Phase Ⅰ: Supply Chain Strategy (Jose & Win)
Company Overview (Jose)
Fast Retailing’s Competitive Strategies (Corporate Level)
Fast Retailing’s Current Financial Situation and Related Problems
Competitive Strategies (Business Level) (Win)
Branding Strategy
Phase Ⅱ: Regional Facility Configuration (Patumma & Hiromitsu)
Regional demand (Patumma)
Production Technologies (Hiromitsu)
Aggregate factor and logistic costs
Tariffs and tax incentives
Political, Exchange rate and demand risk
Phase Ⅲ: Desirable Sites (Bilguun)
Potential sites
Transportation services
Utilities
Community receptivity to business and industry
Phase Ⅳ: Location Choices (Lúcia)
Facility location
Raw Materials
Supima cotton (Mexico and Latin America)
Cashmere and Merino wool
Logistic factors
Appendices

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Phase Ⅰ: Supply Chain Strategy (Jose & Win)
Company Overview (Jose)
Background of Fast Retailing
Since its establishment in May of 1963, Fast Retailing has grown to become a
truly global company which takes pride in its culture, brands, and network. Fast
Retailing’s line of business resembles that of a “Holding” Company, by controlling and
managing the overall group activities as its main owner. Since its inception in the early
1960’s until 1999, Fast Retailing was consolidating its position in the Japanese market
through organic growth by building a chain of suburban roadside stores and later by
urban stores opening. However during the 2000’s and until the present day, Fast
Retailing’s expansion policy has become more aggressive and international oriented, by
entering the Chinese, European, and American market through means of new-store
openings and acquisition of brands to increase its brand portfolio. As of 2014, Fast
Retailing owns and manages the following brands:
● UNIQLO
● GU
● Theory
● Comptoir des Cotonniers
● Princesse tam.tam
● J Brand
Fast retailing is divided into three business units for a better performance
managing and tracking. Those three divisions are UNIQLO Japan, UNIQLO
International, and Global Brands (which comprises all of speciality stores of
non-UNIQLO branded items). Since 2010, Fast Retailing has been increasingly
concentrated in expanding its market reach and profits of the UNIQLO International
3

