The dynamics of the apparel industry are changing. As manufacturing continues to move offshore, companies need a new set of management techniques to find the right production partners and to keep product quality as high as it ever was. Mike Flanagan reveals the new rules of apparel sourcing.

The rich world - North America, Europe and Japan - spent over $100bn on clothing from poorer countries in 1999, an increase of eight per cent on 1998. It is estimated too that nearly 60 per cent of all clothing sold in the West is now sourced from lower-cost regions.

The issue is no longer about moving production offshore, as this is already the norm rather than the exception. Instead, the industry must look at how to find the right partners, and how to work with them to get the right results.

There are few signs of a slowdown
Many observers with a stake in rich-country apparel manufacturing frequently announce signs of a slowdown in the move offshore, but they are deluding themselves. Although US emerging market import growth, by value, seemed to slow from 11.2 per cent in 1998 to 5.3 per cent in 1999, growth in volume stayed about the same. And import growth in Europe actually accelerated.

There are few areas within a rich country's clothing market that really need a domestic manufacturing sector, so it seems inevitable that clothing production will continue to move offshore until it reaches 80-90 per cent. This means that - unless there's some revolution in technology or fashion - the emerging market clothing industry will carry on growing at five per cent or more until at least the second half of this decade.

There's no Shangri-La…
But there are signs that the search for Shangri-La is slowing down. In 1999, while some 'newer' countries experienced rapid growth: Cambodia, for instance (220 per cent up on 1997) and Burma (up 98 per cent), 75 per cent of the extra $16bn this market created came from countries that have been providers for the past ten years, and accounted for 60 per cent of the world's markets.

These 17 countries - the 'Old Frontier' - are Vietnam, Bulgaria, Thailand, Poland, Guatemala, El Salvador, India, Morocco, Hong Kong, Bangladesh, Honduras, Tunisia, Turkey, Romania, Korea, Mexico and China. Their faster-than-average-growth is strong evidence that one of the most widespread theories about this market is wrong: that smart buyers constantly move on to the next cheap country.

So where to next?
South and East Asia, Central America, the Maghreb and SE Europe are the next 'hot places' - as they have been for the past ten years. There is also one other area that has started to grow in the past two years, and that is Southern and insular Africa (South Africa, Lesotho, Swaziland, Botswana, Madagascar and Mauritius).

However there are big question marks hanging over other parts of the world that aren't serious players in the clothing trade:

  • Central Asia (CIS, Iraq, Iran) - problems with infrastructure and its reluctance to join the world trading community;
  • Africa (south of the Sahara and north of the Zambezi) - infrastructure issues (but watch out for Kenya and Uganda);
  • South America - high wage rates price it out of the market (but watch out for countries bordering the Caribbean).

    Although these countries add up to a large part of the world map, their pool of underemployed people is small compared with the underused resources of Asia.

    Future growth is going to come mainly from those countries that already have a significant clothing business. The frontier days of finding new manufacturing countries are over. There will be slightly more activity in parts of Africa and areas of the CIS, but the real opportunities are going to come from doing a better job in the current volume countries, such as China, Thailand and Tunisia.

    The traditional belief goes something like this: "Country X attracts some clothing business, wage rates go up, and a few years later they've priced themselves out of the market". But the continuing growth in countries like Mexico, Tunisia, Romania and China shows that this is not the case.

    In fact, it's a reflection of the fundamental economics of offshore manufacturing.

    The economics of offshore manufacturing

  • Labour is not the only cost. Labour costs are roughly in line with a country's GDP per head and management costs vary much less than direct labour costs. Other costs are not so easy to determine though. For example, energy costs are decided by national governments, and vary much less than labour, while capital costs - which are driven by local macro-economics - are often much higher in developing economies than in mature markets. Raw materials and equipment are often more expensive in emerging markets.

