Can Sustainable Supply Chains Be a Comparative Advantage?

3/31/2014
With stable prices, solid demand and moderate growth forecast for the rest of the decade, Japan's 16-trillion-yen apparel, accessory and footwear market is now back on track. Specialty chains have done particularly well, growing their market share 10 percent over the past decade. Uniqlo's archrival H&M has boosted sales in Japan by more than half in 2012 alone.

New world-class competitors are emerging in the domestic market — and up-and-coming firms, such as Mash Style Lab or Trinity Arts — are building their value add with e-commerce, or direct marketing, such as in the case of Start Today or Jupiter Shop Channel.

Japan's fashion market has several unique features when compared to other advanced consumer markets in Europe and North America. These dimensions include a particular sensitivity to international trend cycles and fashion magazines' strong influence on purchase behavior as well as exceptional customer loyalty to prestigious foreign fashion brands.

But perhaps more relevant at this stage of industry development are the demographics of consumer power: the most advanced fashion consumer markets have the largest customer segment in the 40-year-old age group, but the market size for people in their 20s is biggest in Japan. Living with one's parents frees up budget for fashion consumption.

Companies familiar with the power of younger consumers are well positioned to compete in the Japanese market and also are in an excellent position to benefit from the expanding fashion consumption of the growing middle classes in emerging markets. Chains such as Uniqlo should be able to thrive in this context.

But there is a twist. The 2013 collapse of Rana Plaza in Bangladesh, killing 1,134 garment workers, was a watershed moment for the global fashion industry, with repercussions for Japan and throughout Asia. The accident brought the dire working and safety conditions in Bangladesh's textile and garment industry to global public attention.

The response by the industry was to take remedial action on fire and building safety. The European buyer-funded Bangladesh Accord on Fire and Building Safety and the U.S. buyer-led Alliance for Bangladesh Worker Safety were set up to address the most urgent fire and building safety issues plaguing the industry in Bangladesh. These efforts are being pursued together with the Bangladeshi government's National Tripartite Plan of Action on Fire, Electrical Safety and Physical Integrity in the RMG sector of Bangladesh (NAP).

These initiatives are impressive. In a country with 4 million garment workers and more than 5,600 factories producing for export, the first phase of all three initiatives will require 3,967 garment factories to undergo preliminary safety inspections this year.

But the problem of the industry's poor working conditions and heavy environmental footprint run deep. They are systemic. The tragic accident has triggered a reassessment of the overall sustainability of the textile and garment industry. The leading industry players are now assessing how they can render their supply chains compliant and transparent while remaining efficient.

At Impact Economy, we conducted extensive research, and reached out to more than 700 stakeholders in the industry over the past nine months to develop a way forward for the apparel industry. As outlined in my report Creating Sustainable Apparel Value Chains, there are four key levers that industry players must act upon in order to convert the shortcomings of the fashion business into opportunities for industry-wide impact.

First, tackling working conditions in emerging market sourcing locations with a much higher level of ambition is the precondition to breaking out of the prevailing unproductive cycle of suboptimal factory productivity, high absenteeism and high staff turnover. Access to education and training for female workers, taking action against harassment at the workplace as well as providing access to health facilities go a long way in redefining labor as an asset rather than just a cost.

Second, lean manufacturing is a crucial ingredient to unlock productivity. Achieving greater total resource productivity and transparency across the supply chain via front-of-pipe process design, lean manufacturing and energy efficient infrastructure can lower the use of chemicals by up to 20 percent, energy by up to 40 percent, and water by up to 50 percent.

Japanese companies are widely admired pioneers of kaizen, the continuous improvement of manufacturing, engineering and management processes. This kind of thinking now needs to be applied diligently along the textile and garment supply chain.

Third, building sustainable supply chains will require upgrades in the factory infrastructure on a broad front. Given the high cost of local capital in emerging markets, impact investments can provide the resources to finance infrastructure upgrades. They include modifications to improve thermal roof load — the largest contributor to heat gain and indoor discomfort in the tropics — via a combination of green, photovoltaic, and cool roofs; hydroelectric power plants; and smart lighting via high-efficiency T5 tubes and LED lamps. This is doable.

For example, Mas Holdings, Sri Lanka's largest apparel and footwear manufacturing company, provides an illustration of how profitable, efficient and sustainable production can be achieved at its LEED Platinum-certified Mas Intimates Thurulie factory.

Finally, we need to be clear about the rationale: sustainable sourcing is not an otherworldly vision but will soon become a necessity to compete, as it has already in other industries. The need to upgrade supply chains will only become more stringent as consumer demand shifts. And government policies in leading consumer markets increasingly demand producers to assume responsibility for issues such as forced labor and environmental pollution in their supply chains.

The good news is that pockets of best practice exist: the key is to mainstream them. Replicating and scaling the best practices of frontrunner producers on the bundle of manufacturing issues is the easiest way forward. These include skill and capacity building for workers and managers; optimizing audit codes and support; raising awareness about gender, workers' rights, and homeworker management; and peer education group formation.

Fashion has always been a highly competitive business, and there will be winners and losers in this process as well.

Japanese imports of apparel have been sharply increasing in the past year. Imports from China alone grew by 22.7 percent, from where Japanese sourced 90 percent of garments. Under the "China plus one" policy recommended by the Japan Textile Federation, importers are now rapidly diversifying into other South Asian locations.

Imports from Indonesia and Bangladesh have been increasing, and imports from Cambodia, Vietnam, Thailand and Myanmar registered double-digit growth. South Asian countries will collectively supply more than 30 percent of total garment imports to Japan within a few years – further accentuating the need for sustainable supply chains.

Around the world younger consumers  — sometimes referred to as "generation Y" — are looking much more closely than their parents at the origin of the garments they buy. To compete, industry leaders are well advised to appreciate the joint push from changing demand patterns and the advent of sustainable supply chains. Next to continuous innovation in materials, this convergence will soon be one of the key drivers of value for the Japanese fashion industry.


Maximilian Martin, Ph.D., is the founder and global managing director of Impact Economy.
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