Textile and apparel supply chains are becoming more regionally based

Textile and apparel supply chains are becoming more regionally based

How is the sourcing landscape likely to shift in 2017, and what strategies can help apparel firms and their suppliers to stay ahead? As global politics become more turbulent, moving things closer to home or out of the eye of the storm makes sense, executives say. A balanced and diversified sourcing portfolio is key, with a digitised supply chain also helping to speed decision-making.  

Marc Compagnon, executive director, Li & Fung:
The sourcing industry is being impacted by the continuation of shifts in demographics, technology and retail, where demand driven companies such as Amazon and Zara are winning. Manufacturers still need help with upgrading their capabilities including the digitalisation of their processes. Doing so will streamline administrative costs, give them greater control over day-to-day production and capacity and let them make operational adjustments – fast.

Then there is political uncertainty in the UK and US. The British government has yet to publish a roadmap of how it plans to leave the European Union or make significant headway in bilateral trade deals, so we could be well into 2017 before we understand what Brexit means.

As for the US, Donald Trump's new administration is gearing up for some significant changes to the status quo. He campaigned to eliminate the Trans-Pacific Partnership (TPP) trade deal and advocated bilateral trade agreements. I don't think these will have an immediate impact in 2017 because it takes time to renegotiate the terms of trade deals. Regardless of the outcome, companies that have a diverse sourcing strategy from multiple production markets will be well placed to manage this uncertainty.

Guido Schlossmann, president and CEO of Synergies Worldwide Sourcing:
Sourcing will become much more complex and uncertain and, at the same time, there is an increasing push for shorter lead times and lower prices. Multiple sourcing shifts are anticipated due to change or abolition of trade agreements (TPP, NAFTA), geo-political risks (Turkey, Ethiopia), security issues (Pakistan, Bangladesh, Turkey), the transfer of technologies (computerised flat knitting machines are now available in Bangladesh), a shortage of workers (China), volatile currencies (Brazil, Mexico, Turkey etc), and increasing corporate social responsibility demands.

To address all these challenges a smart multi-sourcing strategy is needed: own offices, virtual manufacturers, low cost sourcing partners, importers, vendor direct. Proper communication flow and leaner decision making processes will be key, and could be achieved by strategic partnerships, physical visits and smart use of online visual communication tools. There are more and more endeavours to digitalise the supply chain and automate production operations by applying available and new technologies.

Due to these increasing sourcing demands the role of the middleman will change dramatically. Agents need to change into low cost sourcing partners and/or virtual manufacturers and/or single service providers such as quality control or social compliance only. We foresee smaller agents will disappear from the market due to the increasing demand in service levels, and traditional large agencies will dramatically lose volume if their commission fees are much higher than the operating costs of their customers.

Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA), and lecturer at the Wharton School at the University of Pennsylvania:
Consolidation of sourcing will continue. The good will become bigger, and scale will drive value. Unless suppliers hit a critical mass they are in danger.

Suppliers also need to create more value by providing more services, even tighter integration, and probably take on more financial exposure. Middlemen will continue to be squeezed, so these need to find reasons to continue to be part of the supply chain.

With the impending demise of TPP in its current framework, more motivation may now exist to make China work, to try Africa, and to experiment with on-shoring or near-shoring. As global politics become more turbulent, moving things closer to home or out of the eye of the storm makes sense.

All of these changes point to a slowdown and perhaps an impending end to the deflationary era of apparel. In this climate, apparel firms should create capacity to try new sourcing strategies, work even closer with key suppliers, and experiment with new innovative or disruptive ideas.

Borrowing successful ideas from adjacent industries may also be a good way to stay ahead of the competition.

Rick Helfenbein, president & CEO of the American Apparel & Footwear Association (AAFA):
In 2017 expect sourcing to be the 900-pound gorilla in the room. In addition to all the normal creativity that companies will try to achieve (quicker/faster/better), there will be a new element called 'strategic planning' or 'war room sourcing.' Expect to have many meetings with your boss to discuss 'what if' strategies.

