Unlocking trapped value in retail supply chains is where the opportunity lies

Unlocking trapped value in retail supply chains is where the opportunity lies

How is the sourcing landscape likely to shift in 2018, and what strategies can help apparel firms and their suppliers to stay ahead? The days of "chasing the cheapest needle" are over, executives say, and instead the need for speed is changing the way products are sourced and manufactured. A balanced and diversified sourcing portfolio remains key to enabling retailers to react faster to trends, commit less up-front and navigate political uncertainty. But China's dominant role seems set to stay.

Marc Compagnon, group president, Li & Fung:
In a word – speed. The continuous growth of e-commerce means consumers play a more critical role in what brands and retailers produce and thus affect how they source products. Brands and retailers continue to place more orders but in smaller quantities and they need to do it faster.

With the accelerating disruption, retail will likely look completely different by 2020. There may be further consolidation in the market, more movement from online to offline, and a true omnichannel model will emerge. It is very difficult to predict what the future holds – but without doubt it will be marked by constant change and evolution as well as a need for increased speed to market to meet the quickly moving demands of global consumers, who will be driving more of the design and production processes than ever before. China will continue to be an important market for sourcing as well as emerging supply chain technologies that Western countries can learn from.

Suppliers who have a diverse global vendor base, strong industry knowledge and are flexible in sourcing near-shore as well as offshore will help apparel firms move faster and provide new products to consumers with a shorter lead time.

Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey's Apparel, Fashion & Luxury Group:
Apparel companies must continue dealing with a volatile, fast-changing environment along with heightened competition and increasingly savvy consumers. That is driving an urgent search for greater efficiency and flexibility along the end-to-end sourcing chain.

In recent decades, apparel buyers have relentlessly shifted sourcing to lower-cost countries – "the next stop of the sourcing caravan." Today, the search for the caravan's next stop is as active as ever, but there are new dynamics at play. Some traditional low-cost countries are losing their attractiveness, while sourcing executives are showing keen interest in newer markets – particularly Vietnam, Myanmar and Ethiopia.

Digitalisation is "the next sourcing country." Digitalisation will enable apparel companies to achieve a step change in performance, transform to a customer-centric operating model, and create transparency throughout their global supply chains. But the apparel industry is still at the beginning of its digitalisation journey: companies need to accelerate digitalisation and integrate it into their broader transformation. Those that succeed will break down silos between sourcing and product development, shorten lead times, lower costs, and increase transparency to manage sustainability.

Helen Mountney, managing director of Kurt Salmon, part of Accenture Strategy:
Global apparel and footwear production costs have steadily increased over the past two years. Sourcing markets with stable costs are rare, while the vast majority showed strong increases in production costs. This does not only affect China – which has already been on a strong upward trajectory for many years – but also many of the typical low-cost sourcing destinations in Southeast Asia, such as Bangladesh, Pakistan and Indonesia. Cost increases have been driven by rising labour costs and strengthening local currencies in sourcing markets.

To counter cost pressures, fashion brands and retailers continue to search for alternatives in their global sourcing portfolios, shifting production from more established and increasingly costly regions, such as Southeast China, to less developed and seemingly more cost-effective regions, such as Western China, Myanmar and Cambodia.

While market shifts will undoubtedly ease cost pressures in the short-term, it's not a viable solution and will ultimately impact operational performance and product quality. Instead, retailers need to move away from a sourcing cost obsession and focus on reinventing their operating model to unlock trapped value in their supply chains, which is where the opportunity lies.

Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA), and lecturer at the Wharton School at the University of Pennsylvania:
There has been a steady shift in sourcing organisations to move away from transactional relationships in supplier relationships to true partnerships. The focus on "chasing the cheapest needle" that is making apparel as cheap as possible is replaced with the drive for agility and responsiveness. While speed and costs are still important, making sense of trends, responding to opportunities, and reducing inventory risks are the key drivers.

E-commerce has also changed the way products are sourced and manufactured. Smaller lots and replenishment orders are more and more common.

Suppliers and manufacturers are getting bigger, more service-orientated, and more integrated into their customers' business. Suppliers are making their money less and less from labour, and more and more from services and trade financing. Many suppliers now have higher sales turnover than their customers, so supply chain relationships are more peer to peer.

Apparel firms compete against the strength of each other's supply chains. Executional excellence, quality partnership, and global operational competencies are reasons for success.

Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
The reduction in imports of clothing from China will continue in 2018 and it will be matched by the rise in automation and by Chinese investments in production capacity and infrastructure outside of China. Exports from several Southeast Asian, South Asian and African countries are growing and will continue to do so, partly buoyed by Chinese investments.

The need for speed is driving a lot of geographical sourcing trends. From a European perspective, Turkey, North African and Eastern European countries are poised for further growth or, where they have lost position recently, should start to bounce back. Within the EU, the remarkable rise of Portugal will continue. And with over 150 manufacturers in London and a EUR95bn (US$114bn) fashion industry in Italy, reshoring will be a recurring theme in 2018.

