Levi Strauss& Co.: Global Sourcing
Published 16 Jan 2017
Levi Strauss & Co is said to be the world biggest apparel company it is now presented with a tough decision that could have enormous implications for it profitability, stability and internal values. There is a clear dichotomy of choices now facing the company and these forces the senior managers to rethink entrenched value propositions, weight their relevance and decide on a path that does not undermine or negatively impact their brands and ultimate profitability. The company is very careful in selecting business partners who share their values and so the way forward presents opportunities and also outcomes inimical to its image and financial health. The Company set up the China Policy Group in 1992 to specifically examine two options relating to China.
The Group had two foci: The first was on whether Levi Strauss and Co. should continue to source and purchase fabric in China and the second was if it should make direct investments in manufacturing and marketing in that country. Both decision needed to be carefully thought out and any ensuing decision needed to be pragmatic, principled and consistent with the company’s ethical values and global sourcing guidelines.
The company was started in the 1850s and operates in countries all over the world and by the end of the twentieth century, Levi was said to be synonymous with jeans and is emblematic of American popular culture. The vice president for Corporate Marketing explained that Levi’s® jeans epitomized “freedom, originality, youthfulness and the spirit of America” in markets worldwide. They were even included in the permanent collection of the Smithsonian Institute, a museum of U.S. history and culture located in Washington, D.C. (Janofsky p. C4. Ff). This clearly showed that the company was seriously concerned about its image and wanted to maintain the right relationships with its various publics to ensure that Levi’s products would consistently represent its ideals.
The company manufacture products primarily in countries where they can be sold and market it flagship Levi’s brand in more than sixty countries (Levi Strauss & Co., Fact Sheet). Levi Strauss and Co. also attributes its success in the late 1980s and1990s in part, to “to sales of jeans and related products outside the United States, principally in Europe and the Asia-Pacific region” (San Francisco Business Times, May 22, 1992, p. 5 ff ).
This means that the company needs to seriously consider the financial impact of the China decision on its bottom line. The company would ideally need to operate within the global guidelines and ethics but would have to weigh theses against the possibility of losing a potentially profitable market thus potentially negatively impacting future growth and financial health. Burgeoning international sales have become increasingly significant and in 1992, these sales accounted for 37% of total revenues and 53% of pretax profits.
Therefore the significance of the China market with over a billion people and one of the fastest growing economies in the world could not be ignored even if the company experience some dissonance or discomfort with its decision. Levi Strauss & Co. also recognized that it receives higher profit margins from foreign customers who were more willing to pay for perceived high quality clothing (Eckhouse p.D2). Foreign customers were paying about twice the average price that customers in the United States were paying and this, coupled with profitability data might encourage the leaders of Levi Strauss and company to consider the option to engage in investments in manufacturing and marketing in that China.
Legal “grey markets” were surfacing in some countries and this was the process were people would buy Levi’s products in bulk off the shelf in the United States, ship them into another country and then sell the products at knock-off prices in unauthorized outlets. This is a trend that the company perceived to be a threat to the image of its products. The company has registered its trademark in over 150 countries to combat this trend and a decision to make direct investments in manufacturing and marketing in China may also help the company to successfully fight this unwanted happening.
China has a large population of over a billion people and on the surface; this provides an attractive market for its products. However, Levi Strauss and Co. has guidelines for company selection and these may be in conflict with the company’s options concerning China. China has a military government and the communist regime has come under attack from people and governments all over the world for perceived human rights violation.
The incident at Tiananmen Square, China in 1989 where demonstrators were killed could be a thorny issue for the company leaders to deal with in light of the fact that historically, Levi withdrew from Burma and cancelling contracts to buy 850, 000 trousers and shirts annually because, “under current circumstances, it is not possible to do business without directly supporting the military government and its pervasive human-rights violations” (Billenness 1993).
Levi Strauss & Co. has been sourcing in China since 1986, albeit, sales remained very small since Levi’s clothing was not mass marketed there .The company’s China Policy Group started its work in late 1992 and company’s presence in China was quite little then.