Many of our CEOs are already having these discussions and the subjects range from: What if there are additional tariff's placed on China? What if NAFTA crashes? What if a trade war breaks out?

All these questions need to be addressed and back-up strategies need to be in place.

  • If your company is 100% in China, better take another look.
  • If you are 100% in Mexico, better take another look.

The mainstream idea for 2017 is 'diversified sourcing' – a real need to be holding a balanced sourcing portfolio. In 2017, you must be prepared to expect the unexpected. In the year 2000, President Bush might have called this necessary planning process 'Strategery.'

Stephen Taylor, senior manager at Kurt Salmon, part of Accenture Strategy:
Fashion companies continue to conform to the traditional two season collection delivery model. However, changes in consumer expectations and the weather, whereby temperatures increasingly vary within seasons, mean that the model has to be reworked, which will impact the supply base.

Fashion conscious consumers want to buy the designs they see on the catwalk instantly. To address this increasing 'see now, buy now' expectation, brands will need to be highly dependent on collaborative and effective partnerships with their suppliers.

Suppliers will be under pressure to develop concept designs and prototypes with shorter lead times and fine tune their manufacturing to manage smaller initial orders and respond faster to demands for redevelopment and reorders at short notice. The overall shift will be towards a more agile development model. To support this, one option will be for brands to consider making strategic investments in their supply base.

We have already seen a select number of British brands invest in UK manufacturing as a way of managing short to medium term demand, as well as pricing pressures.

Robert Antoshak, managing director at Olah Inc:
There was a time when simply chasing the lowest-cost supplier made sourcing a relatively straight-forward exercise. But today that's less the case, as the wider a supply chain, the longer the list of challenges. For example, there are labour problems, environmentalists criticising the carbon footprint of overseas supply chains, quality problems, and the like. It's not easy, and these challenges represent a range of apparent and hidden costs.

A solution for some is to pull supply chains closer to regional markets. For instance, some apparel brands have pulled sourcing back from Asia in favour of production in the Caribbean and Mexico. This has the benefit of faster delivery times, less environmental impact in many cases and greater efficiencies to manage quality. Others have even gone a step further by returning production back to their home markets. Although still relatively small in relation to globalised apparel production, some companies have successfully carved out niches for Made-in-USA or Made-in-Europe clothing.

And then there are the intangibles of politics. Should protectionist measures gain in Washington and elsewhere, companies with intricate global supply chains may find themselves dangerously exposed. Despite claims to the contrary, it is unlikely that domestic apparel manufacturing will ever return en mass to developed countries like the US. But creative supply chains that include American-made yarn or American-grown cotton, but are made into clothes close to home, could gain primacy, particularly in a world where global trade is discouraged for political reasons.

Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware:
Textile and apparel supply chains are becoming more regional-based. For example, data from the World Trade Organization (WTO) shows that 91.4% of textiles imported by Asian countries in 2015 came from other Asian countries, up from 86.6% in 2008. This suggests that Asian countries are together building a more integrated supply chain.

Likewise, in 2015 close to 90% of apparel exported by North, South and Central American countries went to the US and Canada and 81% of apparel exported by EU countries went to other EU countries too.

To be noted, all of these three major textile and apparel supply chains are facilitated by respective free trade agreements in the region such as the North American Free Trade Agreement (NAFTA), the ASEAN-China Free Trade Area (ACFTA) and of course the common market enjoyed by the EU members. On the other hand, fashion brands and apparel retailers often use the western-hemisphere supply chain and EU-based supply chain as a supplement to the Asia-based supply chain for more fashion-oriented or time-sensitive items. I think such a dual-track sourcing strategy will continue in 2017.

Related, supply chain management will play a growing important role helping apparel companies control sourcing cost, improve speed to market and better meet consumer demand in 2017. An interesting phenomenon revealed by the 2016 US Fashion Industry Benchmarking Study released by the US Fashion Industry Association is that around 30% of respondents say they plan to consolidate rather than diversify their sourcing base in the next two years. As one respondent commented: [Our] focus right now is really finding efficiencies and maximising productivity in the supply chain. While we won't necessarily move out of any countries, we are consolidating the base within regions."

