Not sure if this was posted here before: http://alphaideas.in/wp-content/uploads/2014/12/Teaching-Note-on-Unconventionality.pdf
The manufacturing facilities of Kitex about 12 miles outside Cochin adhere to the highest
standards of quality, safety, and social compliance in the world. It’s 4,000 workers (most of
whom are young women) enjoy a safe, hygienic, and comfortable environment. They also live
on the campus. Many of them come from villages more than 1,000 miles away. When they
arrive, they are often found to be malnourished. Kitex provides them with tasty, nutritious
food, which I ate when I visited the factory. I also got an opportunity, along with other
stockholders of the company, to see the superbly constructed and maintained factory premises
as well as the dormitories for the women workers.
It is here where Kitex excels. It’s fully compliant, large scale operation (the company can
manufacture about 250,000 pieces of infant-wear every day), its fair treatment of employees,
its focus on automation, and other factors gives it a low-cost advantage over its competitors
which is hard to replicate. For example, given its large business volume, the per-unit cost of
social compliance for Kitex is much smaller than that of thousands of sweatshops, most of
whom simply can’t afford to comply. Kitex will continue to gain market share from them
because— thanks to its low cost advantage — it can charge the same price for its products
than it’s non-compliant competitors and yet earn healthy profit margins.
Another source of Kitex’s competitive advantage is high switching costs for its customers.
Large buyers of garments spend significant amount of time and resources in selecting and
approving vendors. Once a vendor has been selected and approved, then so long as it’s
compliant with quality, safety, and social compliance standards, its very difficult and costly to
switch to another vendor just to save some money.
Besides, there aren’t very many vendors like Kitex out there. There are only 12 companies
of comparable size in the world which can meet the business volume requirements of large
buyers without compromising on quality and safety standards. Kitex is one of them and is
likely to become much larger in the future as its clients give it a higher proportion of their total
sourcing requirements. For example, Carter’s, which is just one of Kitex clients buys garments
worth $1.5 billion every year, while the aggregate revenues of Kitex for FY14 were only about
$75 million. The Annual Report of Carter’s for 2013 states: “We source products internationally, primarily from Asia. One sourcing agent currently manages approximately 70% of our inventory purchases… Our goal is to shift the mix of our direct sourcing from approximately 30% in fiscal 2013 to 50% by 2017 in an effort to improve the performance of our supply chain.”
As gigantic customers like Carter’s, Toys“R”Us, Gerber, and The Children’s Place divert
more of their sourcing requirements to Kitex, I expect the company’s revenues and earnings
to grow manifold over the next decade.
