Abstract
Dong-In group is a contract manufacturer of outdoor gears and equipment for leading global outdoor companies. It provides complete manufacturing services to many global companies. Established in 1992, in Seoul, Korea, its headquarters are based in Gimpo, South Korea. The company has a highly automated aluminium forging facility in Gimpo, seven factories in the Philippines, and one in Vietnam. Within the Philippines, there are six manufacturing plants and one warehousing and fabric cutting service provider for the factories. The facility in Vietnam is also a manufacturing factory. The company has been looking forward to moving up the value chain by taking up a larger share of the outdoor gear manufacturing supply chain. This is crucial if the organization wants to gain competitive advantage and have a sustainable business model. Being renowned worldwide for its excellence in low cost manufacturing, the next step is to add more value for the customers (i.e., outdoor companies). With this intention, the CEO of Dong-In is in the process of identifying what parts of the product development process can he acquire next and what are the challenges he would face in doing so.
Keywords
On 30 December 2012, Dong-In Entech Group of Companies celebrated its 20th annual day. The entire factory, situated in Bataan, Philippines, was in a celebratory mood. Representatives of Black Diamond, one of the oldest regular customers of the Dong-In Group had flown from California to be part of the celebrations. Over the drinks table, Mr I. S. Jung the CEO and President of Dong-In Entech Group of Companies and Mr K. J. Park the Vice President of Dong-In Entech, Philippines, were discussing opportunities to acquire more of the value chain of Black Diamond. Dong-In Entech was established in 1992 in Seoul, Korea, as a provider of manufacturing solutions to global leaders of the outdoor adventure industry. With its humble beginnings, today Dong-In Entech is the preferred choice of global brands, such as Black Diamond, Gregory, CamelBak, Georgia and others in the outdoor adventure industry (Figure 1). All these global brands placed manufacturing orders on contract basis with Dong-In Entech. As a result, of their manufacturing expertise, the organization had to gain competitive advantage over other players by moving up and grabbing a bigger share of the value chain of the outdoor gear industry rather than being just seen as a cheap manufacturing location.
Dong-In Entech Group
Dong-In Entech Group of Companies was a complete manufacturing solutions provider for highquality, high-end outdoor adventure products for the global market. Dong-In Entech Co. Ltd was founded in 1992 in Seoul, Korea. The company became known for its expertise in producing technical and high-quality products, such as backpacks, sports equipment and COTs (carts for ambulance use). Headquartered in Korea, Dong-In Entech Group had one factory in Korea, seven subsidiary companies in the Philippines and one subsidiary company in Vietnam. All the subsidiary companies were manufacturing locations. The customers of Dong-In included high-end backpack and outdoor-gear retailers across the world. Most of them had been working with Dong-In Entech for 15 years or more (Table 1).
Dong-In Entech in Korea
The head office based in Korea handled sales, sourcing, accounting, trade, and research and development (R&D). The sales department was in charge of handling customer needs and requests, as well as nurturing and looking for old and new customers, respectively. The responsibility of the sales group included handling business contracts, coordinating with the factories for sample development, pricing, and facilitation of purchase orders (POs) from the customers. The sourcing department was incharge of canvassing and purchasing all raw material requirements for all manufacturing facilities of Dong-In Entech across the world. They were also responsible for proper handling and delivery of all incoming and outgoing materials. The accounting department controlled all financial reports and documents including taxation reports and settlements related to all kinds of payments. The trade department took care of the documentation, processing and customs clearance for all of the import and export transactions of the head office. The R&D department was in charge of all the R&D activities for hard goods included in aluminium and plastic related products and material selection as well as prototyping of hard-goods-related components and the roles and responsibilities were distributed to various the head quarter divisions in Korea.
Time Line of Dong-In Entech Group
Dong-In Entech in Philippines
Dong-In Group of Companies, Philippines had seven subsidiaries with the central warehousing at Freeport Area of Bataan (FAB). In the mid-1990s, Mr I. S. Jung, the founding president of Dong-In Entech Group took the decision to shift the manufacturing facility to Philippines in order to stay competitive in the global market. The highly mechanized and complex task of aluminium forging for producing different hard-goods components to be used in frames of backpacks was retained in Gimpo, South Korea, and the labour-intensive work of sewing, embroidery and assembling of products was shifted to the Philippines. The Philippines served as an ideal location due to its geographical centrality on the international trade route, ease of accessibility, availability of cheap labour and an English speaking workforce. Also, the government of the Philippines was promoting labour-intensive industries to create job opportunities for its citizens. The FAB, then known as the Bataan Export Processing Zone, was offering tax holidays for investments and the imports of raw materials and export of finished goods were exempted from taxes and duties. The incentives of FAB were (adapted from FAB website 1 ):
Dong-In Entech Factories in Philippines
Income Tax Holidays (ITH) for 4 years extendable to a maximum of 8 years, a 5 per cent tax on gross income earned was imposed in lieu of all national and local taxes.
