Does the move by Liz Claiborne to wind up its sourcing department and buy all its offshore garments through Hong Kong-based Li & Fung mark the end of the trend for sourcing direct? Mike Flanagan thinks not, but believes more questions will be asked about the best use of resources.
 
After similar moves in the past few years at Timberland, Arcandor and Tommy Hilfiger, there's a temptation for many buyers to worry that all the major brands' and retailers' sourcing operations are likely to be consolidated into a tiny number of super-agencies.

I'd argue this misunderstands how buying works today. Major retailers and brand owners usually have buying needs that can't be accommodated by just one approach to buying.

Liz Claiborne claimed to have pioneered a policy in which everything was bought by a Liz Claiborne buyer directly from a clothing factory - but that was a policy practically few other people copied.

Wal-Mart's biggest supplier?
Li & Fung (L&F), for example, is often cited as Wal-Mart's biggest supplier - and that might be true, though Wal-Mart doesn't see any need to tell us such things.

Li & Fung might have done some buying directly for Wal-Mart, it certainly developed in the 1990s by doing a lot of sourcing for the wholesalers who supply Wal-Mart, and it does niche sourcing and merchandising jobs for some brands Wal-Mart sells, like Levi Strauss.

Add together all the products that end up in Wal-Mart and it's possible that some years more products sold in Wal-Mart started life being bought by Li & Fung than by anyone else - possibly even than by Wal-Mart's own buying offices. 

But if that happened, it wouldn't be because of a Wal-Mart policy decision to concentrate business into Li & Fung.

Wal-Mart buys some clothes direct, some own-branded clothes through wholesalers, buys some specially developed brands from branded companies and buys straightforward branded clothes as well.

Each is bought in a way best suited to the product concerned, the market it's bought for and the country it's bought from.

Wal-Mart, with its mix of products, brands and countries of operation, has probably the most complex buying needs of any major clothing retailer.

But the UK's Next - heavily focused on clothing, almost entirely under the Next brand, and with sales largely in the UK - also uses a mix of sourcing models, with its own sourcing organisation often pitching against offers being made by other vendors - including Li & Fung.

Tesco employs 250 people at its Hong Kong sourcing centre - but they too have to compete with offers made by other organisations.

Common sourcing rules
Today's major brands and retailers believe they can source in a variety of ways - but enforce common rules for quality control and ethical compliance whoever does the actual buying. 

And the trend certainly isn't entirely towards eliminating sourcing operations.

In the month or so before Liz Claiborne decided to do without a sourcing department, other major apparel businesses took completely different decisions.

Metro, the giant German multi-format retailer, moved from one central buying office to an organisation in which buying was delegated down to its key operating divisions.

Phillips-Van Heusen, on the other hand, reorganised so all buying was concentrated centrally. 

Retail organisations themselves seldom stay the same for long, either. As the Li & Fung/Claiborne deal was being announced, the new chief of Germany's Arcandor, Karl-Gerhard Eick, was telling his company's shareholders that a breakup of the business was not at all impossible.

If its Primondo (formerly Quelle) mail order division were separated from its Karstadt department stores, would both still want to do all their sourcing through Li & Fung? 

Retailers' different sourcing policies are triggered more by business priorities than by any great global moves in the relative merits of one sourcing strategy over another. 

Liz Claiborne, for example, has stopped being entirely focused on the Liz Claiborne brand.

Managing a portfolio of different brands requires some difficult decisions about what services the holding company provides for the operating businesses and which it should source from a third party. 

Moreover Li & Fung's been tilting the table lately by offering to buy sourcing operations from retailers for hefty chunks of cash.

Whatever the strategic arguments for third-party sourcing are normally, they can look a great deal stronger to a retailer who's trying to repair a vulnerable balance sheet in a recession and finds someone's waving $100m at him

Strategic arguments for...
What are the strategic arguments? 

There's unlikely to be much in it either way as far as straightforward product costs are concerned.

Li & Fung typically charges around 5% of the cost of garments it buys, and returns a net pre-tax profit of 2-3%.

The cost of running buying offices round the world might be cheaper for Li & Fung - and as Li & Fung is now among the world's biggest garment buyers, it ought to be driving at least as hard a bargain with factories as apparel retailers with a turnover of a "mere" $5bn or so.

But it's unlikely anyone will ever know for certain how much L&F saves. The arguments for switching buying from your own sourcing department to a third-party agent can be more complex than a straight 5% reduction in the cost of a T-shirt

Those arguments include:

Scale of operation. Li & Fung has a bigger chain of buying offices than anyone else - including Wal-Mart.

This ought to give clients exposure to a wider range of potential factories, and keep them informed of trends in supplier countries that would be difficult for a business with just a handful of offices around the world. 

Flexibilty of approach. Liz Claiborne's public explanation of the L&F deal was that the right sourcing strategy for one big brand wasn't necessarily right for a business diffused over a wider range of brands, each with different needs.

Some protection from overhead pressure. To an agent, a chain of buying offices isn't an overhead: they're the company's crown jewels, as shops and websites are to retailers.

To a retailer, a chain of buying offices is a perpetual example of something that can be cut in the next recession.

Sourcing managers will always be facing the question: "Surely you can keep watch on Sri Lanka from Bangalore?" And then a year later: "Can't you control Bangalore from Singapore?"

Management control. Bill McComb, Liz Claiborne's CEO, has been quoted as being worried his buying team had lost the "stomach and muscle to continually re-tender your business" - and Li & Fung certainly hadn't.

Whether Wal-Mart and Tesco would accept that argument about their sourcing operations, of course, is a different question.

...and against
But there are also opposite arguments. Personally, I doubt we're about to see the end of buyers' own sourcing offices.

But what the very different Liz Claiborne and Metro decisions do are ask whether "sourcing is something we use our own, or subcontracted, resources for?" 

And this will be a question every major buyer will now put on the agenda.

I don't believe Wal-Mart or H&M will ever dispense with sourcing teams altogether: but I also doubt any retailer or brand now will completely rule out some use of agencies, somewhere. 

The point, of course, is that a consolidated sourcing industry doesn't have to be bad for anyone.

It's just that in today's climate, the moans from people thinking they'll be hurt by any change are always louder than the applause from people benefiting.

We're living in a "glass half empty" environment. And that's as big a fallacy as perpetual optimism.

Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.