Established thinking in the Apparel, Footwear and Textile industries needs revisiting
Most entrepreneurs, when asked why they started their own company, will reply that they wanted to direct a company as they saw fit- to make their own decisions. Autonomous as it sound’s, external market dynamics still play a fundamental part in the decision-making process. All too often these dynamics are assumed to point to only one possible outcome as businesses follow the status-quo in order to impress the stock market and secure funding.
Within the Apparel, Footwear and Textile industries, nowhere is this more evident than in the area of sourcing. The movement to buy-in goods from “low-cost” sources has become an irresistible force with some major retailers insisting that suppliers enter into joint ventures, set up factories internationally and/or buy-in finished products.
Many assumptions lie behind these tactics and, though many may be soundly based, others may be ill-founded or inappropriate in certain circumstances. Companies are individual entities – so blindly following industry trends is unlikely to suit them all.
Strategic thinking around sourcing issues must be well-researched not only in terms of labour cost savings, but also the implications beyond cost such as flexibility, speed to market and marketing. Furthermore, political, economic, social and technological conditions all have the potential to turn a short-term gain into an expensive long-term problem.
Thinking about the bottom-line
The central argument for outsourcing manufacture is lower labour costs. In JBA’s 1999 Apparel, Footwear and Textile Industries survey, 72% of respondents cited lower costs as being the most important reason for buying in finished products. The respondents’ sentiments are proved correct by Figure 1, which shows the wide gap between some of the high labour cost regions, such as Europe, and lower cost areas, such as Africa.
Even accounting for differences in productivity, local infrastructure and management effectiveness, manufacturing costs in developing countries can be as low as a third of those in developed economies. Further more, low cost sources are no longer limited to distant shores, but exist within the neighbourhood – for example Latin America for USA, Eastern Europe and North Africa for Western Europe.
Cheap labour – poor strategy?
Whilst it is accepted that sourcing from low labour cost countries is cost efficient, this single benefit might well be out weighed by other considerations. Firstly, the issue of cost itself. If the choice to make or buy is to be made solely on the basis of cost, it is reasonable to expect that these costs are total and accurate.
Accurate cost calculations are incredibly complex for both domestic and international sourcing. Quite apart from the obvious hidden costs – such as set-up and training, regional investment grants, contract negotiation, time difference, compatible IT systems, delivery and quality control – the way in which cost calculations are derived needs to be addressed.
It is extremely difficult (and may not be worth the effort) to apportion every cost incurred to a style (or even style/colour/size) level. Accountants necessarily apply an average figure of most indirect expenditure to any given costing. This is based on various assumptions, but chiefly that sales of x products multiplied by a figure of $y will recover sufficient contribution to ensure that all overheads are paid. This process inevitably means that some products will be over or under loaded with cost. When sales are unlikely to be uniform across range variations, the impact on profitability that actual sales figures will make is almost indefinable. It is also difficult to truly assess the cost and profitability associated with individual customer accounts.
It is equally important to ensure objective and thorough consideration of the total costs of goods sourced internationally. Again, calculating true costs accurately is challenging. It is hard to assess the impact on profitability that may occur through quality issues, the cost of returns; from inspection through to additional warehouse space and transport. Standard credit agreements vary across the globe and, again, can impact overall profitability severely.
Often, a manufacturer enters a sourcing arrangement on the basis that it already has the skills required in terms of design, technology and management. While this is usually the case, such work is likely to require domestic teams to travel, which is often over-looked, as are the issues of team cover and adapting to the local methods.
Time is money
The 1999 JBA Apparel, Footwear and Textile industries survey asked respondents who manufactured less than half their finished products in-house, how they decided whether to make or buy. Almost half said that quick response was the main factor.
Few things illustrate the importance of speed to market better than fashion-conscious industries. NIKE is perhaps one of the best known ‘virtual manufacturing’ footwear companies. Its distributors have to order shoes from Asian suppliers months in advance – risking the shoes being out-of-fashion by the time distributors have a chance to sell them. When enthusiasm for Nike cooled in 1997,its supply chain became overloaded with worthless sneakers.
The Nike example is cited by John Dunlop -a former US Secretary of Labour who has studied the links between America’s textile, clothing and retail industries – in his declaration that “labour costs no longer decide the global economy: time is the critical issue.”
Linked to the flexibility that quick response delivers, tight control of the value chain can deliver more profitability than low-cost labour. A shorter, domestic value chain offers more cost effective stock management as inventories can be reduced by more frequent deliveries. This means the value chain is more nimble, which is a necessity for companies that want to capitalize on winners and eliminate dogs. For many companies, such flexibility can outweigh the down side of extra costs.
The buying methodology of retailers was called into question by the US Dama project. In some organizations, buyers have an open-to-buy at the beginning of a season and may receive a bonus based on the number of garments which they can procure into each price point – effectively, cheapest is best. This is a very partial view and not necessarily one that is in the best interests of the business. Buyers are encouraged by their remuneration package to source from lowest cost countries. In fact, when the ability to capitalize on top sellers was taken into account, domestic manufacture was often shown to provide the highest level of service to the consumer and overall, the greatest absolute profits.
Niche players often favour domestic suppliers too. Innovation usually grows out of high labour cost countries. Products such as Gore-Tex, Lycra and wrinkle-free fabrics provide niche players with powerful advantages while other manufactures wait for their low-labour cost suppliers to catch up.
Marketing also plays its part. US shoe firms New Balance and Red Wing report that a segment of their customer base buys because of their ‘Made in the USA’ labelling. However, Nike has no such concerns. It also has to be recognized that some countries are more diligent than others in enforcing country-of-origin labelling regulations. In addition, many ‘correctly’ labelled goods under current regulations may mislead consumers – some goods that contain a majority of imported materials and labour can still qualify for domestic labelling.
A final consideration is that as manufacturing becomes more capital-intensive, for how long will labour costs be a major component of final pricing? There is no simple answer as to whether a company should source domestically or externally, other than the acknowledgement that every company is different and will therefore need different strategies.
What remains crucial for management teams is to have a true and accurate understanding of their current position and future options. Smart use of IT can maximize either strategy, but the key to success is simply good senior management. No-one will ever be thanked for a global sourcing policy in isolation. What people will be thanked for is an appropriate sourcing strategy that gives the business competitive advantage. And that advantage has many more components than simply the cost of labour.
Assumptions to challenge:
- Consumers are only interested in price
- Direct labor costs = lower priced garments
- Not sourcing from low-cost countries = lost share to competitors who do
- Lost share to competitors = less profit
- Low-cost labor sourcing is equally appropriate to all market sectors
- Companies know their costs accurately
- Companies know the profitability of all its products
- Companies know the profitability of all its customer accounts
- Specified standards will always be met
- There is no sustainable strategy other than sourcing
- Consumers read labels and their buying is influenced by them
By Rob Jennings, International ProductMarketing Manager for Apparel, Footwear & Textile Industries, JBA
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JBA Style is the market-leading integrated system for businesses in Apparel, Footwear & Textiles. Within JBA Style, all business units and activities can be coordinated. From design and development through global planning, manufacturing and sourcing. JBA Style promotes excellence in Supply Network Management, Logistics and Customer Service.