Apparel businesses are mistaken if they think that shifting to low cost sourcing countries is the key to long term profitability – this is one of the key messages of the latest Global Sourcing Reference report from Kurt Salmon.
Cheap is cheerful – for more than two decades, this has been the mantra for the world’s largest apparel brands when it comes to deciding which countries to source from. China led the way on that front for many years, but wages there have steadily been increasing for the past decade. In that time other markets, with wages lower than those in China, have begun to improve market share. The most notable of these in terms of sheer volume have been Bangladesh and Vietnam, but also increasing their slice of the apparel exports pie have been the likes of Cambodia, Thailand and Sri Lanka. All these destinations have wages which are lower then China’s, as do relatively new entrants to the party, Myanmar – out from the economic cold following years of US-led sanctions – and Ethiopia, arguably the most interesting of the lot given the amount of investment it is attracting from – you guessed it – China.
Cynics have, justifiably, accused the apparel industry of a race to the bottom where sourcing is concerned, continually seeking out locations where wages are extremely low and where the level of competition is such that brands can squeeze suppliers until the pips squeak.
The latest sourcing report from Kurt Salmon, however, suggests this picture might be changing, with sourcing country costs diminishing in importance. The report points out that fashion brands and retailers are facing strong pressure on growth and margins in the wake of continued consumer demand for fast fashion at low prices. We would add ourselves, here, that we don’t expect this picture to change given that we now have a whole generation of consumers for whom cheap clothing is the norm.
The report suggests many brands continue to struggle with high inventories and slow sales, while rising apparel sourcing and production costs are heavily impacting margins. However, the report points out that retailers shifting production purely to capitalise on more cost-effective markets are chasing a short term fix to a more fundamental problem as costs continue to rise in all sourcing regions.
In short, brands and retailers need to be cuter by moving away from a “sourcing cost obsession” and looking at how they can reinvent their operating model to “unlock trapped value in their supply chains.”
We spoke to report author Dr Peter Rinnebach (pictured), managing director, Kurt Salmon, part of Accenture Strategy, and asked him first of all about the issue of sourcing costs. Asked how important labour costs and wage rates in sourcing countries are in the grand scheme of sourcing, he told us: “Labour costs and sourcing country mix need to be monitored and managed continuously. It’s important for margin, and also to ensure ‘good housekeeping’. This also includes shifting production to more cost competitive countries – if key requirements on product quality, innovation, reactivity, social and environmental responsibility can be met.
“China has been losing ground for several years compared to other markets closer to Europe, which have better reactivity, but similar or higher costs, and in South East Asia, which have limited reactivity and lower costs.
“Retailers and fashion brands are now starting to think differently about sourcing locations, either to drive down product costs where time and reactivity are not critical, or, shift away from a pure product cost focus where fast reaction, trend innovation, and late quantity decisions matter to achieve markdown reductions.”
Notably, the report touches on other issues which are driving sourcing dynamics, one of which is the use of technology and the growth of customisation. The likes of Nike and Adidas, with its Speedfactory, are already moving into customisation, albeit with a price premium for products which have been tailored to particular market segments. Long term, we see this becoming a more mainstream trend, particularly if 3D production gains significant market traction (although that remains a big if at the present time).
But how relevant is customisation to the fast fashion sector right now? Answering, Dr Rinnebach says: “Customisation can be relevant for almost all segments of the fashion industry – even the fast fashion environment. It will always command a premium price as it requires individual handling of items, additional processing and logistics. This means we’re unlikely to see bespoke shirts or blouses on a £19.99 price point in the near future, but this is likely to change in the next decade with further advances in automation and robotics. If customers demand it and are willing to pay for it, the industry will follow, and supply chain and sourcing will not be an obstacle.”
On a similar theme, the report touches on the issue of cut and sew robotics. Much has been written about this in recent years, and there is undoubtedly something alluring (from a financial viewpoint) about the notion of removing people from the notoriously labour intensive ready-made-garment sector.
But how mature is the technology here and, more pertinently from a CSR standpoint, does it represent a serious threat to labour forces in sourcing destinations such as Myanmar and Cambodia which are predominantly cut, make and trim (CMT) sourcing spots? Dr Rinnebach says: “Cut and sew robotics is an emerging trend. We’ve seen pilot projects in sportswear manufacturing. However, it is unlikely that the market position of emerging low-cost sourcing countries like Myanmar and Cambodia will be threatened in the short-term. It will be difficult for such technologies to compete and gain significant costs advantages within standard products like t-shirts compared to the labour costs in Asia.
“Brands should consider leveraging robotics in product groups requiring one of the following criteria: the need for an extremely high-speed reaction to respond to market trends: technologically sophisticated products, or customised products.”
The Kurt Salmon report suggests a continually shifting sourcing landscape, one in which it is no longer as black and white as finding the cheapest possible location and shifting production there. Brands which can take a long-term, strategic outlook where sourcing is concerned and view the bigger logistical picture are well placed to capture market share. It is no surprise to us to see the continued success of Inditex, which – unlike many direct rivals – has not viewed Asia as the sourcing be all and end all, instead building sizeable sourcing ‘clusters’ in Turkey, Morocco, Portugal and Spain, where the company’s headquarters is based.
Inditex is as close as the fast fashion industry gets as far as near-shoring is concerned (ultra fast fashion brands such as Boohoo aside). Yet producing close to home is not necessarily the panacea many seem to believe when it comes to speed to market.
Dr Rinnebach concludes: “Improving speed to market is an end-to-end value chain challenge, from merchandising and design, to development, sourcing, and logistics. It always begins with clarity in merchandising and buying at the start of a vertical process. Long calendar cycle times are usually the result of unclear direction for design and development. The result is typically high overdevelopment, many design and prototype iterations, and significant loss of time. In addition, clarity on segments of the range which require speed, and which do not, is important. It is not feasible or practical that everything should be fast tracked.
“Where speed counts, near shoring is relevant. Potentially higher costs are balanced by reduced loss of margin from markdowns. Where speed is not critical i.e. never out of stock, the focus can still be on classical low cost countries. Logistics can help, but it’s not the most critical factor in cutting lead times.”
2017 Global Sourcing Reference report from Kurt Salmon, part of Accenture Strategy
Key insights
Pure sourcing country cost shifting is not the answer to long-term profitability. While shifting sourcing volume to more cost-effective markets (i.e. Bangladesh, Pakistan, Cambodia) might hint a possible way out of the gross margin trap, it is in fact rather a basic necessity. Shifting sourcing from one country to another will only provide a temporary fix as almost all sourcing countries continue to become more expensive.
Technology innovation to unlock trapped value. Digital technologies can enable better collaboration, visibility and control across the entire value chain which will improve product innovation, time to market, reliability, execution, and quality. Analytics will help retailers improve sell-through performance, stock turns, markdown, and gross margins. Cut and sew robots are improving production efficiency, and 3D printing is enabling quicker product development and cutting down sample iterations.
Customisation is a key investment area. As consumer demand for personalised and customised fashion rises, retailers and fashion brands will have to find a way to serve this market on a mass scale, while keeping costs down.
Priorities for global sourcing leaders. Speed to market is the current number one priority for global sourcing leaders, followed by social and environmental compliance, quality and innovation management.