division, while consolidating its position with UNIQLO Japan, and rationalizing its
extensive Global Brands division.
This report will focus on the UNIQLO International division, more in specific its
UNIQLO US expansion campaign.
Fast Retailing’s Competitive Strategies (Corporate Level)
SAP Supply Chain Strategy and Business Model:
Fast Retailing is considered as a Specialty-store of Private-label Apparel (SPA),
therefore, and as a holding company, they implement a high degree of control
throughout their estire clothes-making process (Exhibit 1). Fast Retailing’s control on its
supply chain extends from design to manufacturing, all the way to the retail. Through
this strategy, Fast Retailing has been able to achieve “low costs” on its final product and
a high degree of flexibility to meet fashion trends. The SPA model also incorporates the
procurement of raw materials, production planning, development and manufacturing, as
well distribution and inventory management. As well, Fast Retailing has created R&D
centers (currently located in Tokyo, New York, and Shanghai) in order to reduce lead
times of product design and development, localize fashion trends, assure quality and
pricing of raw materials, and reduce lead times (specifically with distribution centers and
manufacturers).
Fast Retailing has announced its intention for the short-term future to open new
R&D centers and full-fledged product development facilities in Paris, London, and Los
Angeles. It is worth mentioning that Fast Retailing is currently shifting its “overseas
management control” of its retail stores to “local management”. The rationale behind
this change is in order to allow the end-point of its supply chain to be more responsive
to local needs in terms of product-availability, inventory management, and
end-customer satisfaction.
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Lastly, from several public documents we came to understand that Fast Retailing
(as a group) has the following capabilities:
● ease of access to financial resources
● store operations know-how
● production management and planning
● low cost production systems (owned and outsourced with production
partners)
○ Owned production bases: Japan, China, Vietnam, Bangladesh,
Cambodia, Indonesia, Thailand, The Philippines, Singapore, Sri
Lanka, and India.
M&A Strategy:
Regarding Fast Retailing’s M&A strategy, the company is currently engaged in
active acquisition of brands that demonstrate “potential for global development”,
specifically brand development in the US, Europe, SEA, and South Korea (brands like
Theory, Comptoir des Cotonniers, Princesse tam.tam, and J Brand). The company
seeks to become a top-tier global competitor in the apparel manufacturing and retailing
industry.
Expansion Strategy:
● Brand development in US, Europe, SEA, and Oceania through the opening of
global flagship stores
○ priority is to expand and establish UNIQLO to the US market
○ turn UNIQLO US profitable by developing its network to support the
opening of 100-stores per year on the East and West Coast
● Creation of global headquarters that allow the establishment of locally-managed
stores and networks, reducing operational costs
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○ create design HQ in NY, E-Commerce HQ in San Francisco, HQ in Paris
and London
○ establish strong global R&D centers in NY, Paris, and London that allow
for strategic and local collaboration with business partners
● Build top-class global supply chain
○ strategically-locate factory networks, distribution centers, and retail stores
○ allow the creation of real and virtual market capabilities (top-class global
direct sales business)
Fast Retailing’s Current Financial Situation and Related Problems
Fast Retailing Consolidated Analysis:
After conducting a quick financial analysis of Fast Retailing Consolidated
operations from FY 2010 to FY 2014 (Table 1), we came to understand that despite
showing profitability growth in terms of Net Sales (11.16%), Working Capital (23.97%),
and Net Income (4.84%) Fast Retailing exhibits some fundamental problems in its
current operational strategy, namely in how it utilizes its assets and how it manages its
supply chain. These problems are reflected in the decrease of its ROE from FY2010 at
21.24% to FY2014 12.5% (negative growth of 10.26%).
Regarding the asset utilization efficiency of Fast Retailing, it was observed that
its low Asset Turnover ratio had a negative growth of 2.51% (1.61 to 1.41), however this
ratio includes accounts receivables, inventory, and depreciation. By excluding such
accounts and only focusing on the efficiency of the net PPE utilization, we were able to
observe a relatively high and consistent Fixed Asset Turnover ratio (5.04 to 5.35) which
exhibit growth of 1.21%. These two ratios suggest that Fast Retailing manufacturing
capabilities are seemingly efficient. However its RONA (Return on Net Assets)
displayed a negative growth of 10.64% (from 20.2% to 11.15%);; this suggests that Fast
Retailing has serious operational inefficiencies that harm its ability to create long-term
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value and that they might be rooted in its Fixed Assets accounts (excluding PPE and
Net Working Capital).
Regarding its supply chain strategy effectiveness, it was observed from a Cash
Conversion Analysis that the Days of Inventory Outstanding component, which
measures current inventory levels and how long it will takes to sell, showed a 8.58%
growth rate (from 68.9 days to 103.9 days) suggesting that the company is “piling-up”
too much inventory as they expand (inventory management inefficiencies). The Days
Payable Outstanding component, which measures how much a company owes its
current vendors for inventory and when the company will pay off its debt, showed a
growth rate of 6.55% (from 24.9 days to 34.2 days) suggesting Fast Retailing inability to
pay off its debt to suppliers in short periods of time and suggesting as well the
postponement of such payments.
In overall, Fast Retailing with its current aggressive expansion policy is creating
operational issues in its supply chain that are reflected in its ability to timely convert its
investment in inventory, assets, and other resource into cash inputs (Cash Conversion
Cycle) from 50.9 days in 2010 to 80.0 days in 2014 (growth rate of 9.47%).
Business Segments Analysis:
After conducting a quick financial analysis (Table 2) of Fast Retailing three
Divisions (from FY 2010 to FY 2014), we came to understand that it's most fast growing
business is UNIQLO International by displaying a 36.0% y/y growth rate in its number of
stores (136 to 633 stores). Net Sales yearly growth of 41.58% contributing to 30% of the
Consolidated Sales (with and expected growth of 40%). UNIQLO International showed
a fairly stable EBITDA margin (reflects core operating profitability after removing effects
of depreciation and amortization) despite its 1.65% negative growth rate suggesting the
existence of operational problems (assets utilization, management overheads, etc.).
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By taking a closer look at the opening of new retail stores of UNIQLO
International among its different locations (Table 3), we were able to determine that The
Philippines (92.0% growth), US (90.4%), Malaysia (80.0%), and Thailand (71.0%)
exhibit the fastest growth rates. Suggesting these locations as future targets of Fast
Retailing M&A and expansion policies.
For this report we will focus on developing a supply chain strategy for the
growing business of UNIQLO International at the US location.
Competitive Strategies (Business Level) (Win)
UNIQLO is a Japanese causal wear manufacturer and retailer under a division of
Fast Retailing Co.Ltd and providing customers with high quality, fashionable, affordable
and comfortable lifewear,every day clothes, and becoming a truly global company.
UNIQLO’s Strengths
Seeking the world’s best materials – UNIQLO is offering fashionable clothing
made by luxury materials with reasonable prices because they can directly negotiate
with global materials manufacturers and secure mass-volume orders with low costs.
Creating new markets with new materials – Another unique factor is the ability
of creating new products by using new functional materials to provide fresh value and
affordable price to our customers. As an example, they developed HEATTECH items
with Toray industries and received acceptance from customers.

