Country of origin, the location of the high street store and the roots of a luxury product have extraordinary importance to the success of a luxury product and in some cases have regulatory requirements built around them to protect the brand and industry – say champagne for the Champagne district in France has the right to call itself so…the rest being delegated to the rather insipid nomenclature of “sparkling wine”. The country of origin will define the perceptions around brand value as well as seen from special caviar or cheese just as the location of the store in a suitable high street defines the prestige of the brand. Kapferer & Bastien go one step further and state that the roots of the product and its manufacturing location also define the luxury associated with a luxury product. They state that a luxury product such as Burbery associated with Britain but manufactured in China will negatively impact brand perception. Similarly the Mini though owned by a German company (BMW) still is produced in Britain to retain its appeal in the customers mind. See article below on how the “Made in China” label can effect even local markets in China/India
We need to understand the extent to which the region of manufacture affects the brand and whether a trade off is worthwhile before deciding on the supply chain strategy for the luxury goods. The benefits of low cost country production facilities (say a China, India or Vietnam) is obviously lower prices due to cheaper labour and maybe taxes. The disadvantages besides brand appeal could be many:
· A negative impact on brand
· lack of skilled resources in these countries
· lack of cultural affinity of the producing country with the market in which the product is being sold leading to faulty design/packaging/quality etc
· More difficult to control the supply chain (we’ve all heard of luxury goods being manufactured by unscrupulous contractors in sweatshop conditions)
· higher taxes and customs duties
· Higher logistics costs and lead times
· Risk of Patent and copyright violations – high rate of pirated production of designs and counterfeit material in local production centers
Inspite of all the obvious disadvantageous, we still find that outsourcing to lower cost countries is popular and working well for some luxury brands. Lets now look at why this might be so:
· The great push East – a growing market in China, India etc makes it imperative to have production facilities here (and when there, why not have economies of scale and produce for the western markets as well?)
· Nullifying effect of duties and taxes – using free trade agreements like NAFTA (eg. Maquiladora products where products are made with cheaper labour in Mexico and shipped to USA with low or nil duties) or simply importing CKD (Completely Knocked Down) and SKD (Semi Knocked Down) and assembling them in the market country typically lowers taxes/duties – this is specially seen in the automotive sector
· The growing maturity of supply chain and logistics systems – 3 PLs, supply chain software/technology and strategy and logistics companies have now matured to better control and deliver products across continents with precision and lower lead time
· Developing local talent in LCC (low cost countries) or splitting the supply chain – with talent being groomed in LCC, certain aspects of design and manufacture are being developed locally. However the major strategy is to retain brand development and design in country of origin while outsourcing only the production to LCC
Obviously the major argument for moving production away from country of origin will be COST and against it will be loss of BRAND value and issues in copyright and patent protection – something that must be closely considered before we decide on the supply chain strategy
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