Last but not least, in 2017 apparel companies will continue to give more weight to sustainability and social responsibility in their sourcing decisions. Building a more transparent and sustainable supply chain is an irreversible trend in the apparel industry.

Julia Hughes, president of the United States Fashion Industry Association (USFIA):
Sourcing trends remain stable. China remains the major supplier to the world. While we do not see that changing, 'China Plus Many' is the strategy of many brands and retailers of all sizes, and we expect companies to continue to diversify their sourcing to help them meet consumers' needs as well as mitigate global supply chain risks. Vietnam remains the strong No. 2 supplier – and even though president-elect Trump plans to withdraw from the TPP, we expect Vietnam to continue to attract business.

Made in America remains an important aspect of sourcing. In USFIA's 2016 benchmarking study, 52% of companies said they source from the United States, basically no change from the prior year, with 20% saying they expect to increase sourcing from the United States in the next two years.

Social compliance and sustainability are also critical to companies' sourcing decisions. In 2016, 89% of our study respondents said ethical sourcing and sustainability issues are more important to their sourcing decisions now compared to five years ago. "Ethical issues are a top priority – top of mind when making sourcing partnership decisions," said one company. "Customers expect social responsibility and we require our supply chain to adhere," said another. And USFIA plans to expand our work on social compliance and sustainability in 2017, too.

To stay ahead, I am going to repeat a theme from last year. Today, more now than ever, it is important for companies to get involved – and stay involved – in the policy process in Washington, DC. Companies should participate in benchmarking studies to ensure we have accurate data, and participate in advocacy efforts, either on their own, or through associations like USFIA, or both. Government officials need to hear from the brands and retailers who are creating high quality jobs in the US, creating new technologies, and creating the products that consumers need and want.

Rajiv Sharma, group chief executive at Coats:
The overall geographic landscape of sourcing looks unlikely to shift dramatically in 2017. However what is of most interest is what has not changed. China, somewhat against the odds, has remained by far the largest supplier, and is of course also still a growing consumer market.

In terms of strategies that can help apparel firms and suppliers stay ahead, there are two elements that should be integral.

Digital simply has to be in the strategy somewhere and contribute an increasingly more prominent part year-on-year. Whether it is digitising the supply chain to help reduce the number of human interventions along the journey or harnessing digital to provide quicker and more efficient contact and feedback with the customer or end consumer.

The second element is added value services. How can the offer, whatever and wherever it is in the supply chain, be extended? Margins are constantly being squeezed and there is a limit to what costs can be passed on while still remaining both competitive and commercially viable as a business – but a cost effective differentiator is added value or service.

There should be a focus on the immediate customer at all times and a constant search for innovative and value adding ways their lives can be improved, made easier and smoother. But it is also relevant to keep the end product front of mind, regardless of where you sit in the supply chain. It is, after all, ultimately about the demands of the consumer and, as the gap between the manufacturer and end consumer constantly narrows in terms of time and distance, so all apparel firms and suppliers are effectively getting closer and closer to that end finished product.

Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey's Apparel, Fashion & Luxury Group:
Sourcing is also a victim of the global volatile landscape and companies will be facing the challenge of doing more with less. Slowing sales experienced by the industry in 2016 and the rise of omnichannel are making it necessary for companies to adapt quickly and move from transactional sourcing to performance-based sourcing.

To stay ahead, apparel firms and their suppliers must answer the question of how digitisation can drive efficiency and improve service in both procurement and throughout the value chain. Advances in virtual design, digital printing, robotics, and automation are transforming the way companies design and make their products. The apparel industry is still at the early stages of this adoption. The shift in 2017 will be to spot the opportunities for including automation in production in order to drive up flexibility, while still optimising traditional non-digital sourcing to prepare for digital procurement.

Supplier collaboration will also become more important, as ensuring long-term success requires supporting suppliers in order to build skills for the digital future.

Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
There is the geographic and the organisational angle. Organisationally, more collaboration and a longer-term outlook in sourcing relations will enable both buyers and suppliers to reap financial benefits from better functioning supply chains. Companies are starting to own factories again, or they are implementing programmes to work closer with key suppliers. Also, large apparel manufacturing conglomerates are gaining market share because they are able to invest in factories.

Geographically, 'new' production locations will continue to quickly or slowly grow their market share. And interestingly, even without more restrictive trade deals and political power play, the importance of 'local for local' production will grow. This is the case in big and growing markets such as China, India and Turkey, where local demand is crowding buyers out of factories that prefer the higher margins of the local market. And to a much lesser extent it will be the case in high cost economies in Europe, North America, Asia and Australia where reshoring will again be an important issue in 2017.

Rick Horwitch, vice president and global retail lead for supply chain strategy at Bureau Veritas Consumer Products Services:
With a new US administration coming in, and elections taking place in key Asian and European countries including India, South Korea, France, Germany, Hungry, Czech Republic, Slovakia, Portugal and the Netherlands, a lack of clear direction will make 2017 a challenging year.

While TPP may be dead, there is still positive news for retailers and brands doing business in Vietnam. In 2016 the EU and Vietnam signed a free trade agreement. In Asia there will be a significant push to approve RCEP (Regional Comprehensive Economic Partnership). This covers all ten ASEAN (Association of Southeast Asian Nations) countries plus the six countries that ASEAN has FTAs with (Australia, China, India, Japan, New Zealand and South Korea). This group represents nearly 50% of the world's population and 30% of global GDP. The big winners will be US and EU retailers and brands who have significant global distribution (in the EU and throughout Asia – especially China).

Strategies will continue to be built around the big issue of demand and supply: speed/time, cost/efficiency, country balance and transparency. The days of 'chasing the cheapest needle' are over. Collaboration, commitment and trust across the entire demand chain are critical.

Key points will be:

  • Vietnam will continue to grow both in manufacturing and textiles (fibre, yarn and fabric), taking share from China.
  • Retailers and brands will look to accelerate sourcing from countries/regions with FTAs. Jordan, sub-Saharan Africa (especially Ethiopia and Kenya) will continue to see growth and Egypt will see resurgence.
  • China for China and Vietnam for China (assuming RCEP is approved) will be important – especially for US and EU brands and retailers with distribution in China.
  • Regional/nearshoring sourcing closer to the consumer will expand (Asia for Asia, EMEA for EMEA, Americas for Americas).

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
For the past eight years, forecasting exercises have been dominated by constant, ungrounded, claims of the imminent collapse of Chinese exports due to alleged declines in China's competitiveness that have simply never materialised.

2016 saw little change in the problems the apparel trade had suffered the previous year: Static rich-country apparel markets; Western retailers still struggling with over-investment in stores; Western brands and retailers mostly looking at continuing losses in unsuccessful overseas expansions; net losses from movements into e-commerce; and retail prices tumbling both because of overcapacity throughout the supply chain and price-cutting due to the internet.

But according to Clothesource Tradetrak, for the first nine months of 2016 these problems led to almost no change in how apparel importers ran their businesses. Fractional increases in the proportion of US and EU imports coming from their neighbours, and a slight increase in EU imports from Vietnam and Bangladesh were almost the only changes on 2015. Africa continued to attract much bolstering – but sub-Saharan Africa still exported fewer clothes to the West than Portugal.

Most exporting countries saw prices tumble, meaning stable or slight increases in the number of garments exported looked like a decline in sales values.

However, there is a real prospect three looming superpower earthquakes – China's belief it can remain a non-market economy while retaining free access to Western markets; the US Republican party's goal to tax imports out of existence; and Trump's determination to negotiate imports out of existence – will result in real changes to the sourcing map.

Click on the following links to read more comments about the year ahead:

Outlook 2017 – Apparel industry challenges and opportunities

Outlook 2017 – Strategies for sourcing success

Outlook 2017 – What else is the apparel industry watching?