Economic Standstill

By Merlin Hernandez

In a bid to jumpstart the tepid recovery, and to boost investment and the employment rate, the Federal Reserve has increased its stimulus with monthly treasury purchases of $45 billion. This is in conjunction with the $40 billion in mortgage-backed securities per month which started  last September. While the new purchases can only come by creating new money, the prime rate is held near zero to further encourage borrowing, and with current inflation below 2%, new movement in the economy is expected to cushion any rise in inflation.

But market response has been unsurprisingly lukewarm reflecting nervousness about the looming fiscal cliff which has been cited by the IMF as the biggest threat to the US economy, and raising some fears of a liquidity trap if the economy is allowed to go over the cliff even for a short period. Businesses have halted new expenditures, including new hiring in fear of a stringent fiscal policy come January if agreement is not reached in Washington on the extraction of some $600 billion from the economy.

Strong seasonal retail showing and a further reduction in jobless claims did not shift investor caution either, with the Dow Jones and S&P index down slightly at the end of the business day on Dec. 13 (Thursday). The uncertainty over fiscal cliff negotiations between Democrats and Republicans also has international implications. Even with news of the ratification of the long-awaited Greek bailout that could tame the European debt crisis, the European Central Bank cut its growth forecasts. This is in anticipation of US economic setbacks which would summarily reduce US demand for European goods if the government fails to reach agreement on tax and spending cuts.

China’s emerging recovery, after a two year slowdown, had been gaining momentum with growth in the manufacturing sector. But the prospect of a stalled US recovery leading to much reduced US demand and export revenues has caused contraction in investor enthusiasm. There is concern that GDP growth will be significantly below targets if the US does not resolve its fiscal issues, with talk of an expansion of the China deficit as a result.

The US Federal Reserve is already revising future growth prospects downward based on the current economic standstill. Q4 of 2012 was expected to be the cranking up period for slow but steady growth in 2013 but as it stands, the world may just have to brace itself for a new recession if Congress is unable to reach a bipartisan compromise by December 31.

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Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. She has extensive experience in International Trade. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

Contemporary Risk Management

by Merlin Hernandez

Small businesses typically develop their risk profiles from past experience and management judgment. But current economic challenges would indicate the need to look beyond what is known for their long term survival. Smaller enterprises are increasingly finding lucrative opportunities overseas. Size and capitalization are no longer impediments to operating globally as information technologies have so reduced time-cost considerations as to afford small and medium enterprises (SMEs) entry to doing business internationally.

The globalized environment and its increased interdependence, however, has funneled a rise in the sources and speed of risk transmission in vital areas such as financial markets, energy, internet, and logistics to require an altered mind set in assessing risk. For example a distant earthquake or typhoon that causes internet disruption or extensive damage to port facilities can cause significant rupture to the supply chain or short term market potential. Additionally, the effect of the global financial crisis on capital markets, and the new global politics of debt and its impact on economic growth, taxation, credit markets, regulatory changes, and political stability bring greater uncertainty into the global business and investment climate.

In spite of what has been described as anti-globalization sentiments, SMEs are still finding that globalizing operations is worth the risks to reduce costs, improve efficiencies, and increase profits. Even for SMEs that choose not to ‘go global’ these risks may still affect their operational efficiencies. A well-structured global strategy can offer better supply chain management, opportunities to exploit overseas market niches, or centroid manufacturing advantages in order to compete more effectively. But in the dynamic world of contemporary business, new types of risks are always immanent, and firms need a risk management protocol that constantly scans the environment for new threats. This makes risk identification as a feature of historical data analysis limited in its ability to mitigate challenges in an ever-changing landscape.

Risk management plans also fall short when they are siloed within the business life cycle, phase, project, or unit in an approach that strategizes for causes and their direct effects. Failure derives from attempts to minimize the effects of those causes without accommodating the full long term strategic perspective, changes in the operating environment or new opportunities for competitive advantage that might arise out of those risks.

Since business activities remain organic and interrelated for long term efficiencies, risk management should take an aggregated approach with management action focused more on root causes rather than immediate causes, using integrated mitigation strategies for wider organizational benefit in the longer term. Contingency planning, disaster management, and a change management orientation would additionally provide an agile response matrix for greater risk tolerance and mitigation in a contemporary risk management approach.

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Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. She has extensive experience in International Trade. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

Industrial Spying in Fashion

by Merlin Hernandez

A trade secret is original information used to create a pattern or formula that is exclusive to the owner indefinitely as long as they protect the secret. Industrial espionage allows a competitor to gain access to information about a company’s plans, products, clients or trade secrets to effectively reduce their competitive advantage and increase that of the competitor. In the fashion industry and its hyper-competitiveness, industrial spying is a practice that is not uncommon. Many cases of industrial espionage in fashion occur in the context of outsourced manufacturing with spying and IP violations in the host country.

