In the heady days of the mid-eighties,consumers spent vast amounts of their disposable income on a wide range of clothing goods.Times have changed. It seems unlikely that market conditions will improve in the periodleading into the next century.
At present, despite rising incomes acrossWestern Europe and other mature economies, disposable income has changed into new spendingpatterns. Job security is now a past luxury for most of the working people of WesternEurope and North America. In addition, these populations include older and retired people,and reflect a slowdown in birth rates.
This is not a good scenario for futuretrends in the consumption of goods, particularly those purchases that can be deferred orreplaced by cheaper alternatives. Clothing, furnishings and household textiles fall intothis category.
The outcome is an increasingly tightceiling on prices for garments. Retail profit margins have become tighter in the majorconsumer markets. This has been reflected by changes in marketing and purchasing policies,with implications for garment suppliers and the textile pipeline. Naturally, retailersclaim that garment prices must be at a level that the consumer can afford. This, in turn,generates the required volumes of demand. In this way, increasing pressure is put onsupply prices and stocking levels throughout the supply chain – from retailer through tofiber manufacturer.
It is interesting to consider the differentlevels of pressure on such supply chain linkages that derive from the various retailstructures across a number of regions. It is arguable that the oligopolistic structure ofretail in the UK will exert more pressure on manufacturers than do the fragmentedretailing sectors of France, Spain or Italy.
The supply chain
It is fair to say that retailers of appareland footwear, as well as those of other disposable goods, are under pressure to remaincompetitive. Inevitably this creates price discounting and the ensuing consequences forprofit. This is passed through the processing pipeline, to the manufacturer of finishedknitwear, or woven apparel or other goods. In turn, each of these groups seeks to securecompetitive advantage by price or by some other stratagem over their rivals in the samesector. This then passes as pressure price or qualitative aspects onto their suppliers offabric or yarn.
Industry response to these pricingpressures has varied, most notably in relation to the type of technology involved.
There are, for example, sectors of activitywithin the textile processing pipeline which lend themselves to automation. As a resultsuch processes can embark on investment plans. These allow productivity and machineefficiencies to be exploited in order to respond to such pressures. They reduce price,improve quality and offer other less tangible competitive advantages.
Various forms of spinning offer suchopportunities. Over the years spinning has become automated, although the degree to whichit is achieved varies according to the product. This means that the costs per unit oflabor have been reduced via raised productivity. For example, a comparative costingexercise indicated that a site in Switzerland had the edge over certain prime sites indeveloping economies. This was due to the particular type of spinning in place. It wasvery highly automated, requiring very low numbers of operatives, and the location wasclose to the main consumer market.
However, such levels of automation are notavailable to all textile processes. Indeed there are sectors which are particularlysusceptible to high labor input. This is the nature of clothing manufacture. Huge researcheffort still yields few solutions which allow a more automated route to garmentproduction, and how manufacturers can respond to increasing price pressure and otheradvantages sought by retailers. Although efforts to rearrange the flow-patterns of apparelconstruction have succeeded in raising productivity, the overriding costs of sewingoperatives continue to represent an intractable obstacle to competitivity in the long run.
Consequently other solutions have beensought involving various forms of commissioning. These range from sourcing finished goodsor commissioning semi-finished production capacity in regions where labor is relativelycheap. Other solutions involve the relocation of entire manufacturing units to regionswhere competitive advantages can be exploited. The outward processing trade is a growingphenomenon which has characterized clothing manufacture during the latter stages of thiscentury. This looks to be a bigger trend in the years ahead.
This solution sounds simple. However, thereality is different. At present there is an abundance of cheap labor available in newlyindustrialized and developing economies around the world. There are enormous problems tobe surmounted if the competitive advantage of low labor cost is to be exploited. On a listof priorities the levels of skill and the work ethic available from the local workforce isone of the prime requirements. The acquisition of relevant skill requires education andpatient training on the job. It is critical to the success of such solutions. Difficultiesin establishing sound working practices, due to the customs, social mores and expectationsof a local population, can reduce the competitive advantages expected to be gained.
