Viewpoint: Will Bangladesh be the next sourcing hotspot?
The global clothes sourcing bandwagon is forever looking for the next hotspot, especially as nearly two decades of apparel price deflation comes to an end and worries continue to escalate about raw material and labour costs, capacity issues and the overall competitiveness of China.
Indeed, the subject is the topic of the first just-style webinar being held at the beginning of next month on 'Sourcing in China: what's the alternative?'.
But is Bangladesh ready to step into the role of sourcing country of choice?
New research by consultancy firm McKinsey & Company, based on interviews with chief purchasing officers (CPOs) in European and US apparel companies, suggests value players plan to expand their share of sourcing value in Bangladesh from a current average of 20%, to 25-30% in 2020. Mid-market brands plan to grow their share from today's level of around 13% to 20-25% in the medium term.
As a result of this inflow of demand, Bangladesh's ready-made-garments (RMG) industry will see market growth at an annual rate of 7-9% and export value of around US$36-42bn by 2020, according to the report 'Bangladesh ready-made-garments - the challenge of growth.' This means the market will double by 2015 and nearly triple within a 10-year horizon.
But such a move won't be without its share of challenges.
Despite the lure of competitive prices, available capacities - Bangladesh has around 5,000 RMG factories compared with Indonesia (2,450 factories), Vietnam (2,000), and Cambodia (260) - supplier capabilities, and the broadening of the EU Generalized System of Preferences (EU-GSP) rules to include two-stage processing on products from Bangladesh, a number of hurdles exist for buyers when it comes to sourcing garments here.
Not least of which is the country's infrastructure - transport and utilities supply - which McKinsey describes as "the single largest issue hampering the Bangladesh RMG industry."
At the moment, buyers have to be careful in the products they choose to source from Bangladesh, since congested roads, limited inland transport, and a lack of deep-sea harbour add to garment lead times.
As volumes continue to grow, these issues will need to be resolved in order to avoid a collapse in the transport network. Likewise, power supply issues have led to delays in manufacturers' expansion plans.
Another issue is compliance. While non-governmental organisations and corporate social responsibility (CSR) stakeholders report some improvement, gaps still exist. Issues include lack of worker education, a risk of subcontracting, lack of law enforcement, and a need for fair practices and compensation.
Yet another challenge comes in the form of supplier performance and workforce supply. In the medium term, McKinsey expects labour costs to steadily increase, as pressure from buyers for more fashionable and sophisticated products like outerwear, tailored products, ladies' intimates, and functional clothing puts pressure on the supply of suitably-skilled workers.
Consequently, productivity levels will need to improve - not only to mitigate rising wages, but also to close the existing productivity gap with other supplier countries. At present there are just 50 to 100 local garment manufacturers able to produce more advanced product categories, productivity, services, and compliance, the consultants estimate.
And only if productivity in Bangladesh RMG factories catches up with the levels seen in India will its suppliers be able to deliver on the 2x to 2.5x unit demand growth forecast by McKinsey through 2020.
The current lack of any noteworthy raw materials supply in Bangladesh also weighs on lead times, adding up to 15 days when sourced from India and up to 30 days when sourced from China. Improvement in local capabilities and verticalisation would improve lead times, but integration is more likely to be seen in knitwear due to the high capital investments needed for wovens.
Making it work
Despite the challenges that exist in Bangladesh, companies can still highly benefit from its sourcing offer, the research concludes.
But there are a number of areas that the three main stakeholders - government, suppliers and buyers - need to address to overcome the hurdles to success.
For the government, longer-term plans and investments to accommodate expected future growth should focus on infrastructure, education, and trade support such as bilateral agreements and securing raw materials supply.
Likewise, five "action fields" have been identified for suppliers. These include productivity (management skills, fair wages and incentive schemes, lean production, enterprise resource planning systems); and compliance (step-change in labour/environmental compliance standards).
Other priorities include partnerships with buyers (long-term capacity planning/blocking, co-development of products, electronic data exchange); supply chain management (foreign raw materials footprint, "verticalisation"); and funding (retained earnings and equity funding, co-investments with buyers, and joint ventures).
And for buyers, the advice is to "take care." As the sourcing landscape in Bangladesh becomes more populated with western buyers and new buying countries like China, India, and Brazil, there will also be a shift from a buyers' to a suppliers' market.
Compliance efforts should be actively pursued, as should close relationships with suppliers, including efforts to improve communication between merchandising and sourcing teams and reduce last-minute order changes. And a new pricing model will be needed as demand grows for mid-market products and higher absolute margins.
Despite these hurdles, there's no doubt Bangladesh should be on the radar of all European and US apparel buyers.
But they will also need to prepare themselves to make the best of what the country has to offer, especially as it gets increasingly crowded with the arrival of new players and an increase in the sourcing efforts of existing ones.
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