Apparel Might be Moving Out of China. What’s Your Plan?
As the Trade War with China continues with no resolution in sight, many American apparel companies are faced with a dilemma of whether to continue outsourcing production and materials from China and risk the impact of higher costs or look for suppliers elsewhere and risk a disruption to their supply.
Currently, billions of dollars in imports from China are taxed as high as 25 percent. The increased tariff, when coupled with consumer pressure on cost, can cause a decline in apparel businesses’ margins. According to The Wall Street Journal, 40 percent of all clothing and 70 percent of shoes sold in the United States are made in China, and though there are alternatives to Chinese suppliers, changing vendors is often easier said than done.
Switching to a new vendor can require significant time and effort and could disrupt normal operations which will lead to cash flow challenges. On a positive note, changing vendors could present the business with an opportunity to refresh its collections and designs and source new and higher quality materials.
To minimize the negative impact on cash flow, it’s important to ensure a smooth transition from the incumbent supplier to the new one through careful planning.
Avoid changing vendors during a seasonal peak
This may seem quite basic, but it’s actually fundamental. Switching a vendor in high season can lead to delays in order fulfillment and to the business receiving lower quality merchandise as a result of taking too little time to do proper due diligence on the vendor. Both of these negative results can put an unnecessary strain on cash flow, as customers who receive their orders late may deduct a penalty fee, cancel the order altogether, or return goods that don’t meet their quality standards. If you have already paid the vendor, you will be out the cash but still need to cover the cost of day-to-day business operations.
Stockpiling merchandise in case something goes wrong with the new supplier is expensive and ties up the business’s cash
Stockpiling merchandise as insurance in case something goes wrong with the new vendor is not an attractive option. Trends in the fashion industry can change quickly and apparel businesses can find themselves with merchandise on their hands that they cannot sell. Excess inventory not only ties up cash needed for the business to operate, but it also creates a cash drain due to increased carrying costs. Apparel businesses that find themselves in this situation should look into liquidating their slow-moving inventory rather than running the risk of the inventory becoming obsolete.
Build quality control stipulations in the letter of credit
A commercial letter of credit is perhaps the most useful tool for doing business with a person or company that you do not know well. Buyers will have the comfort of knowing there is documentation in place verifying the quality and characteristics of the goods before they are obligated to pay, while sellers are guaranteed payment as long as they comply with the terms of the letter of credit. As a buyer, you would want to ensure that the goods are inspected and signed off on by your quality control agent before funds of the LC are released.
It’s always good practice to avoid paying vendors up front or putting a large deposit on an order so you’re not limited in what you can do if the goods don’t meet your quality standards. An LC provides that assurance and you can be as specific in terms of the quality as required.
In the end, given the enormous volume of goods imported from China, it will be difficult for American businesses to shift their procurement to other markets overnight. Asian countries such as Vietnam, Cambodia and India, as well as countries in Eastern Europe, offer good alternatives for apparel companies to source materials. However, as many businesses turn to suppliers in these markets, prices of materials are probably going to increase.
Sourcing domestically is also an option, especially when it comes to small lines of production, as the higher cost of production is often offset by a much lower cost of shipping. It also allows apparel businesses to control the quality of their finished goods more closely while giving them the flexibility to increase or decrease quantities as required.
David Ciccolo is President and CEO of North American Operations at Bibby Financial Services (BFS). He has more than 30 years of experience in commercial banking, factoring, and asset based lending (ABL). BFS provides funding to apparel businesses worldwide from start-ups to well-established mid-sized companies. For more information, visit www.bibbyusa.com.