While Western European manufacturers mayeliminate problems associated with managing the operation, they may also find their profitmargins eroded by transaction costs for which they have not accounted and which areoutside their control. For example, the labor may be cheap and trained, but thetransportation of it to the workplace may incur considerable cost. Such is the case inEgypt, where manufacturers on purpose-built industrial sites, enjoying the tax advantagesattached to them, have to bus in workers over considerable distances. The workers have touse a new road system which appears to be falling apart from the pressure of transportalmost as fast as it is built. There, the mindset of the population and the country’sinfrastructure still have to make huge advances from the practices of the previous regime.
It takes time for such changes to takeplace and to permeate through to all government and workplace attitudes. Equally it takestime for a labor force to acquire the skills and levels of productivity required by themanufacturer to achieve profit and price targets.
It is common, therefore, for Apparelsuppliers to select different regions from which to source clothing production accordingto the particular advantages offered. It is familiar practice for a single garment to beconstructed on a number of different sites before reaching its final destination; thesupplier organization in Western Europe. Shirt manufacture offers a perfect example of howWestern European manufacturers set up supply chains, exploit the competitive advantagesoffered by the different regions and involve different types of product.
The characteristics of supply chains varyin the opportunities and disadvantages available to be exploited in a range of economiccontexts. These contexts are identifiable by the particular mix of factors which theyoffer. The two scenarios in Figure 1 illustrates this. The two scenarios are dramaticallydifferent in the opportunities they offer. They are at the opposite end of a potential mixof considerations by manufacturers and retailers when making their sourcing decisions. Asthe following two examples demonstrate, there are many considerations which determine thelocations selected by a supplier of shirts to a retailer for two different types of men’sshirts.
- long distance from the consumer market
- long Product Life Cycle (PLC)
- price sensitive
- stable demand
|Unit cost advantages||Unit cost disadvantages|
mass volume production capacity
a range of investment incentives
|high transaction costs
low skill levels
low quality of production response times slow
- short distance from the consumer market
- short Product Life Cycle (PLC)
- high value add
- hard to forecast sales
|Unit cost advantages||Unit cost disadvantages|
|highly skilled labor
high quality of product high
quick response management
|high cost of labor
return on capital (ROC) expectation for investment
Fig.1 The extremes of productsourcing
A basic shirt
Shirt A is of a standard construction instyle, made from a white poly/cotton plain weave fabric. It is produced in mass volume,and may also be repeated in a range of commonly worn pastel shades. The style is anon-fashionable, commodity shirt which will remain relatively unchanged over a long periodof time.
Such a shirt is eminently suitable forscenario one above. Given the style’s long product life-cycle character, it is suited forproduction at long distance, since quick response will not be an important factor fordistant producers. Furthermore, the time is available to move the shirt production to arange of operations offering the best cost and skill advantages.
Nevertheless, Shirt A production is highlyprice sensitive, because it is essentially a commodity product. As a result it isvulnerable to exchange rates and to competition from other developing industries which maychallenge the labor costs of existing operations.
The ‘basic’ solution
In this case the solution was resolved bycommissioning an agent in Hong Kong that was capable of organizing a sourcing andprocessing route such as:
Fabric: This is a commodity fabric. It isbest sourced from those regions that offer quality fabric at low cost. Korea, Thailand,India, Pakistan or Indonesia.
Lay cutting: This will need to be automatedfor these volumes of manufacture, and therefore is a process involving high investmentcost and high skill. It is most likely to be sourced in Hong Kong, or in Guangdong, wheregarment manufacturing skills are long established.
The main front and back blocks: Theserepresent the easiest part of shirt assembly. Therefore this is sourced in units wherelabor is cheapest and relatively low skilled. This may be in the north of China.
Second phase of assembly: This involves theassembly of the remaining shirt blocks, and a higher degree of skill, due to sleeveheadconstruction, collar, cuffs and lapels. This may take place in the northern Chineseoperation, or may be returned to southern Guangdong for assembly.
Finishing: Button holes and application,embroidery and other finishes require sophisticated machinery and highly skilledoperatives. This may be available in Guangdong, or sourced back in Hong Kong where finalpackaging may also be undertaken, prior to returning to the agent or the West Europeansupplier.
