just-style management briefing: Supply chains need to get creative
By Leonie Barrie | 2 February 2011
Faced with rising apparel costs and the likelihood that 2011 will be a perfect storm of pricing uncertainty - or what Mike Todaro, managing director of AAPN (the American Apparel Producers' Network) describes as "death by a thousand costs" - what can apparel manufacturers, brands and retailers do to try to alleviate some of the pain within their supply chains?
"2011 is going to be a year of extreme uncertainty in costs, pricing, and visibility of demand, within every link in the chain," explains David Sasso, vice president of international sales at Buhler Quality Yarns.
"The answer to higher costs is not to lower them but to counter them with better efficiencies, new processes and innovative management practices."
Many factors are in play right now including declining global cotton production and rising demand from growing economies like China and India; higher costs of oil, energy, freight, labour and raw materials, including nylon, polyester and spandex; and disruptions to production from overseas unrest.
Yet while costs continue to rise, brands and retailers are struggling to preserve profitability as western economies still limp towards recovery and cash-strapped shoppers continue to hunt for bargains.
Mike Flanagan, chief executive of industry consultancy Clothesource, points out the problem of rising input costs is a global phenomenon, and not unique to China as a lot of people seem to think.
"In 2010, the cost of raw materials grew at almost the same rate everywhere. Intercontinental freight costs grew almost everywhere at the same rate. Energy costs, the costs of capital and labour, grew everywhere - but in ways that varied massively between countries.
"For buyers, the challenge of 2011 isn't that China's got expensive: it's learning to handle inflation - a routine part of buying for most of the past century, but one that everyone forgot between 1995 and 2010.
"Relearning techniques possibly long forgotten - like value engineering, cross-costing, negotiation skills with suppliers who might have alternative customers - will grow in importance."
"Sourcing and supply chain management can be a source of competitive advantage," agrees Ria Stern, global marketing director for Hyosung's Creora elastane yarn, especially as retailers continue to expand globally and their supply chains become more complex.
"There is more pressure on sourcing teams to find [ways to] reduce costs by staying one step ahead of labour costs and raw material prices. I have observed some companies hiring experienced sourcing leaders in their headquarters, who have spent extensive time in Asia, to manage this function as a more strategic part of their business strategy."
But AAPN's Todaro thinks the "loss of talent has been staggering up and down the chain. The everyday crises and surprises of global logistics keep on happening because few know what professionals they can turn to for support.
"The obvious option for companies is to make investments down chain, at the sources of supply. It's all about collaboration. But so many of have outsourced for so many years that few truly understand who their suppliers are and therefore cannot reach them to collaborate on strategies."
He adds: "The old joke was buyers know the costs of everything and the value of nothing. Well, today they don't even know the costs."
Apparel retailers, brands and manufacturers all seem to have their own views on the best way to cope - many of which have been reported on just-style in recent months.
As Stern points out, some - including Talbots, Wal-Mart and Hudson's Bay Trading - have outsourced to Li & Fung in the belief that the global sourcing giant is better placed to reduce costs and increase competitiveness.
T-shirt and sock maker Gildan Activewear, on the other hand, is confident its strength lies in the fact it manufactures in the western hemisphere. It plans to lift product prices by around 5% in the retail channel, but says this is nothing to the higher costs coming out of Asia, where prices "are up anywhere between 15% and 25%."
Teen clothing retailer Abercrombie & Fitch sees escalating cotton costs as a chance to enhance product quality, helped by strong relationships with vendor factories.
And apparel seller Liz Claiborne has tried to offset higher input prices by committing to the production of some items like sweaters off-season, value engineering trade-offs, and work by the sourcing, merchandising and design teams to keep input pricing in line with consumers' willingness to buy.
But "there's very little left to take out of the supply chain," notes John Long, retail strategist at consumer goods consultancy Kurt Salmon. "Retailers have done such a significant job to contain costs over the last 18 months, primarily because of the pressures of the recession."
Some retailers have tried to offset the impact of rising prices of cotton and other raw materials by increasing the mix of synthetic fibres in their less expensive lines. But they're also working on improving fabrication too, so garments retain a similar quality feel to 100% cotton.
"Retailers today aren't comfortable with the notion of price increases," Long explains, adding that they've worked hard to maintain entry level price points in particular. "But we don't believe the prices people are paying for fabrics are ever going to go back to what they were."
Price pressure on suppliers
The dangers of course are that the price pressure on suppliers is so great that they lose customers because they cannot pass on or absorb the rising costs, or that quality ends up being compromised.
"The greatest risk this year will be quality," notes Todaro, explaining that many firms looking at ways to protect their margin in the face of rising costs "will cut quality any way possible - cut, blends, fabric, trim, whatever."
From a spinner's standpoint, cutting fibre quality can be a false economy explains Sasso, with the resulting yarn failing to perform as well in subsequent knitting, dyeing, cutting and finishing.
"I've seen where our yarns can make a huge reduction in seconds at the garment stage. If you can go from a 30% rejection rate to 5% or less, the better quality pays for itself. The efficiency gains that you can do with better quality can a lot of times offset the increases."
Another very real worry is that fluctuating raw material prices will lead to a lot of manufacturers going out of business because they don't have the capital credit lines to support rising raw material costs. And that as a result, retailers should brace themselves for delivery issues in the year ahead.
It's a concern shared by Sasso, who believes financing and raising the capital to even stay in business will be a major worry in 2011. "We have been surprised that so many spinners have closed or are operating at limited capacity during this robust market," he says. "The answer is that they lack the capital to buy their raw materials and banks are not increasing credit lines."
He suggests retailers will have to get more "creative" with their supply chains over the next 12 months to make sure they have a steady source of fabric at stable prices - from getting involved in the purchasing of fibre, spinning, knitting, dyeing and finishing to offering help with financing.
The stark truth, he believes, is that "if they [retailers and brands] don't take a position on yarn and fibre they won't get the fabrics they need."
Companies "who really push their suppliers hard are taking a short-term view that has potentially negative long-term consequences," says Josh Green, founder and CEO of Panjiva, a New York based firm that provides information for retailers and importers seeking new sources of production.
This is because "the minute you put pressure on your suppliers to absorb the costs, you're increasing the amount of risk that you face because of your suppliers potentially going out of business."
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