Unique Clothing and Focusing on Fast Fashion – UNIQLO differentiates itself
from other companies by developing well-designed unique products and closely focus
on world’s fast fashion and quickly make adjustments to production to reflect the latest
sales trends.

8

Control over the products – Under control, we would like to describe with two
facts;; Quality and Production Control and Inventory Control. UNIQLO always
emphasizes its product quality with skillful employees and visits partner factories every
week to check the production status and resolve the issues. Moreover, customer’s
concerned quality issues are valued and conducted improvement by quickly
communicating with responsible production departments.
For the inventory control, they maintain optimum level of inventory by
monitoring sales and stock on a weekly basis and dispatching necessary inventory and
new products to fulfill orders.

Effective Marketing – UNIQLO conducts seasonal promotion campaigns for the
core products such as fleece, Ultra Light Down, Airism and HEATTECH by advertising
its products’ unique qualities and features on TV and in other media. At the end of each
season, there are the timing of markdowns and limited period sales (typically 20-30% off
the regular price) to ensure that inventory sells out.

Widespread Stores in Japan and outside Japan - There are 846 stores (direct
run stores- 816 and franchise stores-30) in Japan by May 31, 2015 and 633 stores
outside Japan including 374 in Greater China (Mainland, Hong Kong, Taiwan), 133 in
South Korea, 80 in Southeast Asia and Oceania. They have enjoyed rapid expansion in
Asia and are developing a full fledged store network in US. They are expanding in
E-Commerce by offering Online sales in Japan and also in Greater China, South Korea
and US.
Their Customer Center received more than 100,000 comments and requests annually
and act on them with appropriate departments to improve products, stores and
services.

9

Branding Strategy
All employees are encouraged by Group CEO to embrace Fast Retailing’s
Japanese qualities as integrity, heartfelt consideration of customer needs and a
commitment to superior quality and services. Actually, UNIQLO is offering simple,
well-designed clothes to be affordable and accessible to everyone.
To be recognized, it conducts Wheelchair Tennis Tour and supports players with
high quality tennis wear and also sponsors sporting events worldwide. It also fulfills
responsibilities to society and it can make UNIQLO to be well-known and successful.

Product Portfolio
UNIQLO’s basic merchandising concept is to offer clothes that can be worn by
anyone, anywhere, anytime and they perform as their slogan “ Made for All”.
The significant and main products are classified as UT collection, UJ collection
and Fleece collection for both genders. There are many different T-shirts with various
colors and designs in UT collection, different color and style jeans in UJ collection and
wide ranges of colors and designs with rich patterns jackets under Fleece collection.