  • Non-factory costs can be greater than labour. Contract manufacturing hanging blouses in SE Europe for an EU country can incur a round-trip freight cost that is often greater than the labour cost. Buying quota can sometimes be more expensive than the total factory cost and costs such as freight and quota vary in a completely different way from wage rates or interest costs.

  • Once offshore, variations in labour cease to be critical. Say a garment's production cost is $10-8 labour and $2 'other' (energy, depreciation, interest, taxes and so on) when it is made onshore. Move it to a country where the wage rate is 90 per cent lower - and the total labour cost is now 80c. The likelihood is that the 'other' will still be $2, and the total cost $2.80. To reduce this even further might cause more pain than gain. For example, in a location where labour costs are a further 75 per cent cheaper, the total production cost is now down to $2.20 - an additional saving of just 60c. Remember: a manufacturer's overall efficiency influences cost more than the absolute cost of labour.

  • A growing clothing industry doesn't necessarily inflate labour costs. The key influence here isn't the rate of growth but the availability of suitable workers. Labour costs in countries like Taiwan, Poland, and Slovenia have grown in the past decade because of consistent expansion in the overall economy as a whole. Labour costs haven't grown in Morocco or Romania because the overall economies have stagnated, and this has created large pools of workers who are available (after training) for the booming clothing business. China has a huge pool of rural underemployed, constantly keeping wage rates down.

  • But a growing clothing industry can reduce non-labour costs. As a country's clothing industry matures, the pool of trained equipment maintainers grows. Key trim suppliers, such as Coats, Freudenberg, YKK, and Mainetti, establish a better local infrastructure - sometimes manufacturing locally, sometimes keeping a larger part of their catalogue in permanent stock, and often reducing their prices. The quality of support services, such as freight, laboratories, and quality control also improves. All of which can create stronger downward pressure on prices.

  • And growth creates internal competition. A growing clothing industry in an emerging market invites new entrants. The real difference between prices lies in the profit expectations of factory owners.

    So is growth a good thing for the buyer?
    Growth in a country's clothing industry doesn't necessarily increase prices, but it does tend to create two dilemmas: buyers and sellers view the world differently; and quality can become a problem.

    Saying that "buyers and sellers view the world differently" may sound like a truism, but a UK or US clothing vendor shares the same mindset as his retail customers - the market's flat, competition's tougher, prices have to come down. And a vendor can't afford to lose a customer.

    Offshore manufacturers just don't see things that way. They've seen sales growing an average of 10 per cent annually for the past ten years and their geographical base is expanding. If they fall out with a customer, there are 20,000 other American, European and Japanese retail chains and wholesalers to sell to. The largest - Gap and Sara Lee - have nothing like the clout with offshore manufacturers that Wal-Mart has with its local suppliers.

    This doesn't make manufacturers lazy or complacent. It simply means that losing a contract will not be a source of great worry and they are also unlikely to be affected by bullying or bluster.

    Clothing factories in high growth markets don't disregard quality, but a fast rate of growth can make good quality tougher to achieve.

    The new rules - getting garments right

  • Buy, don't make. Understanding Western retailers and customers and developing the right garments for them is tough enough. Owning factories thousands of miles away complicate matters even more. The relative merits of different production centres are changing all the time: why be encumbered with facilities whose comparative advantages can disappear at the stroke of a Central Banker's rate-setting hand?

  • Spread your risks. In the past year, there has been serious, industry-sapping civil unrest in Fiji (Australia's largest supplier after China) and Laos; strikes in Cambodia; US Customs raids in Hong Kong; human-rights scandals in Saipan; earthquakes in Turkey and Taiwan; floods in India; and commercial chaos as eastern Europe's currencies appreciated against the Deutschmark.

    How to get the quality you want
    There can be few factory owners who actually want to make low-quality clothes. But the busier a factory, the easier it gets for even the toughest operator to let things slip. So it's important to choose the right factory. It's easy to ask the standard questions about ethics, pricing and capabilities, but what special processes are you going to need in manufacturing, operations, housekeeping or record-keeping? Is there real evidence that the factory can provide these processes at a price you can afford? If it has to buy some processes in (like washing or embroidery), is the subcontractor reliable, and is the main contractor able to manage his quality as effectively as his own? It's important to understand factories' weaknesses: not to disqualify them, but to know how they are best managed.