Getting the country-product matrix just right is the best way to source in 2018. This means taking into account the product's physical requirements but also matching the country's geographic position and a firm's abilities with the particular creation cycle time required for each product. Speed is the new buzzword, but it has no value if there is no shopfloor logic behind it.

Rick Helfenbein, president & CEO, American Apparel & Footwear Association (AAFA):
Many credible manufacturers and brands have set up in-house "war rooms" to better understand the potential disruptive changes to tariff and trade that are currently being discussed in Washington, DC. Even though the majority of apparel and footwear product arrives from China and Vietnam, many seek to diversify their sourcing base, as they retain severe angst to maintain all their eggs in one basket. Diversification of sourcing will (again) be the prime focus for 2018, and this pattern will continue until the administration settles on a cohesive path for US international trade relations.

Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware:
The '2017 US Fashion Industry Benchmarking Study' that I conducted in collaboration with the US Fashion Industry Association (USFIA) last year, provides some interesting insights into companies' latest sourcing strategies and trends.

Based on a survey of 34 executives at the leading US fashion companies, we found:

1: Most surveyed companies continue to maintain a relatively diversified sourcing base, with 57.6% currently sourcing from 10+ different countries or regions, up from 51.8% last year. Larger companies, in general, continue to have a more diversified sourcing base than smaller companies. Further, around 54% of respondents expect their sourcing base will become more diversified in the next two years, up from 44% in 2016; over 60% of those expecting to diversify currently source from more than 10 different countries or regions already. Given the uncertainties in the market and the regulatory environment (such as the Trump Administration's trade policy agenda), companies may use diversification to mitigate potential market risks and supply chain disruptions due to protectionism.

2: Although US fashion companies continue to actively seek alternatives to "Made in China," China's position as the top sourcing destination remains unshakable. Many respondents attribute China's competitiveness to its enormous manufacturing capacity and overall supply chain efficiency. Meanwhile, it is interesting to note that the most common sourcing model is shifting from "China Plus Many" to "China Plus Vietnam Plus Many" – where China typically accounts for 30-50% of total sourcing value or volume, 11-30% for Vietnam and less than 10% for other sourcing destinations. I think this sourcing model will likely to continue in 2018.

3: Social responsibility and sustainability continue to grow in importance in sourcing decisions. In the study, we found nearly 90% of respondents now give more weight to sustainability when choosing where to source than in the past. Around 90% of respondents also say they map their supply chains, keeping records of name, location, and function of suppliers. Notably, more than half of respondents track not only Tier 1 suppliers (suppliers they contract with directly), but also Tier 2 suppliers (their suppliers' suppliers). However, the result also suggests that a more diversified sourcing base makes it more difficult to monitor supply chains closely. Making the apparel supply chain more socially responsible, sustainable and transparent will continue to be a hot topic in 2018.

Julia K Hughes, president, United States Fashion Industry Association (USFIA):
Sourcing trends remain stable. China remains the major supplier to the world. While we do not see that changing in the short-run, "China Plus Many" remains the strategy for many brands and retailers of all sizes. In 2018 we expect companies to remain focused on managing risk.  And one way to remain nimble in sourcing is to continue the trend for diversification.

We know it is hard to develop a sourcing strategy when there is so much uncertainty.  Companies need to be ready to implement back-up strategies in case there is a sudden disruption, whether it is caused by the weather or by the policymakers in Washington. We continue to tell our members that it remains essential to stay involved in the policy process in Washington, DC. Companies should participate in benchmarking studies to ensure we have accurate data, and participate in advocacy efforts, either on their own, or through associations like USFIA, or both. And they should join coalitions like the US Global Value Chain (USGVC) coalition to talk about the jobs that apparel brands and retailers contribute to the global economy. Government officials need to hear from the brands and retailers who are creating high quality jobs in the United States, creating new technologies, and creating the products that consumers need and want.

The value of participation and fighting back against bad policy proposals was proven during 2017 when the industry mobilised, along with many other business groups, to oppose proposals for a border adjustment tax (called the BAT). At the beginning it seemed almost impossible to get the proposal dropped because many powerful Congressional leaders were committed to the idea. But an organised campaign to talk about jobs and the cost to American families was successful, and by the time the Congress passed a tax reform package there was not a whisper about the BAT. If we can focus that same energy on the trade policy front, we can push back the proposals that would hurt trade.  

Rajiv Sharma, group chief executive, Coats:
The key sourcing trend is Asia for Asia. As Asian consumers buy more, so Asia retail expands and production that previously exported to Western markets is now staying in Asia. This Asia production for Asia consumption is therefore shifting sourcing in that region inwards.    

Another trend that is long-standing but noticeably accelerating at the moment, is near-shoring – for both the US and Europe. This means that places like Central America and Mexico are growing as they supply more to the US. Similarly Turkey, Middle East and Africa are growing as Europe looks to them to supply more. The growth we are seeing in Africa is not only from near-sourcing: as more of Asia's production remains in Asia, suppliers are looking to plug the sourcing gaps that is creating.

Another accelerating theme is order complexity. Overall volumes of orders are not going up, but with increasing numbers of styles and models they are becoming more complex.

