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Kaihara Corporation

2007 7th Porter Prize Winner Denim Textile Manufacturing
Specializes in blue denim fabric for fashion jeans. Vertically integrated manufacturing from spinning to weaving to finishing. Offers quality, speed and product ideas sought worldwide despite high price.

Executive Summary

img_2007_01_p.jpgKaihara specializes in blue denim textile manufacturing, and has achieved the vertical integration of the entire process (from cotton spinning, to dyeing, weaving, and finishing). It can produce denim with various nuances with precision and stability, which has resulted in high brand recognition among global apparel companies for "Kaihara denim," as well as a domestic market share of 50%.

Industry Background

Although vertical integration is common in the textile industry outside of Japan, few companies in Japan vertically integrated cotton spinning, textile manufacturing, sewing, and product planning in the past. When Kaihara vertically integrated the entire process --from cotton spinning to dyeing, weaving, and finishing -- it was an exception in Japan. Later, other Japanese producers of denim fabric became virtually vertically integrated through their subsidiaries and alliance partners.

The Japanese textile industry moved its production activities overseas in the 1970s. Kaihara's commitment to manufacturing in Japan, especially in the northern mountainous area of Hiroshima-prefecture, is very unique.

Value Proposition

Kaihara's target market segment is jeans for casual fashion and premium fashion. Kaihara's customer list includes Levi's, GAP, UNIQLO, Edwin, Seven Jeans, Hugo Boss, and Pierre Cardin. At $4.5 per yard, Kaihara denim is very expensive. Denim produced by Chinese local manufacturers costs $2.5 per yard and denim produced by factories in China owned by U.S. textile manufacturers costs $3.5 per yard.

Kaihara can provide denim with various nuances, such as a softness to the fabric, a smooth or rough fabric surface, and deep color saturation. The nuances of denim fabric are not easy to control because the final results depend on a variety of factors, specifically the quality of cotton, the way cotton yarns are spun, and the degree of indigo penetration, the addition of other colors, such as yellow to give an aged look, and the pattern of weaving. The delicate nuances of the denim influences jeans sales, and Kaihara's capabilities to meet specific requests are highly appreciated by its customers. Kaihara is able to meet these requests with precision. It is able to produce the agreed-upon nuances, and it can also reproduce the same nuances when the customer places an additional order.

Kaihara can deliver denim textile to the customers just in time, when customers want it, in the amount customers want. This is increasingly more important as the product life cycle of apparel industry becomes shortened. Kaihara can do this because its production lead time is short and its manufacturing process can accommodate variations.

Kaihara, not only responds to requests, it also proposes new products to its customers. It develops 600 to 700 new prototypes a year, providing variations in yarn count, indigo concentration, twill, and types of washes. Only 20% of this total will be accepted.

Unique Value Chain

Technology development
Kaihara's product development policy is to develop "new" denim rather than "better" denim in order to meet the customers' needs for jeans as fashion wear rather than work wear.
Kaihara develops and manufactures dyeing machines in-house. It also improves the manufacturing machines bought from suppliers by making its own technical modifications. Kaihara has its own ironworks. It also designs the factory floor layouts itself.

Manufacturing
Unlike Nisshinbo and Kurabo, two other Japanese cotton spinners which are virtually vertically integrated, Kaihara conducts all the processes internally in close physical proximity, and tightly coordinates its manufacturing activities.

By spinning cotton yarn internally, Kaihara can ensure that the yarn it uses is of a consistent quality. Low-quality yarn affects the nuances of fabric, as well as damages production efficiency when it snaps during weaving. Also, Kaihara can control nuances of the fabric by controlling the combination of different types of cotton used in the yarn.

Kaihara can produce various kinds of products. For example, Kaihara's manufacturing machines can treat not only ordinary cotton but also various kinds of yarn, such as uneven cotton yarn, stretch cotton, and rayon. Kaihara owns more "vintage weaving machines" than any other competitors.
In order to fill customer orders quickly, Kaihara maintains excess manufacturing capacity. Kaihara inspects its products using several sets of in-house standards for strength, durability, washes, colorfastness and the degree of indigo penetration. The final inspection is conducted manually, and all the foreign matter, such as cotton fibers that are woven into the fabric, will be extracted by hand.

Marketing and sales
Kaihara sells directly to apparel companies, which design the jeans. For overseas markets, the company has an exclusive sales agent in Hong Kong. Kaihara's two Japanese competitors sell through trading companies.

Kaihara is making moves to raise its brand recognition among consumers. For example, UNIQLO now mentions "Kaihara denim" in its product explanation.

After-sales service
Kaihara can trace back each product. Whenever quality problems occur or products fail to realize their expected finish after washing, improvements can be made quickly.

Human resource management
Kaihara is a family-owned company, and all of the current board members are from the Kaihara family. There is a strict rule against involving relatives other than the original Kaihara family members in the business, in order to prevent politics in the company's management.

Kaihara trains its employees in multiple manufacturing processes and multiple functions. The employees assigned administrative duties are also trained in the manufacturing processes. This serves not only to motivate employees, but also enables Kaihara to increase the manufacturing volume to meet sudden surges in demand. Kaihara's chose to locate its factory in a rural area, to develop strong ties with the community and its employees' families. It knows from experience that in a family-like working environment, employees are more willing to be flexible about working hours. Kaihara rewards its employees through profit-sharing.

Firm infrastructure
The Kaihara family owns 100% of the company's share capital. However, by keeping the amount of share capital small, at ¥50 million, Kaihara limits the return the family can receive as an equity investor.

Kaihara took a risk by vertically integrating its operations. When it began weaving in 1978 and cotton spinning in 1991, both times the company was required to invest an amount that exceeded the amount in its capital account.

Fit among Activities

Kaihara's activities combine to focus on high quality, accurate and rapid manufacturing of many variations of denim fabric. With its own completely integrated manufacturing process, Kaihara can shorten product development time and shift rapidly from prototypes to volume production. By doing its own spinning, the company can build in quality at an early stage, and the vertical integration also helps it achieve consistent quality. Also the company uses information management regarding materials and procedures for each process to achieve consistent quality and reproducibility. The company sells directly without using trading companies which facilitates joint development with customers and fit of product image, enabling quality and speed. (See Kaihara Activity-System Map)

Innovations

  • In-house developed dyeing machine.

Trade-offs

  • Does not produce denim in colors other than indigo blue.
  • Does not produce outside of the Bingo area --does stay within 2 to 3 hours' drive. Does not produce in China.
  • Does not sell yarn.
  • Does not produce in small-lots batches.
  • Does not put scissors to the fabric.
  • Does not become a sub-contractor to other textile manufactures.
  • Does not sell through trading companies.
  • Does not try to minimize cotton inventory.
  • Does not go public, remaining instead as a privately-owned company.

Profitability

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2002 2003 2004 2005 2006
10.3%P 18.2%P 12.2%P 11.5%P 7.1%P 5.5%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2002 2003 2004 2005 2006
8.6%P 12.7%P 9.9%P 7.0%P 6.2%P 5.9%P
Return on sales =Operating income / Net sales

Activity System Map

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