A fashion shirt
This is a color-woven shirt supplied in anumber of color variations. It is a leisure shirt, with a relatively short product lifecycle, ie a fashion garment. Manufacture is relatively complex, involving a multi-coloredwarp and a multi-colored weft. Loom selection must allow for color change during weaving.This will limit weaving speeds. It will need to be relatively automated, but labor musthave high weaving skills. Nevertheless, labor costs must be kept at a minimum.
To complicate matters, the volume ofweaving available to the manufacturer is divided into a number of color variations. Thislimits the advantages of economies of scale. Furthermore, predictions of which colorvariations of the fabric will prove popular in the finished garment cannot be known beforesales of the shirt commence. Therefore the garment manufacture needs to be in closecommunication with his fabric supplier if more fabric is required. Meanwhile, the fabricsupplier will wish to avoid holding stocks of a fabric which will not be sold when thisshirt ceases to be offered to consumers.
The fabric supplier must be able to respondrapidly to meet repeat orders of particular fabric color variations. The supplier needs tobe sited close (in time if not in distance) to the garment manufacturer, so that fabriccan be transferred swiftly. However, the supplier also needs to know how sales of theshirt are going and in which color variation. Therefore, the supplier needs information tobe passed electronically via EDI or the web, between the supplier, the manufacturer andthe retailer.
Similarly the shirt manufacturer needs tohave close links with the fabric supplier and the retailer. Given the complex nature ofthe production, (because of desire not to over-stock) the degree to which the manufacturercan commission out manufacture in order to gain a price advantage has to be limited.Garment assembly is a skilled operation throughout the processes. It requires the matchingof fabric patterning at the seam edges and between the various components. There is a highrisk of faulty assembly, and an accompanying risk of incurring a high level of wastage.
The fashion solution
In this case, the opportunity to sourceproduction is limited. The product requires a much greater degree of control in order toavoid wastage in assembly and high levels of dead stock. Here, the proximity ofmanufacture to the supplier, retailer and market was deemed to be the critical factor. Thefabric was sourced in Turkey, but was assembled in the UK for a UK retailer. In this wayproximity to the market was retained and was enhanced via electronic communication asoutlined in Figure 2.
Fig.2 Electronic communication cycle
Such supply and demand relationships, asthe shirt example illustrates, are to be found around the world. Everywhere, the resourcemix of skill, low cost, quality and availability are weighed against a range of risks andhigh transaction costs.
Relationships between Western Europeanretailers and garment suppliers are commonly linked with operations in the MediterraneanBasin, Eastern Europe, the Indian Sub-Continent and Far Asia. Whereas retailers andgarment suppliers in North America tend to establish links with operations in theCaribbean, Mexico and South America.
It appears that there are similarities inthe interests held by each of the parties in the supply chain in Figure 2. The commoninterest of retailers and suppliers is to fulfil the demand of their markets. Meanwhile,the main interest of garment manufacturers and fabric and yarn suppliers is focused onobtaining the attention of retail buyers from these main markets. However, why is there anabsence of reciprocal growth in consumer demand in the regions which provide theseconvenient supply lines?
Given the economic upheavals in Asia,production costs can only fall as manufacturers protect themselves against failingcurrency values, and as national governments struggle to rebalance their economies. Whatwill be the outcome? It is unlikely that demand will be restored swiftly in thesecountries. Meanwhile it is possible that these economies will look to Western markets asthe source of demand for their own production output and economic salvation. They may evenattempt to manufacture themselves out of trouble via even cheaper exports to the mainmarkets.
On the face of it, this appears aheaven-sent opportunity for the retailers of the West. However, even products which arecheaper must find consumers blessed with the necessary spending power and how many ofthose will there be?
Dr Ann Walker is a director of KisdonResearch and has spent over ten years in the Textile Industry, establishing a strategicmarketing intelligence unit for Lister & Co. in Bradford. For the past three years AnnWalker has become increasingly involved in researching and lecturing on internationaltextile markets as Senior Teaching Fellow at the school of Textile Industries, theUniversity of Leeds.