    Increasingly important, too, is staff turnover and training. One-off factory appraisals can't keep track of these things during high growth times. A good factory could have lost half its staff (and all the folk's memory of how to make your systems work) to the start-up over the road; or the embroidery outsourcer may now be full till Christmas.

    One solution is to ensure independent quality management. Good end-of-line quality control (qc) usually filters out bad garments - often when it's too late to rework. Putting your own qc more or less full-time into each factory ensures that in-line quality checks - on processes, record-keeping, settings, and raw materials, as well as production - are properly carried out. And they act as your eyes and ears, keeping you aware of important changes.

    Iraq and Iran: infrastructure problems hold back domestic textile industry

    But even then, things can go wrong. So here are three more rules:

  • Production must always be in an approved facility with independent inspection. Subcontracting can be fine. But one of the biggest single causes of poor workmanship is unapproved subcontracting - which frequently means to a facility lacking the management, processes, and independent inspection of the approved facility.

  • Briefing must be complete and scrupulously accurate. The second cause of serious poor quality workmanship is bad briefing: wrong measurements, wrong settings.

  • Plan ahead, and monitor progress carefully. The most common area of poor quality - though seldom as catastrophic as workmanship-related mistakes - is the 'presentation' problem that almost always comes from manufacturing to a tough deadline: thread ends, poor pressing, mis-loaded trucks or containers. Almost always, these faults can be traced back to poor planning: production has slipped behind, there's a rush to complete and pack in time, and there simply aren't the resources to inspect fully at completion.

    To avoid these problems, the customer must plan his contribution impeccably and monitor performance. Late despatched, or deficient, raw materials (if contract manufacturing), poor documentation, and late-ordered labels can all delay production and create pressures that lead to quality control steps being rushed. They also give factories endless debating points if blame needs to be assigned for poor quality. Factories can also fall behind without their customer's help, which is why it is essential to keep continuous controls on production performance and insist that adequate quality control be plugged in at finishing when production slips.

    It is also important to define your quality priorities precisely. It is depressingly common to see factories putting superhuman efforts into a production standard that their customers don't want - and then failing to do something the same customer regards as essential. Many customers don't like saying some things aren't important - but if everything's essential, nothing's essential.

    Manage factories as you would manage your own staff
    Getting good work from a factory is the same in practice as getting good work from colleagues.

  • Take as much care in selecting them as possible. There may be a near-infinite number of people out there, but relatively few are right for you.
  • These days, they can walk out on you more easily then you can fire them.
  • Ensure they're given clear objectives.
  • Ensure they have all the information and resources they need to help them do their job - and to avoid excuses later.
  • Monitor feedback consistently. What gets measured gets done.
  • Walk the talk. From personal experience, two lessons stand out. The lowest fault rate ever achieved was on a line with a scrupulously-enforced 'no-metal' policy. The line was so impressed at the reasons for no metal, and the lengths undertaken to ensure that it was metal-free, that the standards spread to all activities. And the worst fault level? A contract manufacturing customer who consistently supplied faulty fabric. The whole factory (and, to our shame, our own inspectors) simply decided the customer couldn't care less. The customer concerned has now gone out of business.

    Mike Flanagan is a partner in Flanagan & Leffman, a business intermediary that helps Western clothing manufacturers source factories around the world. The company then puts its own QCs into these factories to ensure that the customer get the right clothes, on time. Prior to the clothing business, he had extensive experience in international marketing and retailing, and has been responsible for retail chains in over 50 countries. Copies of the complete report on which this feature is based can be obtained from Mike Flanagan on clothesource@cs.com. Mike would also welcome any comments.