Competitive Situation
The group engages in intense competition with other companies in the same
industry both in Japan and in other markets. In Japan, main competitors of UNIQLO are
H&M, Zara and GAP and their customers are always discriminating about products,
prices and services.
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Phase Ⅱ: Regional Facility Configuration (Patumma & Hiromitsu)
Regional demand (Patumma)
Background of UNIQLO in US
In 2005, the company launches in the United States opening 3 stores in New
Jersey shopping malls. In 2006, the company was forced to rebrand their American
stores due to dwindling sales.
Through communication with employees and customers, mid-management
discovered that the low sales were due to the unpopularity of the loose fitting apparel.
Typically at the time, apparel brands like The Gap and Banana Republic catered to a
universal fit, “with a looser, relaxed-in-the-middle fit”. UNIQLO decided to experiment by
introducing slimmer Japanese sizes. As a result, brand equity and location sales rose.
The company is not usually concerned with to change their brand line for fads or
short-term trends, but the skinnier and slimmer fits’ demand in apparel has now become
a new universal fashion norm. UNIQLO’s timeless, functional apparel, with its
combination of superior quality and low prices, has proven recession proof on two major
occasions. During the decade long recession in Japan throughout the 1990s, UNIQLO
succeeded in dominating the market as the go to apparel store for price sensitive
shoppers. During 2009 global recession , their profits rise 17%. Up to now, UNIQLO has
1400 stores worldwide and 40 stores in the United States.
Positioning
In the United States, stores are located currently in high traffic urban areas and
major shopping malls in the core of large cities. UNIQLO often positions their flagship
locations nearby competing flagship clothing stores. For flagship stores, UNIQLO is able
to gain brand exposure, and showcase their low price, high quality apparel among the
other top clothing retailers around the world.
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Expanding UNIQLO's Presence in US Markets
At the end of August 2014, UNIQLO is now focusing on another promising
location for future expansion: the United States.They have now reached a point where
they can begin building a genuine store network in the United States. They aim to
expand our store network in the United States to 100 stores over the next few years by
opening between 20 and 30 new stores each year.

Production Technologies (Hiromitsu)
It is assumed that UNIQLO manufactures clothing mostly in China. However, it
can be argued that North America, either the US or Mexico, will be more preferable to
manufacture rather than China in terms of several aspects discussed further hereinafter
given the company’s expanding strategy in the US market.

As discussed earlier, UNIQLO’s strategy is to enjoy economies of scale by
producing a narrow variety of exceptionally high quality basic items such as
“HEATTECH”, “Airism”, extra fine cotton T-shirts. Because UNIQLO’s strong partner,
Toray Japanese chemical manufacturer, produces chemical raw material for Heattech
and Airism, the company itself does not require special technology. Therefore, the
production method is labor intensive rather than depending on high-tech equipment and
technologies. Now that labor cost and other manufacturing cost in China have been
dramatically increasing, the Boston Consulting Group points out that China has lost a
competitive advantage of cheap labor cost as the world’s factory (Exhibit 2). All things
considered, it would not be uneconomical for UNIQLO to open a manufacture in North
America.

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Aggregate factor and logistic costs
Compared to current distribution most likely from China, the US and Mexico are
more promising as a manufacturing location for several reasons. Because of its
closeness to US market, transportation cost from factories either in the US or Mexico to
warehouses in the US will be significantly lower than that incurred from China to the US.
Moreover, it will contribute to being more responsive to the demand in the market
compared to current distribution from China. For instance, UNIQLO can adjust
production according to the actual demand. In addition, this can reduce excess
inventory that UNIQLO is facing now as well as inventory cost. According to
Chinaimportal website, it takes roughly one month to deliver products from China to the
US. This means manufactures need to produce at least 1-2 months before UNIQLO
stores in the US start to sell them. Therefore, there is a big time lag between production
and sales. This time lag has a negative impact on the company’s cash flow. As for raw
material, taking cotton as an example, the US is the 3rd biggest cotton supplier and
Brazil is the 5th
biggest in the world according to the The Statistic Portal. Consequently,
the shipping cost will be inexpensive if UNIQLO can find a good supplier at a
reasonable price either in the US or Brazil rather than buying from Asian countries such
as China, and India.

