State of Sourcing 2017 – just-style survey results

23 December 2016 | Features & Interviews | Source: Leonie Barrie

The apparel supply chain will continue to be buffeted by rising costs and pressure for faster deliveries, smaller quantities and more styles in 2017, according to just-style's annual State of Sourcing survey. The snapshot suggests many apparel executives are budgeting for this, while others see renegotiating with current suppliers as a key cost-cutting tactic. And almost three-quarters say they are planning to reallocate some of their sourcing in 2017.

Exchange rate volatility and rising raw material and labour costs are among the top concerns for apparel executives as they head into 2017, according to responses to just-style's State of Sourcing 2017 survey.

But not surprisingly, there are also worries about the potential impact from the UK's Brexit vote to leave the European Union (EU) and the election of Donald Trump as the next president of the United States. The two events, which were unexpected and unprecedented and happened in the space of just six months this year, have the potential to throw long-established trading arrangements into turmoil – a concern picked up in our survey.

The "unknowns regarding the political environment and its effects on trade agreements as well as the fluctuation in currencies," one respondent said, make it "difficult to do strategic planning far in advance."

Others point to concerns over Trump's presidency and his administration's policy, especially uncertainty on current and proposed trade agreements such as NAFTA (the North American Free Trade Agreement with Canada and Mexico) and threats to impose a 45% tariff on US textile and apparel imports from China.

As well as unease over increased tariffs and regulatory uncertainty, the implications of this political and economic change extend to a rise in inflation, and the potential for falling consumer confidence. Indeed, the survey's overall outlook for 2017 includes more pessimistic expectations for consumer confidence in all key markets, with the exception of Asia.

Retailers have largely driven clothing sales in the past year through ongoing promotions and campaigns to encourage consumer spending, and there's no doubt this will continue through 2017 – as will the corresponding squeeze on suppliers.

And all of this comes at a time when companies are under intense pressure to meet the fast-evolving demands of omnichannel retail and consumer expectations for a more convenient shopping experience, as well as greater product innovation across all sales channels. This, too, is reflected in our survey, with supply chain operators pointing to an increased need to accelerate time to market, eliminate waste and errors, and reduce operational and product costs – while retailers and brands continue to push for lower prices.

"The fluctuating dollar and pound are forcing buyers to squeeze yet more from the supply base in any way possible to maintain margin. Further unauthorised subcontracting as a result, and an overall lowering of standards," one respondent wrote.

Another says: "Pressure on lower FOB prices but production costs driving upwards is the biggest challenge." While another notes: "Buyers are looking for faster turnaround and lower prices." It's a familiar lament: "Retailers wanting lower prices and higher margins without cutting back on product features"; "The biggest challenge is maintaining or improving quality while keeping prices stable or very slightly higher"; "The continual push for lower prices from retailers, increased due to the fall in the pound."

Also of note is the impact that sustainability, safety and compliance will have on driving up sourcing costs throughout the whole apparel supply chain next year. "Increased cost due to complex compliance requirements," and "multiple standards and changes to various regulatory regimes," were two of the concerns highlighted.

So it's not surprising that a whopping 68.8% of those surveyed expect overall sourcing costs to rise in 2017, independent of sourcing country, compared with 54.5% who predicted a rise in last year's survey.

Strategies for surviving

Among the strategies for coping, almost half of respondents expect their sourcing budgets to go up next year, while for others, renegotiating with current suppliers has risen as a cost-cutting tactic. But process and productivity improvement and closer collaboration with key suppliers are also among measures to try to mitigate any increases.

Sourcing in multiple countries also remains a reality for many brands in a bid to drive efficiencies, manage costs, mitigate risk and navigate new duty opportunities, as well as strike a balance between speed and flexibility. And 73.7% of respondents say they are planning to reallocate some of their sourcing in 2017.

"Re-developing local production for local sales," and "adopting a fast fashion infrastructure that keeps up with consumer demand," were two reasons given, as was the "reliability of vendors with factories in many countries."