New fashion collections express the creativity and innovation of a designer backed by R&D efforts that are time-consuming and costly, and remain the intellectual property (IP) of the design house. Fashion Designers undertake these expenditures in anticipation that a well-differentiated line will bring rewards in high volume sales and repeat orders before competitors can perhaps piggy-back on their design elements with similar products. But some competitors will engage in various improper and illegal methods to acquire new designs, market research or survey results.

This type of misappropriation of trade secrets (intellectual property) fuels knock offs and grey market activities that can cut deeply into the profit potential of owners of new designs by being able to produce items that are similar and cheaper in advance of a collection launch. Any information about a new collection or the designer’s marketing strategies getting into the hands of the competition before it can be brought to market can also shorten the life cycle of a collection further reducing its value to the designer.

Fashion houses employ various IP protection methods to maintain secrecy about new collections. These may include non-disclosure and non-compete clauses in employment contracts, similar agreements with vendors and licensees as well as non-disclosure agreements with customers who are asked for developmental input and those who attend early previews. Some designers who produce overseas will keep designs and patterns at their US studios, and ship cut fabric to overseas contractors for assembling in order to minimize the incidence of design theft. Large manufacturers may employ specialist security personnel to guard against computer hacking and spyware.

Industrial spying continues to afford high gains to perpetrators because it is usually detected only when a knock off is found on the market and there is extreme difficulty in tracing the origin of the product. I have done a few expeditions to parts of New York City to follow up on a tip that design elements of a new collection are already in the trade just as the collection is about to be launched. It is almost impossible to trace the origins of these products to establish liability – itinerant street vendors selling a facsimile of a $700 handbag for $65 – sales people who claim to speak no English – claims of buying items from an unidentified suitcase trader – items with just enough differentiation to deny allegations of being a knock off.

Manufacturers, who may have the burden of proof, find that the anonymity of the suppliers presents a hurdle to bringing suit so perpetrators operate almost with impunity. Every now and then there is a raid on these locations and retailers are hauled into court. Local law enforcement does not have the teeth to go after suspected perpetrators and these cases are usually left to the state or FTC for prosecution. Industrial spying and IP theft remain criminal activities prosecutable by state or federal authorities under the criminal code or in the US Court of International Trade. But successful prosecution is problematic which exacerbates the problem by making industrial espionage in the fashion industry profitable. The only real recourse left to designers is heightened security protocols.

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Merlin Hernandez is an entrepreneurial development and management consultant with extensive experience in the fashion industry. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

Managing Consultant Risk

by Merlin Hernandez

Managing consultant risk requires a proactive mindset that seeks to create a contract that outlines in detail who is responsible for the outcome of the project, what constitutes the beginning and end of the project, its distinct phases, allocated financial and physical resources, unique activities and information specific to the project, and well-defined roles of participants. But the key to avoid misunderstandings that can lead to conflict is to develop risk profile early in the process. A risk management analysis will identify possible problems and failures during the contract phase, and how they are to be addressed. These may then be included in the contract. A contract should not only outline consulting services and deliverables but should ensure that necessary resources are in place. In addition to conditions provided to maintain project continuity, in case of any resource failure or cancellation, a provision for financial restitution to the consultant must be included in the contract.

But there is no substitute for good relationship management skills on the part of a consultant that is specifically aimed at client engagement. It may be a mistake to assume that because an invitation to consult emanated from the client, there will be willingness to accept the process or ensuing recommendations. Relationship building is an integral part of the consultancy. It supports client participation in the process, facilitates client learning, and helps to build consensus on recommendations to improve the effectiveness of the business. The consultant is then seen less as an intervention in processes and practices to which the business has grown comfortable, and more as a transformative element. As part of ensuring that a consultancy speaks to client needs, operates with minimum resistance, and meets client expectations, consultancies should have an early review component at the end of the exploratory phase to find common ground and build client engagement.

This is the interface that is meant to trigger the process of transformation for both client and consultant through the recognition that there is need for a period of accommodation and adjustment for both parties. This is before the full research is done and also serves to guide the research focus. It is an important aspect of managing consultant risk for several reasons. Small business clients are often cagey about revealing their financial information to a “stranger” and would often respond to initial questions in ways that maintain the image they wish to portray. The consultant needs to find ways to access relevant information in as short a time as possible in order to render a meaningful service. Most of the time a small business client has had no experience with what the process entails and as a new element in their business, the consultant has to earn their trust.