Tariffs and tax incentives
Suppose current products sold in the US are made in China, and that the US
government imposes 15.9% tariff on women’s or girl’s blouses, shirts and shirt-blouses,
knitted or crocheted according to the article in Examine China. The duty rate varies
according to commodity;; for example, the rate for men’s or boys’ shirts, knitted or
crocheted items is 19.7%. Furthermore, these tax system and regulations could
significantly change in the future. However, if UNIQLO produces either in the US or in
Mexico, the company can enjoy advantages that NAFTA brings to the company and
minimize the risk of changeable tax systems and regulations controlled by other
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governments . This is because NAFTA seems to be by far more stable than tax system
and regulations in China, being based on mutual agreements among the US, Canada
and Mexico.

Political, Exchange rate and demand risk
In terms of political risk, it would be a good idea that UNIQLO starts to produce
outside Asia to reduce heavy manufacturing dependence on Asia. Even if there is a
political tension or crisis in Asia, the company will be highly likely to be able to continue
producing if the company has manufacturing facility in North America.
As for exchange rate, US dollar is more preferable than Mexican peso because
USD has fluctuated less than Mexican peso has for the last 10 years. As of 2015, US
dollar has experienced 8% increase against Japanese yen since 2005, whereas
Mexican peso has devalued 22% against Japanese yen. As this shows, US dollar is
more stable.
Regarding the demand and market for clothing in general, it will increase rather
than shrink nor be a problem with UNIQLO as Exhibit 9 shows. First, the population in
the US is still growing and there is potential for further growth. Secondly, unlike H&M
and Zara, UNIQLO focuses more on basic clothing items with exceptionally high quality
such as down jacket, jeans and underwear rather than fashion-oriented items.
Therefore, the change of fashion trend will not affect UNIQLO products demand as
much as it will other competitors’ demand.

Phase Ⅲ: Desirable Sites (Bilguun)

Potential sites
To choose favorable sites to open manufacturing factories, which support the
U.S. retail business of UNIQLO, proximity to U.S borders, lower labor cost and suitable
14

hard and soft infrastructures are necessary. In order to lower the transportation cost and
to achieve effective response time, the factories should be located in proximity to U.S.

Regarding this situation, we have chosen Mexico as one of our suitable sites to
expand UNIQLO’s factories in terms of its global expansion plan. Especially, the
northern parts of Mexico where is demographically closer to U.S. would be the best
choice.

As our desirable sites in Mexico, the states of Tamaulipas, Coahuila, Chihuahua,
and Baja Califórnia where all are located in the north of Mexico.

Outsourcing to Mexico is becoming more attractive compared to other popular
outsourcing countries such as China from the perspective of U.S due to its closer
proximity, democratic government, and stronger relations between the two countries.

Infrastructure conditions in Mexico have been attractive enough for the
manufacturers and shippers who are setting Mexico as a production center, market, and
logistics channel to the rest of North America. Considering those of infrastructure
condition, the northern parts of Mexico is potentially favorable with establishing cross
border supply chain network with U.S.

Transportation services
In terms of logistics view of supply chain between U.S. and Mexico, land
transportation is the most major option regarding the cost efficiency.

In Mexico, the road network is the most common used infrastructure which is
composed of 370,000 km of toll roads, in which integrated with freeways, highways,
roads and trails that allow the accessibility to almost all locations in Mexico. Mexico
contains three types of highway system;; federal highways, state highways, and rural
15

roads. Under there, the federal highway are that connect with other roads from adjacent
countries. There are four major highway routes that across the U.S. borders, and they
are located in our selected states. These highways have become wider and shorter in
time, so that it makes shippers drive safer and more efficient.

Exhibit 3: Mexico’s National Highway Network as of 2013

The railway transportation system in Mexico consists of 26,727 km of railways.
The freight railway system is owned by the national government and operated by
several independent carriers. Currently, 15% of both domestic and international freight
transit is operated with rail carriers. However, there are more potential exists that we
can expect.

In Mexico, there are two major freight railroads operators: Ferromex (FXE) and
Kansas City Southern de México (KCSM). In addition, railways links in freight train with
adjacent country U.S. matches its railway system in Mexico as they have same
standard gauge 1,435mm (4 ft 8 1⁄∕2 in).
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According to Bureau of Transportation Statistics from United States Department
of Transportation, the total number of incoming truck or rail in 2013 is 5,031,783 with
4,041,207 in top 5 gateways and 837,326 with 827,632 in top 5 gateways respectively.

