Vietnam was the only sourcing destination to score highly across all five key sourcing factors

Vietnam was the only sourcing destination to score highly across all five key sourcing factors

From capacity to price, stability, sustainability and quality, various sourcing factors affect the choice of apparel sourcing destinations. But which matter most to fashion brands and retailers? And what's the secret of becoming a preferred sourcing base? Emma Davis and Sheng Lu from the University of Delaware take a look.

The apparel sourcing formula is getting ever more sophisticated. According to the 2020 Fashion Industry Benchmarking Study released by the US Fashion Industry Association (USFIA) earlier this year, US fashion brands and retailers consider a wide range of factors when deciding where to source their products. The long list includes cost, speed to market, flexibility, and the risk of social and environmental compliance, to name a few.

However, questions remain. Do fashion companies treat all factors equally in their sourcing decisions? And are any particular sourcing factors given more weight, especially as no sourcing destination is perfect and a trade-off is inevitable?

By leveraging data collected from the GlobalData Apparel Intelligence Centre and trade statistics from UNComtrade, we have taken a detailed look at how various factors affect the choice of apparel sourcing destinations. The findings shed new light on the sourcing strategies of apparel brands and retailers and provide new perspectives to understand the secret of becoming preferred sourcing bases.

Key sourcing factors and performance indicators

Based on experts' ratings, the GlobalData sourcing criteria database provides a detailed evaluation of the world's 27 leading sourcing destinations against 15 specific performance indicators, such as the ability to provide FOB (Free on Board), efficiency and tariff advantages. The database uses a five-point rating scale for each performance indicator (1=least competitive and 5=most competitive).

Directly using these performance indicators to interpret fashion companies' sourcing decisions presents two technical challenges, however. One is that there are too many indicators; the second is that some of these indicators measure similar items. So we first carried out a statistical analysis (factor analysis) to group these 15 sourcing performance indicators – based on their score of correlation – into five key sourcing factors shown below. 

Table 1: Key sourcing factors and performance indicators

Sourcing factors Key performance indicators
#1: Capacity Ability to provide FOB
Vertical integration and ability to source raw material
Ability to provide value-added products
Innovation and ability to develop
Efficiency
Lead time
Reliability
#2: Price & tariffPrice
Tariffs advantage
Flexibility of order quantity
#3: StabilityFinancial stability
Political stability
#4: SustainabilityCompliance/sustainability
#5: QualityProduction quality
Ability to create basic products

#1: Capacity: This covers seven performance indicators, which in general measure the capabilities of a sourcing destination to provide apparel products and other value-added services – and whether that sourcing destination obtains a complete, agile and sophisticated local textile and apparel supply chain.

#2: Price & Tariff: This covers two performance indicators that relate to the financial implications of sourcing from a particular destination. For example, how competitive is the cost of goods? Are any duty-saving benefits offered through a free trade agreement? And is any minimum quantity or value of sourcing order commitment required?

#3: Stability: The two performance indicators that measure a sourcing destination's macro-business environment. Specifically, the political and economic climates that may affect textile and apparel manufacturing and trading.

#4: Sustainability: This covers 'Compliance/Sustainability,' which encompasses all social and environmental compliance issues related to apparel production and sourcing, such as the factory working conditions, overall factory certification record, and compliance with various environmental regulations.

#5: Quality: Whether a sourcing destination has skilled workers, the overall quality of its products, and its ability to create high-quality staple apparel items.

Rating of sourcing destinations by key sourcing factors

In the table below we have rated the scores of the 27 sourcing destinations against the five key sourcing factors. 

Table 2: Rating of sourcing destinations by key sourcing factors

CountryCapacityPrice & tariffStabilitySustainabilityQuality
BangladeshGoodVery goodAcceptableAcceptableVery good
CambodiaGoodGoodAcceptableAcceptableVery good
ChinaVery goodGoodGoodAcceptableVery good
Dominican RepublicAcceptableAcceptableAcceptableGoodGood
EgyptVery goodGoodAcceptableAcceptableVery good
El SalvadorVery goodAcceptablePoorGoodVery good
EthiopiaAcceptableAcceptablePoorAcceptableAcceptable
GuatemalaVery goodGoodPoorAcceptableVery good
HaitiPoorAcceptablePoorAcceptableGood
HondurasGoodGoodPoorAcceptableVery good
IndiaGoodGoodAcceptableAcceptableGood
IndonesiaGoodVery goodAcceptableAcceptableVery good
JordanGoodGoodAcceptableGoodVery good
MadagascarVery goodGoodPoorGoodGood
MalaysiaAcceptableGoodAcceptableAcceptableGood
MexicoGoodGoodPoorAcceptableVery good
MoroccoGoodGoodAcceptableAcceptableGood
MyanmarAcceptableGoodPoorAcceptableGood
NicaraguaAcceptableGoodPoorAcceptableGood
PakistanGoodGoodPoorAcceptableGood
PeruVery goodVery goodAcceptableGoodVery good
PhilippinesGoodGoodAcceptablePoorGood
Sri LankaVery goodGoodPoorAcceptableVery good
ThailandVery goodGoodPoorAcceptableVery good
TunisiaGoodGoodPoorAcceptableVery good
TurkeyVery goodGoodPoorPoorVery good
VietnamVery goodVery goodVery goodGoodVery good

Note: Very good (above 4 points); Good (3-4 points); Acceptable (2-3 points); Poor (lower than 2 points)            

Several patterns are worth noting.