Who will be the likely winners and losers from this shift? By far the biggest beneficiaries are alternative sources of supply in Asia, according to 72.1% of respondents.

Bangladesh and Vietnam continue to be seen as the sourcing markets most likely to grow in importance in the next five years. And of those who source from these two countries, the survey results also suggest they intend to place more orders in both during the next year.

That said, the survey confirms China's undisputed dominance of global apparel manufacturing is unlikely to change anytime soon – with a rise in the number of respondents looking to increase orders from the country in the upcoming year. Although looking out over the next five years, the importance of China as a sourcing market is seen waning slightly. Even so, the question relates to its importance as a sourcing market; it is worth remembering China is also growing fast as an apparel consumption market too and is increasingly served by domestic manufacturers.

"The biggest challenge is maintaining or improving quality while keeping prices stable or very slightly higher," one respondent wrote, adding: "As China becomes more expensive the only thing I will keep there is high-end speciality product. It is important to find suppliers across a range of capabilities and price points without reducing quality and margins."

Despite talk about the rise of sub-Saharan Africa as an apparel source, it appears our survey respondents are still treading cautiously, with the number looking here for alternative sources of supply down slightly from last year.

And one other notable trend is a rise in those looking at near-shoring to Central America and the US.

Opportunity in the challenges

That said, some see opportunities in the challenges, clearly calculating that if they can build more responsive supply chains, get ahead in speed and agility, raw material and chemical management, manufacturing efficiencies, and high levels of service then they will be among the winners rather than the losers.

Several respondents suggest the almost certain end to TPP under Donald Trump, and possibly NAFTA too, as well as talk of the Trump administration imposing heavy tariffs on imports from China and Mexico, may work in favour of alternative sourcing markets, especially those with duty-free agreements.

Others are focusing on opportunities to be had from emerging exporting countries, specifically sub-Saharan African countries or Myanmar; exploring near-shore production in a bid to shorten lead times; or moving towards supplier consolidation and building strategic partnerships with key vendors and factories as a way to maintain stability and price. "Redirecting more to Europe as prices stop rising," one noted, adding: "The level of flexibility that exists in Europe today has not been seen there for over 20-25 years."

Several also highlight improved compliance, sustainable and environmental production throughout the full supply chain, and "being an ethical supplier," as key to their future success. "Since labour ethics are a risk in growing apparel manufacturing countries like China and Bangladesh, there will be an opportunity. Also customers are more concerned about manufacturing sources than before," one respondent said.

Another pointed to the importance of "nurturing new talent in countries that value skill and craft like Ethiopia and Kenya."

Opportunities are also seen on the supply side, including new niche markets and brands, and domestic consumption in emerging markets.

Another area mentioned by many respondents as a way to get ahead in coming years is productivity and process improvement, and exploring supply chain efficiencies – with tools that enable business growth, cost reduction, supply chain agility, product innovation, speed and visibility key to helping apparel brands, retailers and manufacturers navigate increasingly complex challenges throughout the supply chain.

This also echoes survey results that point to a rise in technology investments in the year ahead, with 59.3% of respondents saying this is among their plans.

Their investment is most likely to focus on is Product Lifecycle Management (PLM) software, but streamlining the overall process from design concept to finished goods with ERP and other systems, applying lean working methods to enhance efficiency, automation of garment production, and implementing technologies like RFID to allow for supply chain visibility and inventory control, are among other answers given.

"Reduction of product development time including elimination of tech packs, better communication to reduce number of iterations, utilising cloud-based technologies to connect with central database," are the goals of one respondent.

Finally, a few notes on the profiles of those who completed this year's survey.

Nearly 29% were manufacturers; 23% were importers, agents or sourcing office executives; 12% were retailers; and 11% were fibre, yarn, or fabric suppliers. Those in the consulting, research, government, trade institute, NGO and university fields accounted for 14%; and 2.6% represented software suppliers.

For a detailed breakdown of the results of just-style's State of Sourcing 2017 survey, click on the following links:

State of Sourcing 2017 survey – Confidence and costs

State of Sourcing 2017 survey – Supply chain shifts