Table 4: Figures of Incoming Containers Through Border Cities (as of 2013)

Utilities
Water supply in Mexico has gradually improved for decades. According to the
World Bank, percentage of population with access to water is 94.9% in 2012, which are
better rates than China 91.9% and India 92.6%.
According to the World Bank, Mexico’s percentage of population with access to
electricity was 99.2% in 2010, which is relatively higher value compared to the world
standard.

Community receptivity to business and industry
As a manufacturing factory, response time should be shortened so that
warehouses should be located in proximity of these factories. In Mexico, there are
adequate numbers of Mexico-based sophisticated warehousing facilities across the
counties. Thus, new manufacturing factories of UNIQLO can run the supply chain
without struggling.

17

The number of industrial parks in Tamaulipas, Coahuila, Chihuahua, and Baja
California are relatively high. Relatively, as the industry-oriented area, there are
numbers of warehousing facilities in the states located in northern parts of Mexico.

Exhibit 4: Distribution of Industrial Parks in Mexico(as of 2013)

Workforce
According to UN Human Development Report and Individual Statistics
Departments, Mexico marked 93.4% in total (93.7% in male and 93.1% in female) of
literacy rates for all people aged 15 and over. Secondary school enrollment rate was
86% in 2012, which we can expect to hire enough numbers of educated employees.

According to the latest data of World Bank, Mexico’s estimated total population is
122.3 million in 2013. Among these, total workforce is 53,895,633 people, which are 11th

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largest number in the world. Regarding this favorable amount of workforce with lower
labor cost, Mexico is suitable place to establish factories.

Phase Ⅳ: Location Choices (Lúcia)
Facility location
Currently, 90% of UNIQLO factories located in China and the remain 10% Asian
countries Vietnam, Bangladesh, Cambodia, Indonesia, Thailand, Philippines,
Singapore, Sri Lanka and India. Because all these factories are contractor based,
UNIQLO sends 170 of its own people to monitor and provide guidance to these factories
with regard to manufacturing quality, safety, trueness to the design, and manufacturing
volume. In addition, UNIQLO sends a team of specialists called takumis, each with 30
years or more experience in Japan’s textile industry, to these factories to transfer
know-how.
Even with all manufacturing facilities located in Asia, UNIQLO have received a
far greater response from American customers, by booming aggressively the demand
for its products.
To respond to increasing demand, UNIQLO U.S. has been aggressively opening
new stores across the United States, expanding its presence from New York, to New
Jersey and Connecticut, Boston, Philadelphia, and San Francisco and Los Angeles on
the West Coast, bringing the network to 25 stores at the end of August 2014.Going
forward, the company intends to build an initial network of 100 stores by steadily
opening 20 to 30 stores annually.

Exhibit 5 below shows increasing net sales. Moreover, as UNIQLO’s sales
network has become global, it has worked to expand its production operations to other
locations. Looking to the future, UNIQLO would be working to reduce the risk of
over-concentrating production in China as well as the cost of production.
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Exhibit 5: Historical Perspective of UNIQLO’s Net Sales

While the demand for UNIQLO products in United States tends to increase, the
company faces poor inventory management and time to response. In order to improve
inventory management, responsiveness and keep cost effectiveness production,
UNIQLO should establish a factory closed to United States, where raw materials are
available, labor cost is low and communication infrastructure and transportation are
favorable.
Chihuahua is located in Northwestern Mexico and is bordered by the states of
Sonora to the west, Sinaloa to the southwest, Durango to the south, and Coahuila to the
east. To the north and northeast, it has a long line with the U.S.–Mexico border adjacent
to the U.S. states of New Mexico and Texas. It is the largest state in Mexico by area.

One of the reasons why UNIQLO should establish a factory in Chihuahua City is
its proximity to the United States. Without paying the higher costs needed to
manufacture in the United States, the Northern state of Chihuahua represents an
attractive option. Additionally, Chihuahua is a major cotton producer in Mexico, and the
city has large experience in diverse manufacturing industry. Additionally to easy access
to raw material, low labor cost, density population and favorable communication
infrastructure are the supporting key drivers.

