Reducing the sourcing risk
Today's apparel industry is all about buying clothes from countries with recent histories of instability, so it's likely that any buying decision will go wrong at some point. And even if the country you're sourcing from doesn't have a major political or climatic crisis, your supplier will probably decide to change his business strategy. Mike Flanagan looks at what to do when the predictable becomes unpredictable.
It's possible that the most important event in the past few weeks for the international garment and textile industries has been happening in Nepal.
Maoist guerrillas have threatened a series of companies with attacks if they did not immediately close down, bombing randomly-chosen targets to demonstrate their determination. Companies forced to suspend operations include the garment division of Surya Nepal, the country's largest single tax payer.
This is probably the first case of emerging-market apparel companies being targeted for destruction. But it's just one of a number of occasions in the past year of the real world intruding into this industry.
In summer 2003, for example, the US decided to ban virtually all imports from Burma. This summer, monsoon floods have seriously disrupted exports from Bangladesh.
On the face of it, the EU's draft legislation for cargo screening may seriously disrupt just-in-time deliveries from North Africa - just as increased border security measures have slowed US fashion receipts.
And similarly, America's incomprehensible driving permits (Mexicans can't drive trucks in the US, in spite of NAFTA) stop US buyers from getting the "pack it on the truck Friday, receive in shop Monday" deal many Eastern European suppliers offer their western customers.
One thing many of these complications have in common is that they're caused by events that few could have predicted. Another is that many are caused by events and reactions in buying countries rather than supplier countries.
And none of them probably ever showed up in the "what's the best country to manufacture in?" analyses that many of the hokier consultancies have turned into a pseudo-science.
Many buyers, consciously or unconsciously, think of the risks that buying clothes from poor, rapidly-changing, societies might throw up.
Specialist consultancies claim to offer unique advice on issues like political stability, terrorism threats, the likelihood of being kidnapped, serious climatic problems, or health and safety issues. Embassies fall over themselves to reassure potential buyers about how their country is the perfect place to buy from.
Actually, virtually no Embassy or national Department of Commerce provides buyers with any worthwhile information about garment manufacturing.
But it's astonishing how rarely these issues identified by consultancies or embassies really affect trade. The Caribbean is prone to devastating hurricanes and tornadoes. But it's not bad weather - like the catastrophic Hurricane Ivan - that's destroyed Jamaica's garment-exporting industry: just the declining competitiveness of its manufacturers.
What causes the biggest problems is when the predictable turns into the unpredictable.
Everyone knows, for example, that the monsoons disrupt businesses in Bangladesh. Surely no-one has ever bought a knitted top from that country without realising that things can get very messy if a garment is due out of the factory around July?
The lesson of this year's especially severe flooding is that, sometimes, they can get very messy indeed. But, while devastating for Bangladeshis affected by them, this year's floods shouldn't have told buyers anything they didn't already know.
Similarly, Nepal has had "things can get dangerous here" signs for some time from the State Department, the Foreign Office and most other ministries of international affairs. But so have many countries - like Indonesia - where business goes on, most of the time. Only in Nepal do local terrorists actually seem committed to closing businesses.
But this problem isn't restricted to political and climatic complications.
The most important issue facing this industry isn't how powerful China is going to be. Far more important is how the 250,000 garment factories in the rest of the emerging world are going to respond to China's increasing competitiveness.
Inevitably, some will improve their own competitiveness, and some won't. But in attempting to improve their competitiveness, some will get things wrong and make life tougher for their customers.
Throughout the world, we've been seeing a common thread lately. Well-respected emerging-country garment makers looks at the business, try to make it less vulnerable to the threats from China - and realise the strategy adopted makes them vulnerable to even bigger problems that they just didn't expect, or just don't have the people to control. Sometimes with bizarre results.
The Dominican Republic's Grupo M, for example, is probably the largest garment maker in the Caribbean, and a well rated supplier of many of the world's best-respected brands and retailers.
But, in trying to give itself an edge by setting up some production in neighbouring Haiti, Grupo M became entangled in a bizarre series of labour disputes. The disputes led to the company having to call in its own country's soldiers over the border into its Haitian plant to quell a riot (thereby, presumably, technically invading Haiti) and to extraordinary allegations by some labour leaders that it was injecting workers with poison.
None of which actually helped Grupo M offer better quality, better prices or more timely delivery to its customers
Less surreally, Malaysia's Ramatex has seldom been out of local headlines since it set up base in Namibia, as repeated groups of imported workers - recent stories have featured Bangladeshis, Filipinos and a group called 'ethnic Chinese' - have found that conditions did not match their expectations, and have resorted to Namibia's courts to fight over their disagreements.
Sri Lanka's Tri-Star has a great reputation in making clothes for some of the world's most demanding customers. But its management - excellent at making sure their clients get quality and value for money - has been endlessly distracted by complications in its Ugandan subsidiary, where workers and parliamentarians appear to have had excessive expectations of the factory's salaries and economic trickle-down.
Moving operations to a different country is one trap for businesses seeking to protect themselves - because, almost inevitably, they're exposing themselves to problems they've never had to confront before. But they aren't the only bright ideas that go wrong.
- Internal relocation. Whether it's Shanghai, the Guangzhou/Shenzhen corridor, Bangkok or Djakarta, businesses in the developing world's megalopolises look longingly at the cost of labour, and the availability of space, in their countries' remoter provinces. Only too often, however, local government can be less cooperative, power supplies more expensive and less reliable, and transport to ports cripplingly expensive. In Indonesia and Thailand, there have even been reports of factories moving back to the capital.
- Other overseas expansion. Not all expansion ties up management unproductively in squabbles with foreign activists. Hong Kong's Novel Group and India's Arvind Mills have both recently sold out of their Mauritian expansions, for example.
- Moving out of manufacturing. Throughout Eastern Europe, one-time good, reliable contract manufacturers have moved their concentration from making clothes for other people - which they're good at. Many are shifting attention to creating brands, and sometimes to selling them through their own shops, and whether they have the skills for that the jury is still out.
For example Estonia's largest garment maker, Baltika, announced losses of $4.8m in 2003 (2002 profit: $0.3m) in spite of increased sales, after a changed strategy the company predicted would increase 2003 sales 60 per cent and treble profits.
Baltika's intention was to move away from subcontracting, and establish a strong retail brand (Monton) throughout Central and Eastern Europe - often using its own shops. But sales have been achieved only in Estonia and Lithuania., and Baltika has sacked a large number of its managers around Europe.
So where does all this get us?
Today's apparel industry is all about buying clothes from countries with limited recent histories of stability: most of Europe's and America's supplying countries have had a major political revolution, or a civil war, in the past 15 years - even if, as in Tiananmen Square, it was brutally repressed.
Anyone who purports to predict what will happen in the next 15 is a fool or a charlatan - and anyone skilled in buying and merchandising really should have better things to do than try to be an amateur political forecaster.
The odds are that any buying decision will go wrong at some point; if the country you're sourcing from doesn't have a major political or climatic crisis, your supplier will change his business strategy.
To all of which, there's only one answer: spread your risks. The only sourcing strategy least likely to go wrong is one that has a wide range of active and fall-back suppliers throughout the world.
And how to find those suppliers will the subject of the next of these discussions.
Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.
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