards Asia) is becoming too complex to be managed without appropriate IT systems. Therefore many companies are adopting an ERP system as well as specific applications (especially for the tracking the progress of their suppliers). Leading district firms are tackling logistics issues through increased information processing capabilities and through advanced services from logistics service providers. In order to manage a production network spanning from nearby district suppliers to Eastern Europe (mainly for shoes) and China (for clothing), Fornari has installed SAP–AFS (Apparel and Footwear Solution). This new ERP system has allowed the company to improve visibility over production planning and tighten control over suppliers. Fornari has outsourced outbound logistics, and is considering a logistics platform to handle information exchange for district subcontractors and foreign suppliers to reduce costs, an RFID system to improve responsiveness to European customers and a logistics network to support its strong selling presence in China.
However, most district companies are not large enough to become attractive propositions for IT or logistics service providers. Whilst they can’t afford to lose outsourcing opportunities, these small firms risk being unable to manage the more complex networks that result. Moreover, most district entrepreneurs do not fully support the potential advantages of sharing outsourced services. Since they lack the accounting tools for getting a complete picture of logistic costs, they do not perceive logistics as a competitive weapon. They care only about emergencies when a rush order is required or when a planned delivery is late, but dealing with such emergencies becomes more difficult when distant foreign partners are involved.
Developing the infrastructure, the skills and the mindsets, in order to manage such a radical change in international supply chain management, is probably the biggest challenge district companies will face in the next 5–10 years.
Questions
1. Analyse the strengths and weaknesses of the Italian shoe district logistics model.
2. Discuss the implications for the Italian shoe district of outsourcing elements of shoe production to Asia.
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