IAF ISTANBUL - Navigating a turbulent sourcing landscape
Sub-Saharan Africa is increasingly being considered by apparel sourcing executives
Apparel brands, retailers and suppliers are having to navigate an increasing number of supply chain challenges in order to operate in a more efficient and ethical way. But it is also important to look to alliances in creativity, engineering and sustainability to avoid inconsistency in the future, according to speakers at last month's International Apparel Federation (IAF) Convention in Istanbul.
"Today, buyers are squeezed in-between a lawyer and a chemical expert. Maybe they have some space in the middle to still look at the product, but this has changed drastically," said Jan Hilger, consultant and former chief operating officer of German fashion group Ahlers.
"At the start of my career, a buyer would travel to a factory that was doing the sourcing." Now, he said, CPOs face NGO pressure, and chemical substance, sustainability and ethical requirements, amongst other things.
"In the past, the product was the centre of attention. Now we are running around the globe trying to find the cheapest offer and making sure we can serve all the demands we have from our stakeholders. There are too many things that somebody who works in procurement has to respect today."
That's not to say these issues aren't necessary in order to clean and tighten up the industry, but as the industry has grown, so too it seems have the challenges that those along the supply chain are having to overcome in order to operate in a more efficient and ethical way.
A catalogue of challenges
"Stating the obvious, we are in a very volatile environment," explained Achim Berg, partner at consultancy McKinsey & Company and leader of its European Apparel, Fashion & Luxury Practice. "Many of the key factors for apparel sourcing markets are changing. In some of those we see beneficial development, if you look at cotton price development, oil and gas prices and their influence on man-made fibres and logistics, and free trade agreements.
"On the other hand we see political disputes, we see problems in key sourcing markets if we think about Bangladesh and developments there over the last three years. We also see labour cost increases in more or less all markets. And it seems the industry has to cope with the fact that apparel deflation, which means declining sourcing prices, has probably come to an end after two or three decades of decline."
Berg also highlighted changes at the consumer end as retailers and brands adapt their business models to suit. Hugo Boss is a good example of this. Over the last seven years, the German fashion house has moved from a wholesale model into two additional channels: online and retail.
"Retail is coming into play, which changes some of the rules of play," he added. "Omni-channel has had an impact on the batch size and rhythm of orders...so flexibility is required. Compliance, which has been a hot topic, from our point of view, will continue to be a dominating topic. And therefore, all of us on the buyer side, on the user side, on the adviser side, have to cope with those challenges."
And the picture doesn't appear to look any less bleak over the next 12-18 months, with little change forecast for the sourcing landscape and costs expected to increase.
A survey carried out by McKinsey & Co earlier this year, amongst senior sourcing executives across the US and Europe representing EUR60bn (US$64bn) spend, revealed that two-thirds of those questioned expect sourcing costs to increase by around 1.1% over the next 12-18 months. Of those, value players expect a 2.4% increase, and European buyers in particular, expect a little more (1.4%) than the Americans (0.2%), who are happy about the strong US dollar and all the benefits that brings.
The key driver of those increasing sourcing costs lies with foreign exchange rates. The weakening of the euro has become a problem due to the majority of trade being carried out in US dollars, making it unfavourable. Rising labour costs and raw material prices also featured in the top three challenges keeping sourcing executives awake at night.
Additionally, the sourcing landscape and talk about the decreasing importance of China has not dissipated. According to McKinsey, around 72% of CPOs said they would love to reduce their dependency on China, a message that has been repeated for over six years as some players start to diversify in a bid to be less dependent on the country.
However, as Berg points out, China's garment exports reached US$207bn last year, compared to number two Bangladesh at $25bn. And production there continues to grow.
"China's role as a one-stop-shop is a bit under pressure, but only a bit," he told delegates. "The latest figures on the manufacturing index indicate [production] is growing at a lower pace but nevertheless it is growing. Some European countries would love to have 6-7% GDP growth. Clothing consumption is growing even faster and, therefore, China is concerned about CPOs looking around, but they are still healthy and growing in a market which they are happy to feed."
Avoiding future inconsistency
Despite these challenges, Roland Schuler, president of the International Association of Clothing Designers and Executives (IACDE), believes the question now is how to avoid inconsistency in the future?
"The key words might be to build bridges – not from Europe to Asia – but to build bridges around the world. But alliances are a key factor of common future success. It is important to find alliances in creativity, engineering, and sustainability in supply chains," he told delegates.
Collaboration tools in further education in particular, he said, will be important if the industry is to retain a steady flow of experienced pattern designers and technical engineers. Associations, think-tanks, conventions and know-how exchanges, he believes, will help build this network.
This is a view shared by Hilger, who believes collaboration could help de-mystify some of the challenges, particularly for SMEs that don't have the clout or investment of larger multi-nationals to tackle the requirements the industry is placing on them.
"What we can learn from each other and what we can do better - learning and flexibility - is the guarantee for survival. Why do we all have to fight against each other? It's enough doing that in the market, but on the sourcing and procurement side? The power of the crowd, working together...it seems to have fallen asleep."
A number of fields where smaller companies can join forces so they are not "fighting that battle alone", Hilger said, include restricted substances and auditing.
Of the latter, Hilger said: "All audits are pretty much the same. It is a waste of resources and this makes me angry because we look to save every cent on a fabric…yet on [audits] we waste millions. There is a mis-balance and this could be resolved if companies worked together.
"From the market side, there is so much pressure, we have to come up with different ideas. We can't just do business in the way we did ten years ago. Sometimes we have to leave the circle to find new ways of collaborating."
However, sourcing destinations remain top of the agenda for many garment companies.
Returning to the McKinsey report, sourcing executives believe Bangladesh will be the largest source of growth, in terms of US dollars, despite its industry tragedies. For large brands, moving sourcing destinations can be incredibly difficult, Berg said.
Vietnam is next after Bangladesh as the top sourcing hotspot, while India, Myanmar and Turkey are joint third. Interestingly, Ethiopia joined the list for the first time, behind those three.
Proximity is also becoming increasingly important, especially for small and medium-sized players.
"Turkey, particularly for European CPOs, is the place to source when it comes to proximity to shorten lead times, for smaller batches, and for more flexibility," Berg said. "61% of those we asked wanted to increase sourcing to Turkey, and another 9% want to strongly increase. Turkey is clearly the favourite."
Berg also highlights sub-Saharan Africa as a "new watering hole" that sourcing executives are increasingly considering. Around 40% of survey respondents believe the industry is increasingly moving to sub-Saharan Africa, with 20% showing actual commitment.
Ahler's Hilger, however, offers a more sceptical view on the potential growth of proximity sourcing.
"I have seen statements on manufacturing coming back to Europe. I would be very careful on that statement and I would ask, on what product level and what products? Maybe on suiting or high-end clothing, but I'm not sure T-shirts will ever come back to Europe. We as Europeans hope that is the case, but it not only has to do with labour costs, it has to do with skills and regions."
Click on the links below to read more insight from speakers at the International Apparel Federation (IAF) Convention:
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