Exemption from duties and taxes on imported capital equipment, spare parts, other supplies and raw materials.
Exemption from warfare dues, export taxes, imposts and fees.
Domestic sales allowance of up to 30 per cent of total sales.
Permanent resident status for foreign investors and immediate family members.
Tax-free importation of personal equipment for use within the free port.
The FAB was the only free port in the Philippines that could sell real property.
The first factory in the Philippines was established in 1996. The seven companies taken together regularly employed around 8,500 employees. The facilities of Dong-In Entech Group at the Philippines were of world standard and used the most modern production techniques and equipment (Table 2). Customers of Dong-In Entech appreciated the management’s efforts to continuously upgrade its facilities and surpass global standards. The quality of products manufactured at the Dong-In Philippines facilities met the international benchmark in the outdoor gears industry. A testament of this was Dong-In Entech’s long-term relationships with most of its customers. The facilities in Philippines and Vietnam were the manufacturing locations. The raw materials were purchased by the procurement team based out of the headquarters in Korea on pull system based on just-in-time (JIT) process.
Supply Chain of Outdoor Products
The outdoor adventure industry had come a long way in terms of its new evolved model of product development starting from product conceptualization followed by product manufacturing and finally reaching the store. Traditionally, the complete supply chain of such high-end products as those of the outdoor adventure industry was vertically integrated with the parent brand performing all the activities. Later on the less complicated, easy to produce labour-intensive components were contracted to countries where labour was cheap. At present, most of these outdoor companies did not own any production facility. However, the companies had to exercise a lot of caution while deciding on the outsourcing manufacturing partner. Some of the important concerns of these global companies included:
Technical ability of the outsourcing partner to produce such complex products The reliability of on time delivery Defect-free product delivery The labour practices being followed by the partner.
The last factor became more important after some incidents of suppressive labour practices became public. The end customer was concerned about the place of origin of the product and the reputation of the place and the manufacturer as a good employer. In the event of non-compliance of standard SHE (Safety, Health and Environmental) policies by the outsourcing partners, there were reputational risks involved for the outdoor companies. A typical product cycle at Dong-In Entech started with the parent companies such as Black Diamond, Camelback, etc. placing a PO to Dong-In Entech head office in Korea. The design team of the ordering company (i.e., main customers of Dong-In Entech) brought their product design (blueprints) to Dong-In in Philippines. The Dong-In R&D team at each factory developed the pilot (or sample) product from the pattern design to the final working sample product. Once pilot production was completed, the product was tested with the end customer onsite in Bataan, Philippines (Figure 2).
After completing the pilot development cycle, the inputs of the marketing team and selected group of approvers were sought to decide the market acceptability of the product. The pilot production phase, however, could go through several rounds to ensure that the required quality level had been achieved. Once the product was approved by the customers (i.e., outdoor companies), a detailed production drawing was made and specifications were prepared. Contract was awarded to the contract manufacturers based on the specifications, and the delivery was checked for compliance against the specifications. For a typical product order placed to Dong-In, the delivery time as per the contract was 120 days from the date of placing the PO to Dong-In Entech Head Quarters (HQ). The HQ in Korea then immediately placed a sub-PO with one of the subsidiaries in the Philippines depending on the type of the product. Upon receiving the PO from the HQ, the production team at Dong-In Entech in Philippines decided the production lots and scheduled their manufacturing. The engineering team prepared a bill of materials (BOM) and sent the same to Dong-In Entech HQ for procurement of raw materials. The raw materials were sourced from across the globe by the central purchasing team based in the HQ in Korea. These raw materials were dispatched to the Philippines by the vendors and they were received at the Manila port. It took around 40 days for the raw materials to reach the plant in the Philippines from the day of placement of PO by Dong-In Entech HQ. In this 40-day period the BOM was prepared at Dong-In Entech at Philippines and procurement was done by Dong-In Entech HQ in Korea. The procured raw materials were dispatched via sea, received at Manila Port and transported by road to Bataan plant after custom and excise clearance. Dong-In Entech involved a third party transport operator for transporting the raw materials from the Manila port to the plant in Bataan and the finished products from the plant to Manila port (Figure 3).