The client engagement process presents an opportunity to allay client resistance as they get a sense of what the project would entail and become willing to open up in response to some of the areas raised. It also eliminates any pre-conceived ideas the consultant might bring to the process. Having full financial, research, and other available information around which to structure the inquiry reduces the possibility of making recommendations that are too far divergent from what the business can afford or what the client expects. Once the consultant has an appreciation of the company’s position, financial and otherwise, the client could be more effectively engaged. Recommendations would be more closely tethered to business needs for greater client satisfaction.

But there is always the possibility that a conflict could arise. A contract may not cover the full range of potential conflicts and the quality of the consultant-client relationship will determine how easily conflicts are resolved. In a situation where the parties are not able to resolve the issue, mediation could be valuable. A mediator acts as an intermediary between the parties and encourages settlement of disputes by pointing out the strengths and weaknesses of each party’s case. This should been the preferred method for dispute resolution since mediators do not make decisions or awards, and there might still be the possibility to preserve the relationship with the client if the issue is kept out of court. But this might only be possible if an objective third party essentially removes emotion from the discourse.

It comes right back to relationship management as central to managing consultant risk, and more especially so in the small and medium enterprise sector. The trust relationship allows the consultant to become a credible source of information necessary to effect change. The client input allows the consultancy to be resonant with the client perspective. Misunderstandings will be productive and refined as the collaborative process evolves. The risk of client dissatisfaction is thus minimized in a shared vision of the solutions to be applied to the problems faced by the business.

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Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

Mass Customization: Fashion Industry

by Merlin Hernandez

I encounter many young people who have visions of being fashion designers and would ask me where they should begin. My standard response is “learn to sew and study business management.” Apart from understanding how to put a garment together, the advice is meant to emphasize the value of learning about fabrics, experimenting with color, motifs, textures, and basically finding that ‘sweet spot’ amidst the vast array of options. But the business of fashion is what will separate the dreamers from the driven and I salute anyone who takes a real bite out of that oft bitter fruit. Every now and then I will share some of my fashion insights on this forum…

Mass customization is the production of custom-tailored goods or services to meet the diverse and changing needs of the customer at prices that are close to a mass production model. It is about producing the right product, adapted to individual customer need, at the right price. Globalization has increased the customer base for many businesses but it has also brought greater diversity of needs. The business response has to satisfy an unlimited number of consistent choices but at smaller volumes and lower inventory levels than a mass production matrix.

Traditional make-to-stock approaches will not be applicable for the small designer as holding inventory is costly and collection cycles are getting shorter – Spanish label, Zara, puts out a new collection every 14 days. To facilitate the need for Just-In-Time (JIT) delivery and mitigate the risk of supply chain glitches in a make-to-order model, mass customization allows the cost efficiencies of a line flow for limited make-to-stock batch production of partially finished products. Specific customer differentiation needs are then postponed until the last possible point in the supply network to meet JIT requirements for a high level of customer satisfaction.

In the apparel trade, businesses are increasingly structured to be able to manipulate designs quickly and cost-effectively to meet consumer desire for personalized style in a design-for-market model. Standard designs are embellished with different pockets, cuffs, fabrics, notions, and trim. Most manufacturers who engage in mass customization brand their businesses within a narrow niche in order to better anticipate market needs in the basic body, and limit the demand for style variation beyond the add-ons. There is usually an established range of pre-defined differentiating options for planning and production efficiencies.

Small start-ups entering mature markets are better poised and easily adaptable to a mass customization strategy. They might begin by establishing close relationships with a few distributors/retailers in a co-design process with regard to product features. This essentially allows the customer to guide the evolution of the basic design for a product that suits their market.

Larger manufacturers, especially family-based businesses, are often challenged by a lack of managerial knowledge and an understanding of the customer input to mass customization activities that will integrate the customer into the value chain. Mass customization is a feature of style, fit, and functionality, all of which are subjective. It would require a stable process for cost efficiencies but with built-in flexibility for value creation. To some manufacturers, this may be seen almost as a contradiction in terms and they are resistant. Productive processes may need to be re-engineered some but there are no large costs attached.

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Merlin Hernandez is a management and entrepreneurial development consultant with extensive experience in fashion, hospitality, construction, and retail, among other areas of business. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com

Manager Ethics

by Merlin Hernandez

In our exploration of ethics in business, we tend to look at the issue from the perspective of corporate responsibility. Ethical conduct in business is even more important than whether the firm is profitable in the short term in that it enhances long term viability. The key is to establish broad barometer guidelines that provide a framework for ethical conduct. A company’s reputation for ethical behavior is an important factor in its market power and its partner and supply chain relationships. Sustainability is derived from a business model that will face growth or decline with the same ethical standards.

