Apparel Sourcing Enters a New Era

5/7/2013
Last year around this time, I attended the Prime Source Forum, an annual conference held in Hong Kong that brings together senior executives in the global apparel industry to discuss issues related to apparel sourcing. Then, the big story was about how to deal with rising costs in China and where to go next; now, that story has a slightly different twist.

Consolidation
With rising costs, not just in China, but everywhere, it's becoming harder for smaller players — retailers, brands and suppliers — to survive. What this means is that companies need to be more efficient. According to Ranjan Mahtani, owner and CEO Epic Group, a substantial Bangladesh supplier to a number of leading retailers and brands, "I think we will see a consolidation and a huge change in the marketplace in the next two to five years."

What this also means is that the sourcing models that worked before, with a strong focus on squeezing lower costs from suppliers, are no longer what the market needs. "Sourcing companies need to be much more integrated with their customers, to understand where their orders are and to gain visibility," said Kevin Burke, president and CEO of the American Apparel and Footwear Association.

As retail evolves in a highly competitive omnichannel climate with a more empowered consumer, retailers have to rethink their own business models. In this new retail climate, good marketing and a strong product are not enough — supply chains and sourcing are the foundation of success. "We have to learn to embrace change, many retailers were not able to reinvent themselves," said Mark Green, executive vice president of global supply chain for PVH, which owns brands such as Calvin Klein and Tommy Hilfiger.

Collaboration
"Your customer is your partner," said Peter Kaminsky, managing director, Carter's global sourcing. This theme of more effective collaboration between buyers and suppliers is an ongoing refrain in the business.

For some brands such as Ann Taylor, which produces more complex products that require more specialized skills, collaboration is even more of an imperative. "The average tenure of our suppliers is 10 years, for some it's 25 years; we call them partners because we believe in partnership," said Craig Dana, managing director, Ann Taylor Far East. "One of the things we do is take feedback from suppliers, for example, the steps we suggest are not always right."

However, while both buyers and suppliers emphasize the importance of collaboration, the relationship is still somewhat one-sided. "Our ability to offer visibility into planning and forecasting is limited due to a shortage of information provided to the mills," one representative from an apparel supplier noted.

Clearly "collaboration" is one area with significant potential for development which will be enabled through the adoption of collaborative technology.

Efficiency
With labor costs — a standard price lever — increasing in many low-cost sourcing countries by up to 20 percent, greater attention is being placed on efficiency. Given that for many retailers and brands, this shift is relatively recent, Colin Browne, vice president, footwear sourcing, VF Asia Limited, noted that "We have only really started to scratch the surface on efficiency."

Browne highlighted the shift that has occurred over the few years in the sourcing world. "Our role is no longer only about sourcing, since we all know where the factories are. I spend a lot of time thinking about efficiencies, how to help factories get better at what they do. I am trying to take the cost of the man out of the equation."

The need for greater efficiency is ultimately dictated by the consumer market demanding greater variety of high-quality products across multiple channels at a lower price. This translates into greater complexity through the supply chain. "While overall volumes are not increasing, order sizes are getting smaller – which means more small orders,"said Stephen Forte, head of global sales for Coats.

As Forte and others pointed out, managing this complexity with traditional methods will no longer suffice. Companies need to leverage technology which supports greater collaboration and visibility in the supply chain.

The consumer is king
In case anyone forgets, sitting at the end of the chain is the consumer, who is more price, design and quality conscious than ever. "We have been able to offset wage increases with productivity, but this is getting tougher. The consumer will not pay more," said Duncan Scott, vice president external products, New Balance.

Today's hottest retail buzzwords — omnichannel and mobile — also raise issues with sourcing and supply chains. "If we can't ship to where the consumers are going to be at, we are going to have a problem. We need to figure out how to be more nimble," said Edwin Keh, CEO, the Hong Kong Research Institute of Textiles and Apparel (HKRITA).

Whether there are magical new supply chain answers to the omnichannel challenge is still unclear. Despite new buzzwords, it still seems that the opportunities from a sourcing and supply chain point of view lie in looking at the fundamentals, including streamlining operations, reducing inventory and building efficiency into the end-to-end supply chain.

Sustainability
Certainly the recent factory fires and other crises in Bangladesh have highlighted the corporate social responsibility issues, but by all indicators, sustainability is no longer just a green check-box, but a real imperative for many companies. "We need to protect people and not brands," explained Tom Nelson, managing director, VF Corporation in his opening address at the GAFTI meeting, held alongside the Prime Source Conference.  "We need to take responsibility from a human and not a business point of view."

This view was echoed by many global sourcing leaders at major retailers and brands. "We as an industry have a target on our back. The answer is improved communication and collaboration," said Kaminsky of Carter's Global Sourcing.

Jenny Sim, vice president of global sourcing for Foot Locker, added, "Ethical sourcing is a big issue that won't go away until we become better. We owe a lot to our suppliers. When they become better, we become better."

"There is a need for a common understanding on the top issues, even 60 percent of what we can agree on. The industry needs to drive change versus the NGOs," said Philip Poel, managing director for Under Armour.

One of the solutions the apparel industry is working on is an industry standard to enable improved communication between retailers, brands, suppliers and other parties in the supply chain. "We are trying to define a technical standard which can support both social and environmental audits," said Peter Burrows, executive director, Fair Factory Clearinghouse, a non-profit organization focused on building software which will enable a more free flow of information by using an XML technical standard for data exchange.

What will the future look like?
There is no question that the future for apparel sourcing will look different. On the whole the consensus is that consolidation across buying groups and suppliers will continue and the future will see the two working together more closely.  More specialized, innovative and nimble brands will have their own niche, especially those that have mastered e-commerce. In the meantime there will be a place for buyers looking for the lowest cost suppliers in a limited number of markets such as Bangladesh, Cambodia, Myanmar and a few others.

Commenting on the supply chain model of the future, Peter Shay, founder and managing director of Third Generation Capital, noted that "There will be a shift from a product orientation to a service orientation. Large companies like VF can afford to source in a more efficient and sustainable way, while other companies need to focus on buying - that is on costs."

However it's clear that the days of this type of cost focused sourcing are numbered. "The future lies in a transnational factory where Zara, for example, provides an order and the various supply chains support," noted David Birnbaum, of textile consultancy, Third Horizon Ltd.

In this transnational industry, China is still a powerhouse but it's clear that China's role is shifting rapidly. While before we talked about where the next China is, now it seems there really is no next China.  PVH's Green summed it up most succinctly: "The next China is not a place, it's a how," meaning that it's a concept, it's innovation, it's many places. One might add that enabling this "how" is a set of fundamental supply chain processes which combined with technology establish a platform for efficiency, visibility and collaboration across global supply chains.

Russel Beron is a director at CBX Software, a provider of extended supply chain management, PLM, global sourcing and supplier collaboration software which help retailers and brands streamline their supply chains and increase profits.
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