All raw material was segregated and stored as per the production batches at the central warehousing facility at Bataan in Philippines. The fabric received in rolled sheets was cut as per the required shape and also stored as per production batch. All the raw materials were sent to the production floor of each factory when the scheduled production batch date arrived. It should be noted that Dong-In followed the pull-based system and the raw materials were purchased only after the PO was issued. For this reason, Dong-In Entech enjoyed a good relationship with its selected list of qualified suppliers. The ground floor at each factory followed the assembly line for production. The raw material was released piece by piece at one end and several operations were performed at the succeeding workstations. At the end of the assembly line, a quality inspection person inspected each and every bag individually for any defect. The defects were categorized under two types; one was minor defect such as a thread coming out or slight deviation in the sewing line. These products were kept in a bin and taken up for repair at the end of the day so that the assembly line was not disturbed. Second type of defects were those that could not be repaired. These products were discarded. The final products were dispatched to different locations as specified by the customer, to different parts of the world. It took a total of 50 days from the day the raw material was received to the day the products reached Manila port to be dispatched to the customers. In these 50 days, all procedures including cutting, embroidery, sewing, bag assembly, packaging and dispatch from Bataan to Manila port were completed in the Philippines. When the outdoor equipment company placed the order on a lump sum basis with one of the Dong-In Entech factories in the Philippines, Dong-In Korea issued manufacturing contracts to that factory. Under this agreement, only the contracted factory was responsible for the manufacturing of that particular product. The logistics of the raw materials were handled by Dong-In Entech HQ in Korea. Dong-In Entech in Philippines requested Dong-In Entech HQ on a cost plus basis. Before making the order, the outdoor company delivered their design of the products to developing the pilot products (or sample products) with one of Dong-In Entech factory in Philippines.
CamelBak was one of Dong-In Entech’s renowned customers. They were known in the industry for their back packs and military equipment. CamelBak’s design team visited East Cam Tech Corp. (ECTC), which was one of Dong-In Entech factories at Bataan. The CamelBak team collaborated with ECTC R&D team and made the pilot working samples. It took around 3–5 days to make the final sample product. Usually, CamelBak brought two to five designs at once and spent 2 weeks with Dong-In Entech R&D team before placing the product order. During the pilot product development phase, clients such as CamelBak and others could stay at the Dong-In Entech factory guest houses. The responsibilities of ECTC as well as Dong-In Entech HQ ended when the finished product was dispatched at the Manila Port. This arrangement was based on FOB (Free On Board).
Product Cost
The cost of the product varied from product to product. For instance, the cost of a simple sling bag would comprise mostly of the material cost as the labour requirements were very less. These bags could be produced using highly standardized assembly lines at a very high output rate. However, for other products like a trekking bag pack, the production process would be complex and might require adjustment to the standard assembly line. It showed the cost of production for two product categories. One was a simple bag which could be produced at a very high output rate and required significantly less labour hours (the low-end products). The material cost was 88.5 per cent of the total cost for the low-end products (Table 3). Labour cost for such a product was around 5 per cent. On the other hand, the high-end products in reference, the cost of material reduced as the percentage of the total cost. However, it should be kept in reference that such a product would cost more than the simple Product A. The cost of material for such a product was 74.5 per cent and the labour cost increased to 19 per cent because it required high labour cost and complex assembly line. If the same product was being manufactured in a high labour cost country such as Korea, Dong-In would lose its competitive advantage.
Dong-In Entech Product Cost Ratio Based on Tiers
Climbing Up the Value Chain
Mr I. S. Jung was aware that comparative labour cost advantage model was not sustainable over a long time. To make the business model of Dong-In sustainable, he needed to move up the value chain and grab a bigger pie of the complete production process but it would be a tough task. He had been spending many sleepless nights trying to figure out which additional part of the supply chain could be performed by Dong-In with complete confidence of the clients. Several ideas had come up, these included developing engineering capabilities, so that the product engineering drawings could be prepared by Dong-In giving the brands a cost saving on the engineering front. Other suggestions on the table included complete integration of Dong-In with the customers so that dedicated teams for each customer executed the product design—prototyping as well as testing. This model would mean that the clients outsourced the product development portion of its supply chain to Dong-In and just added their brand name to the product and sold the product at a premium. However, this would require the client to completely trust Dong-In its abilities to design the product well without any conflict of interests. Other aspects such as confidentiality of new product under development and protection of other intellectual property rights would need to be figured out. Mr I. S. Jung hoped that this meeting with Black Diamond would give him good insights on what would lay ahead in future for Dong-In Entech. He also needed to present his thoughts carefully to ensure that his intentions were understood and taken up.