But what is a manager’s ethical role? The ethical profile of the business rests in the hands of its managers who stand at the frontline of how the business is perceived. Attendant pressures and deadlines of a new situation can cloud the issues and lead to expedient behavior that may not necessarily be ethical. The goal of a business is to maximize profits but the goal of a manager is to achieve his/her divisional and even personal self-interest. In order to maintain ethical conduct, it is necessary to have these two goals coincide. Manager engagement is a critical factor as it expands to employees. Engagement can be achieved through recognition and incentive programs and benefits that are tied to performance (like bonuses, stock options, professional development etc.)

Another dimension to the manager dilemma is the regulatory environment. Government’s quarterly profit disclosure requirement for public corporations puts pressure on corporations to be transparent and ethical in the conduct of their business. But the added pressure of needing to show increasing profits each quarter may be an ethical crisis waiting to happen. The problem is that investors will not wait a few years to see if the firm’s ethical position is working for its long term viability. Businesses need to show the potential of their stock in the short term to attract investors. With stock value as the primary indicator of the quality of an investment, there is strong incentive to keep the value of the stock high even using various and sometimes questionable ways to massage accounting statements to show improved profitability.

Managers are usually rewarded for reported short term success which has become a value in itself. Sometimes this comes at the expense of the long term survival of the business. Long term viability, on the other hand, could sacrifice short term profits or mean operating at a loss in the very near term. Recognizing these options across the board in a business makes it easier to see an ethical perspective as strategic. This requires emphasizing sustainability, brand equity, employee engagement, and customer loyalty over short term profitability. As features of an ethical culture, these values give managers the leeway to operate within the ethical framework.

In proposing other ways to address a system that almost lays the foundation for unethical behavior, Paul J Updike suggests a measure similar to “backwards accounting” as the best measure of ethical behavior. A “rolling revision” like what is done with quarterly GDP measures can be used for corporate profits. Once the interests of managers and the firm are aligned, quarterly or even monthly revisions of profitability measures would ensure that a combination of quality, price, and value delivery is used to measure short term profitability. Used repeatedly, long term viability will be taken care of in an atmosphere of ethics and profitability.

Category: ETHICS

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             Point well taken

Merlin Hernandez is an entrepreneurial development and management consultant with extensive experience in the fashion, hospitality, and construction industries, among other areas of business. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

Getting into the Fashion Business

by Merlin Hernandez

It is no secret that the creative impetus for New York fashion and by extension US Fashion, turns on the edgy, adventurous, risk-taking creations of young, new designers. But most of these designers do not make it past their first collection primarily due to lack of an understanding of how the production processes at their disposal affect their ability to control the factors of production for competitive advantage.

Many new designers exhaust their limited resources well before a second collection can be brought to market while elements of their designs can be seen in the collections of major fashion houses up to five years later. It is important that new designers pay attention to the necessary production processes to execute a collection. The cost and complexity of market entry requirements dictate that design elements need to factor production processes in order to execute a new collection at a price favorable to entry.

For manageability, early collections should be kept small. But even with small product variety, production still may not meet the full requirements of repetitive process flow operations that would drive economies of scale. Elements of innovative, edgy designs make for flow paths that are varied, to produce small customer orders in a labor intensive operation. Worker skills not automation determine flow, and throughput times are longer with a larger proportion of work-in-progress inventory. This more fully describes an intermittent operation or batch (job) process, more expensive to execute, ultimately with higher price points that threaten market entry potential.

The appropriateness of process flows is often determined by the structure of the production side of the industry at the designer end. Very few new designers can afford to set up their own production facilities and rely on the array of production houses servicing the trade. For obvious reasons, these houses have a preference for the large volumes of established designers, and prioritize their established clientele, or large, lucrative new contracts. Production processes follow a high volume repetitive flow that is closer to a mass production mix. The production period for each season spans only eight to ten weeks, and the smaller volumes of new design labels tend to be wedged in between major runs, and need to be completed in the shortest possible interval.

The longer throughput times and intermittent flows of small specialty collections are challenging and can result in the need to bring in additional workers for timely completion of the run. In addition, new designers tend to produce samples that are high on aesthetics with little production consideration. In commercializing the collections, efforts to re-configure the design to create a production sample for process efficiencies are often resisted. All of this translates into more man-hours and considerably higher costs that devour resources at an accelerated rate.

As a result, market entry prices often do not compete well for those who make it that far, and designers have an uphill battle to get their creations into the trade. The structure is only effective for those young designers who are prepared to make the initial compromises to get a foot in the door. Many of them work with consultants and experienced production managers who can guide
them through the maze of the industry structure.

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Merlin Hernandez is a management and entrepreneurial development consultant with extensive experience in fashion, hospitality, construction, and retail, among other areas of business. For more information on this and other topics, please send enquiries to businesssolutions1168@gmail.com