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UNIQLO uniqueness is product innovation. The factory to be established in
Chihuahua would be located close to its New York R&D and another to be opened in
Los Angeles. The R&D staff from Los Angeles would be responsible for quality and
production control, maintain close contact between the partner factories in Chihuahua
and to monitor progress of production as well as identify problems. Similar procedure
has been followed in factories located in Asia.

Raw Materials
UNIQLO is able to offer reasonably priced garments made with luxury materials
such as cashmere, Supima cotton, merino wool and premium down. Originally, those
materials, especially cashmere, are expected to be expensive, but UNIQLO is able to
negotiate directly with global materials manufacturers and secure mass-volume orders
at low cost.

Adding manufacturing capacity in Chihuahua, it gives advantage for UNIQLO not
only in point of view of transportation cost to end customers but also in terms of easily
access to raw materials. All materials needed to produce UNIQLO clothes can be
supplied internally in Mexico and from Latin America at a relatively low cost.

Supima cotton (Mexico and Latin America)
Organic cotton production in Latin America began in Peru in the 1980’s and has
since grown to include: Argentina, Brazil, Nicaragua, Paraguay and Peru. In this region,
farmers are keenly concerned with ensuring their food security. Small farmers are
particularly vulnerable to low prices and the global trading environment for both
conventional and organic cotton.

Inside of Mexico, cotton is most important commercial crop, second in value after
corn. Six districts in the northern borders states, Mexicali, Juarez, Conchos, Matamoras,
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Don Martin and Laguna account for 90% of the total production, the remainder is widely
scattered through a dozen states.

Exhibit 6 illustrates that the major cotton producers are concentrated in the
northern part of the country and Chihuahua, the leading producer of cotton with 58.7%,
followed by Baja California with 20.3%, Coahuila with 12.9%, Sonora 4.8%, Durango
with 2.3% and Tamaulipas with 1.0%.

Exhibit 6: Cotton Producing States as per Government Report (2010)

Cashmere and Merino wool
Mexico is known as one of major international player of cashmere and wool
production. Located in Mexico’s capital city, Santiago Textil has focused on
manufacturing cashmere and wool used to tailor men’s suits, for over 100 years.
Santiago Textil’s competitive advantage lies in its cost efficiency, its innovation, its
improvement of product quality and, above all, its long process of adaptation to meet its
customer's needs. The company has diversified its range of textiles to meet the needs
of the fashion markets. Santiago Textil has explored various other areas: ladies’
fashion, uniforms, felts for billiards tables and casinos, bedspreads, blankets and
upholsteries, among others.
22

With easy access to raw materials at relatively low prices, UNIQLO might
maintain or reduce the production cost, comparing to China. Once cotton is available in
some Latin American countries, UNIQLO can easily negotiate the cotton acquisition
price with Mexican producers and thus lowering the production cost.

Additional to raw material access, Mexican manufacturing has a significant
advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S.,
which are exceptionally low because of a glut of supply on the market. China pays from
50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over
China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.

Exhibit 7: Mexican Manufacturing Labor Force Illustration

UNIQLO production process is high labor intensive. Mexico is beginning to beat
China in low labor manufacturing cost. Manufacturer wages, adjusted for Mexico’s
superior worker productivity, are likely to be 30 percent lower than in China by 2015.
China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000
but are catching up rapidly and tended to be slightly higher during 2015. Also labor
productivity remains higher in Mexico, even though the gap is narrowing. The crossover
point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity)
23

grew to equal those in Mexico. By the end of 2015, Mexico will be around 29 percent
less expensive.
During times of global financial downturn, companies look to find ways to reduce
costs without sacrificing the quality of their goods. This has proven to be a real
advantage for areas like Chihuahua, where the average cost of manufacturing labor in
the region is around $6 dollars an hour. UNIQLO can take advantage of this low labor
cost.