During 1991 the company leaders decided in the “11th hour” of consultation to give up on a China joint venture to produce clothes for sale in local Chinese markets after they discovered that the venture would be responsible for enforcing China’s one-child-per family policy. This was not in keeping with the internal guidelines of Levi Strauss and Co.
In China, the company sourced materials for its products either directly or indirectly from contractors and these include buttons, threads, labels and fabric. China was a top location for global companies to place fabric mills and so Levi could easily source many of the required raw materials at competitive prices.
According to the report from the Harvard Business School, Levi Strauss decision carried other implications:
Any change in LS&CO.’s China stance would be felt most directly by employees in the Hong Kong branch of the company’s Asian sourcing organization. Responsible for all Hong Kong and China sourcing, the 120-person office arranged for a total of 20 million to 22 million units from about 20 contractors in 1992. The Hong Kong branch was confident there would be no problem finding satisfactory contractors if LS&CO. expanded its China presence. In fact, the company’s Chinese contractors were doing well under the Business Partner Terms of Engagement—better even than contractors in some other parts of Asia with whom LS&CO. had very successful relationships.
These implications would have to be considered by the senior leaders before any concrete action is taken to move forward. Historically, the leaders of Levi predicated their actions on a strong link between” good ethics and good business over future years and appreciated the ethical dilemmas that came with a decision to do business in China. It all well and good to potentially make a goof profit, but the leaders did not want to sacrifice ethical ideas on the altar of financial gain.
Levi Strauss & Co. adopted the “principled reasoning approach”(PRA), a thorough and explicit procedure that involved six discrete steps: (1) defining the problem, (2) agreeing on the principles to be satisfied, (3) identifying both high- impact and high-influence stakeholders and assessing their claims, (4) brainstorming possible solutions, (5) testing the consequences of chosen solutions, and (6) developing an ethical process for implementing the Solution (Levi Strauss & Co.: Global Sourcing (A). This approach could prove to be the guide to making a decision that allow the company to implement a strategic plan without violating internal guidelines.
Levi Strauss & Company need to avoid benefitting from what was considered to be questionable labor practices in some countries and labor practices in China was not always ideal. Also, Consumers all over the world is being more conscious about source of labor concerning the goods that they ultimately buy. These ethical concerns could severely impact Levi’s sales if International and local consumers in the United States reject items sourced or manufactured in China. The consequences could be at best risky and at worst; financially disastrous. Levi would not want to be seen as supporting sub-standard wages in China in order to make a profit.
On the other hand, Labor costs in countries differ and the average salary to maintain a household in different countries differs. Levi’s decision to continue to source and purchase fabric in China or make direct investments in manufacturing and marketing in that country does not mean that they support sub-standard wages or a military government. In fact a decision to make direct investments in manufacturing and marketing in that country may mean that they have a level of control over the wages of workers and the ability to ensure that the company can withstand international scrutiny about its practices. Levi could then ensure that labor standards are equal to that of any first world nation and that the salary of workers in the manufacturing plants is fair.
The company can roll-out a global strategy that ensures that workers all over the world are comparatively and equitably paid, albeit not necessarily at the exact same hourly rate. The China market cannot be ignored by the company as it is one of the fastest growing economies’ in the world and future expansion and profitability of Levi may be impacted on that country’s continued growth. The company can help to change the stereotypical image of firms benefiting from unjust labor standards by becoming a beacon of good corporate citizenry and also increase its profitability.
- “Apparel Business Unwrinkled by Retailing Slump,” San Francisco Business Times, May 22, 1992, p. 5 ff
- John Eckhouse, “Record Profit as Levi’s Sales Top $5 Billion,” The San Francisco Chronicle, March 2, 1993, p. D2.
- Michael Janofsky, “Whether It’s Bluejeans or Mini-Motors or Power Plants . . .: Levi Strauss, American Symbol with A Cause,” The New York Times, January 3, 1994, p. C4 ff.
- Simon Billenness, “Burma: A New Issue for Social Investors,” Franklin’s Insight: Investing for a Better World, Franklin Research and Development Corporation, October 15, 1993.