First, no souring destination appears to be perfect. Only one of the total 27 leading sourcing destinations – Vietnam – was rated as 'Very good' or 'Good' across all the five key sourcing factors. This partially explains why most fashion companies choose to maintain a relatively diverse sourcing base to meet different needs.

Second, fashion brands and retailers have many choices for sourcing destinations that can meet their demand for production capacity, price point and quality. With regards to Capacity, the inputs suggest as many as 21 out of the total 27 sourcing bases (or 78%) are either 'Very good' or 'Good.' Almost all of these 21 sourcing destinations can also offer high-quality products. Further, 23 out of the total 27 sourcing destinations (or 85%) were rated 'Very good' or 'Good' for Price & tariff.

In addition to conventional sourcing hubs like China, Vietnam and Bangladesh, some emerging sourcing bases such as Cambodia, Haiti and El Salvador are quickly improving their production capacity and product quality, especially for basic and staple apparel items. For example, thanks to foreign investments, which have also brought in technical know-how, Cambodia has been making its apparel products benchmarking Japanese standards. Similarly, Haiti has been continuously improving the quality of its basic garments, tees, and jeans. Nevertheless, the results also imply an ever more crowded and competitive export market for apparel, given the relatively low market entry barriers.

Third, in comparison, fashion companies face much more limited choices when seeking an apparel sourcing destination with a stable financial and political environment and a strong sustainability record. For example, nearly half of the 27 sourcing destinations were red-flagged as vulnerable financially or with a relatively high political instability, which could worsen further due to Covid-19. Similarly, less than one-third were rated as 'Very good' or 'Good' for Sustainability, suggesting this area remains an Achilles' heel for apparel sourcing. On the other hand, it is important to recognise that the scope of sustainability and compliance issues relevant to apparel sourcing has significantly expanded, making it an even more challenging and resource-intensive task to manage related risks.

Which sourcing factor matters most?

To gain more insights into the impact the five key sourcing factors have on the selection of fashion companies' sourcing destinations, we conducted another statistical analysis (panel regression). Specifically, we looked at how the five factors affected the value of apparel imports in 2019, both globally and in the three largest apparel import markets – the United States, the European Union (EU), and Asia. As summarised in Table 3, the findings reveal some interesting patterns.

Table 3: Impact of sourcing factors on the value of exports

Sourcing factorsWorldUSEUAsia
CapacityNo significant impactNo significant impactNo significant impactNo significant impact
Price & tariffNo significant impactNo significant impactNo significant impactNo significant impact
StabilityNo significant impactPositive impactNo significant impactPositive impact
SustainabilityNegative impactNegative impactNegative impactNegative impact
QualityPositive impactNo significant impactNo significant impactPositive impact

Calculated based on data from GlobalData and UNComtrade (2020)

Apparel sourcing today is no longer a "winner takes all" game. Notably, Capacity has limited impacts on the value of apparel imports from a particular sourcing destination. This result echoes the findings of several other recent research (such as the USFIA benchmarking study), which also suggest fashion companies tend to maintain a relatively diverse sourcing base rather than putting all their eggs in one basket. In other words, due to concerns about supply chain risks and other non-economic factors that are hard to control, even the most economically competitive sourcing destination won't be able to dominate the market.

Apparel sourcing is not merely about "competing on price" either. As shown in Table 3, the impact of Price & tariff on the pattern of apparel imports is not statistically significant. This result does NOT necessarily mean price is irrelevant. However, it does imply that sourcing decisions are far more complicated than just about chasing the lowest price or trying to take advantage of the duty-savings of a trade agreement.

The results also show that improving financial and political stability, as well as product quality, can help a country enhance its attractiveness as an apparel sourcing base. American and Asia-based fashion companies, in particular, seem to give substantial weight to Stability and Quality in their sourcing decisions. Together with the rating scores in Table 2, this provides a new perspective to explain why fashion companies tend to use Vietnam and China as their leading sourcing bases, given their relatively stable business environment and high product quality. In comparison, garment factories in less economically advanced countries, such as Bangladesh and Cambodia, that have been struggling during the pandemic and are unable to demonstrate financial stability, could suffer a further disadvantage in competing for new sourcing orders post Covid.

Finally, the current fashion sourcing model does not always provide strong financial rewards for sustainability. Specifically, a higher score for Sustainability does not lead to more sourcing orders at the country level. Such a pattern applies to both the world market and the three specific country/regional markets we examined. Behind the result, fashion companies today likely consider sustainability and compliance at the vendor level rather than at the country level in their sourcing decisions. It is also likely that sustainability and compliance are treated more as pre-requisite or bottom-line criteria instead of a factor to determine the volume of sourcing orders.  

In conclusion, the sourcing decisions of fashion companies seem to be more complicated and subtle than they first appear. It is important to continue to interpret and decode this behaviour in the post-Covid world in response to consumers' shifting shopping habits, the dynamics of primary sourcing destinations, and the new trade policy environment.

About the authors: Emma Davis is a research assistant in the Department of Fashion and Apparel Studies at the University of Delaware; and Dr Sheng Lu is an associate professor in Fashion and Apparel Studies at the University of Delaware.