Logistic factors

UNIQLO warehouse in US and outbound logistics cost, from UNIQLO warehouse
in US to stores, would reduce. Currently, products are shipped to UNIQLO's
warehouses in Japan from the partner factories overseas. UNIQLO uses a third-party
transportation service provider to ship merchandise from the warehouses to UNIQLO
warehouse in US and finally to the stores stores in USA.

Since there is a significant increasing demand in US market and availability of
raw materials in Latin America, it may be better to locate manufacturing facilities closed
to North American customers. So, the inbound logistics cost (from manufacturer in
Mexico to UNIQLO warehouse in US) and outbound logistics cost (from UNIQLO
warehouse in US to stores) would reduce.

Due to favorable geographical location close to US, UNIQLO can use tracks to
transport merchandise to central warehouse in US. The transportation cost might be
relatively high comparing to shipment from Japan to US, when UNIQLO set contract
with manufactures in China and other Asian countries.

24

Exhibit 8: Design of Proposed Supply Chain for UNIQLO International US

Briefly, the current distribution network used by UNIQLO when manufacturers are
located in Asia might change and the great difference is that the company will not need
to ship merchandise from Japan to US.

Table 5: Merits and Demerits of Manufacturing Locations

25

Mexico has more free-trade agreements than any other country. The North
American Free Trade Agreement gives UNIQLO access to U.S., as well as to Canada.
Additionally, Mexico has free-trade agreements covering 44 countries. These
contributed to low transport cost, comparing to current chain. The trade agreements can
also contribute to quickly expansion of UNIQLO brand to some Latin American
countries, with strong purchasing power, such as Brazil.
Appendices

Exhibit 1: Fast Retailing SAP Business Model
26

Table 1: Fast Retailing Consolidated Performance (FY2010 - FY2014)

Table 2: Fast Retailing Business Segment Performance (FY2010 - FY2014)

27

Table 3: UNIQLO International Stores Opening (FY2010 - FY2014)

Exhibit 2: Comparison of Top 25 Export Economies (as of 2014)

28

Exhibit 9 : Annual sales of Clothing and clothing access in the US
(2013 Annual Retail Trade Report, United Census Bureau)

29

References
● http://www.fastretailing.com/eng/ir/library/pdf/ar2012_en_n.pdf
● http://www.fastretailing.com/eng/ir/library/pdf/ar2014_en.pdf
● http://www.fastretailing.com/eng/ir/library/pdf/20150108_results_en.pdf
● http://www.fastretailing.com/eng/ir/library/pdf/20141009_yanai_en.pdf
● http://www.fastretailing.com/eng/ir/library/pdf/20140410_results_en.pdf
● http://www.fastretailing.com/eng/ir/library/pdf/20110407_yanai_en.pdf#page=001
● http://www.myaccountingcourse.com/financial-ratios/profit-margin-ratio
● http://www.myaccountingcourse.com/financial-ratios/cash-conversion-cycle
● http://www.investopedia.com/features/industryhandbook/retail.asp
● http://www.investopedia.com/terms/r/rona.asp
● http://www.jstor.org/stable/141530?seq=2#page_scan_tab_contents
● http://www.fastretailing.com/eng/group/strategy/tactics.html
● http://juniqlo.blogspot.jp/p/chapter-2-product-profile.html
● http://www.statista.com/statistics/263055/cotton-production-worldwide-by-top-cou
ntries/
● http://ecodb.net/exchange/mxn_jpy.html
● http://ecodb.net/exchange/usd_jpy.html
● https://www.examinechina.com/blog/us-duty-rate-for-clothes-imported-from-china/
● http://www.pwc.com/es_MX/mx/knowledge-center/archivo/2014-09-transportation-
and-logistics.pdf
● https://en.wikipedia.org/wiki/Rail_transport_in_Mexico
● http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transp
ortation_statistics/html/table_01_54.html
● http://danielsethics.mgt.unm.edu/pdf/china-vs-mexico-di.pdf
● http://www.inboundlogistics.com/cms/article/mexico-paves-the-road-to-properity/
● http://www.worldbank.org/
● https://www.bcgperspectives.com/content/articles/lean_manufacturing_globalizati
on_shifting_economics_global_manufacturing/
30

Supply Chain Network of Fast Retailing Co.(UNIQLO)

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