Robert P Antoshak, managing director, Olah Inc:
Sources of supply have consolidated. In fact, this consolidation is nothing new, but it has accelerated in recent years. Last year, six countries (China, Vietnam, Bangladesh, Indonesia, India and Honduras) accounted for the bulk of apparel exports to the US – making up nearly three-quarters of all apparel imports.

Reshoring has picked up some steam, but it's still not a full-blown trend, more a marketing soundbite than sustainable business strategy. It helps many brands to say they source from the US or Europe. It makes for a good story – only that the higher costs for such production, coupled with the problems of coping with depleted domestic supply chains, fail to result in higher sales for many brands. Many consumers resist paying more for domestically-made merchandise.

Nevertheless, the apparel industry is under pressure from some consumers, NGOs and others to clean up their supply chains. Transparency has become an essential business strategy for many brands. So has sustainability, which from a messaging standpoint goes hand-in-hand. And reshoring takes on a new significance when transparency is bundled in with a reshoring message.

Many brands are criticised for using far-flung global supply chains to produce their clothing. NGOs point out the carbon footprint of such production – with elements of a finished garment made in multiple countries – is hard on the environment. And then there's the problem of disposable fashion: many products are not only cheap to make, but they are also cheaply made, designed to wear out quickly, but also encourage consumers to go back to stores to load on new styles. What happens to all of the previously worn clothes? More times than not, it ends up in landfills creating new environmental challenges for the industry.

Reshoring is not a total answer to the environmental challenges of global supply chains and waste disposal, but it may become a more critical element of many brands' sourcing strategy over the next few years.

Rick Horwitch, vice president and global retail lead for supply chain strategy at Bureau Veritas Consumer Products Services:
Given the events of the past year the answer to this question from a global trade and geopolitical perspective could be summed up as: "One Belt, One Road" vs "My way or the highway."

Last year I wrote that 2017 would be a year of transition and adjustment to the new Trump administration, and separating the hyperbole from policy and reality. As we headed into 2017 we knew there would be change and challenges. There always is with a new administration. A year later, US trade policy is, at best, a mess. The only "consistent" message seems to be "if it's good for America then it must be good for you, too – My way or the highway."  

On climate change and the environment, we are the only major industrial country in the world not signed on to the Paris Accord (or committed to any type of significant environmental policy). Traditional allies and partners can no longer assume to count on long-standing agreements. As I have travelled the world in 2017 there is a clear sense of frustration, and sadness, that the US has abandoned its traditional leadership role.

The same month that the US officially pulled out of the Paris Climate Change Accord, China strengthened its commitment to the accord. China also concluded a multinational summit in Shanghai laying out an ambitious vision for the "One Belt, One Road" initiative. Whether this comes to fruition is still to be seen.   

Either way, the message from some in the West is clear: there is no such thing as a "sure thing" when it comes to trade and traditional alliances. From China the message is also clear: they are ready to fill the leadership void through investment, infrastructure and innovation.    

  • Strategies will continue to be built around the big issue of Demand and Supply – speed, efficiency, regional balance and transparency. The days of "chasing the cheapest needle" are over. Collaboration, commitment and trust across the entire value chain are critical.
  • Speed-to-market is being redefined to "Idea-to-Consumer." The winners will be those companies (retailers, brands and manufacturers) who evolve their thinking in strategic collaboration and focus on value generation to the consumer.         
  • Vietnam will continue to verticalise, expand into new product categories and take production market share from China.
  • Chinese suppliers continue to invest and expand both domestically (moving inland) and abroad (Vietnam, Ethiopia, Americas). And, the Chinese government is the global investment leadership in infrastructure projects as part of the One Belt, One Road initiative.  
  • India's textile industry will see a resurgence as demonetisation, tax and bureaucracy reforms are starting to take hold.
  • Regional sourcing closer to the consumer will continue to expand (Asia for Asia, EMEA for EMEA, Americas for Americas).

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
What's happening with sourcing? The simple answer is: "very little." The apparel sourcing revolution from 1995 to 2008 transformed our industry – and was the most visible part of the global economic revolution that arguably changed the world, faster and more equitably, than any other political or economic movement in history. The much-reported counter-revolutions – onshoring, robotics and AI – haven't happened and probably never will.

The minor tweaks – like the alleged movement of manufacturing from China or an imminent boom in production from Ethiopia or Burma – haven't really happened either. The overall sourcing picture in the first half of 2017 was almost unchanged from 2009.

Throughout the West, the only significant changes have been:

  • Japan no longer gets 90% of its clothes from China: it's hovering below 70%;
  • Bangladesh and Vietnam now look set to stay at numbers two and three for the next few years.

The major tweak most of us expected from the victories of Brexit, Trump, and protectionists like Macron is now clearly a delusion: throughout the West, the grown-ups have reasserted their authority. In the developing world, the long-term industrial strategies of Xi, Putin, Zuma and Modi all make their countries less attractive for honest foreign businesses to invest in.   

Click on the following links to read more comments about what to expect in the year ahead:

Outlook 2018 – Apparel industry challenges and opportunities

Outlook 2018 – Strategies for sourcing success

Outlook 2018 – What else is the apparel industry watching?