Sourcing Shakeup (Roundtable Report)

Whether it is better to pay for quota and ship late in 2004, or wait until early January 2005 to air freight? That is the question. And it's an issue high on the list of concerns voiced by participants in Apparel's third annual Sourcing & Logistics Roundtable as they enter this important transition period. (A list of the roundtable participants' full names and titles is at the end of this article.)

In the intensely competitive global apparel marketplace, nothing should be left to chance, but some things are simply beyond control. Read on to find out how companies are navigating the unpredictable sourcing and logistics environment created by heightened security regulations, lack of transportation capacity and the quagmire of the last days of the quota system.

Preparing for January

Apparel: How is the impending phaseout of quotas affecting global sourcing and logistics strategies? For example, what steps is your company taking to deal with the potential disruption from the lack of carry-forward for the remainder of 2004?

Stone (Roka Apparel): We are a private label supplier. In this hemisphere, for us to survive and be strong, we have to tighten our belt and cut corners on delivery time. We have to be leaner, faster. Quality goes without saying. . We have to: No. 1, identify the weak source, . determine who never delivers on time . [and] replace them if we have to. Today [we source] 90 percent U.S. fabrics, and we do not see that changing a tremendous amount, even with CAFTA, because of [the need for] quick turn; [No. 2, we must continue to] focus . on the amount of time it takes to do a full-package turn and get it to the customer immediately.

Buckles (Leading Lady): We're not only [tracking] the quota fill rates from the countries we're in, but [improving] collaborative efforts with our retailers, to know what we can expect from the countries [where we're sourcing.] We're looking closely at the rate of sales . our projections, our inbound supply, and adjusting it, because it's cheaper for us to adjust and get a little heavier than it is to recertify a factory for a different country.

Sheely (Gold Toe): We're probably a little different in that we're a sock company. [The quota situation hasn't really] impacted us. . Socks made primarily of synthetic fibers are not currently under quota for us, so we can bring them out of China without regard to quotas. Socks that are primarily cotton-based, of course, [are subject to] the cotton quota, but as it impacts a sock, the cotton quota charge that we would have to pay makes China economically unfeasible, so those socks are coming from south of the border, so that really hasn't impacted us.

Gazitua (Perry Ellis International): We've had to air freight some goods. We've had to ship some goods to Long Beach, [CA], especially from Vietnam, for category 338 [men's and boys' knit cotton shirts], which is filling up extremely quickly. So we've had to change where we're shipping - Long Beach instead of Miami. We're also looking at . factories . that we expect will fill up, and moving to other areas. As we get [closer] to December, we'll be looking at the difference between air freighting goods in early January [vs.] shipping ocean from, say, China, where they may have a quota but they have a high quota charge on it . keeping in mind that air space will probably be really tight and also very expensive.

Gabbe (Carole Hochman): [Regarding] goods that you need for delivery to the customers in late January and early February, we're absolutely analyzing quota costs vs. air costs. There clearly is a concern on the part of some of the shippers as to space availability; however, . the bigger forwarders are able to block and book space for you. . The air freight is a bargain compared to the cancellation or chargeback opportunity for the stores, who say, "I'll take it but give us a discount."

Davis (Liz Claiborne): One of the things that we're doing is working with some of our larger factory partners in looking at opportunities to expand inside of China. . We're also carefully watching what's happening to labor rates there . Everybody's getting ready for January, and it is important to line up all of your resources for air freight if you're against some very tight windows with your customers.

The loud sucking sound

Apparel: Who will be the winners and losers, in terms of countries and regions?

Sattler (Phillips-Van Heusen): Certain countries are benefiting from [quota issues] this year that will not benefit next year, particularly in hot apparel categories such as 338, 339 [women's and girls' knit cotton shirts] and the pants categories, 347, 348. Declining rates of imports from Central America and Mexico into the United States [will likely fall] even further next year.

Gabbe (Carole Hochman): I had breakfast [in mid-August] with a manufacturer in El Salvador who said that "the sucking sound is getting louder," and he's actually looking at the possibility of liquidating his facility there.

Kirby (Oxford Industries): Countries will survive as apparel sources if they have low labor costs, immediate access to the raw material input, and, a distant third, if they also are party to a free trade agreement with the U.S. Any countries that don't have at least one of those three won't be around much longer as an apparel source.

Buckles (Leading Lady): For us, Mexico will probably be the biggest loser. We've been in Mexico for a long time now. Our partners in Asia are just far more responsive; their quality is better. Even though the lead time is longer, it's worth it, because you have a dependable supply source. . Sadly, we see that unless CAFTA passes, and passes big, our partners in El Salvador will probably be hurt. They can't compete with [Asia in] getting the product we need and want.

Ninemire (Tandy Brands): Is that going to drive a capacity issue in China?

Buckles (Leading Lady): We are primarily a niche market intimate apparel supplier of nursing bras, full-figure bras and we also have a medical line. . The plants that we work with [in China] are very specialized . so hopefully not for us.

Gabbe (Carole Hochman): I do not envision a capacity issue in China, period. I envision a capacity issue for the movement of goods out of China. I perceive a risk relative to a shift in the food chain, where the [Chinese] move into more high-tech, higher paying production, such as plasma TV screens, which they're already doing. But the capacity [in China] is frightening, [e.g.] their ability to build an eight-lane highway in five years from a dirt road, to build a city in two or three years, including its infrastructure, their ability to put up textile mills and absolutely state-of-the-art printing facilities for packaging supplies, and beat everybody at it, is just mind blowing.

Kirby (Oxford Industries): [The Chinese] haven't spent enough money developing electrical generating capacity. But I'm sure that once the Chinese government turns its white-hot focus on that particular problem, they'll solve it. [Has] anyone else experienced production problems due to the brownouts and the blackouts?

Sheely (Gold Toe): We have experienced brownout issues, so . we required our suppliers to install generators in their factories in order to supplement incoming power, and they have done so.

Gabbe (Carole Hochman): We've experienced it as well, however, only in the smaller, less sophisticated companies. The larger ones have all come back with one of two statements: "Of course we have a generator; how would we stay in business?" or "We're big enough that we have support from the government that keeps our facilities running when we need to be running."

Planes, trains and trucks

Apparel: How do you expect to move goods out of China if there isn't enough capacity?

Gabbe (Carole Hochman): On the short-term side, there's the potential for a surge as we cross over into 2005. [There will be] people holding back and moving goods in the beginning of January that otherwise might have flowed in December, and [the concern is whether there] will be enough container capacity in the Far East to handle it. .In the long term . [there's a need for] increased [port] capacity. If I had to bet on any country in the world to succeed at getting something done in a hurry that needed to be done, I'd certainly put my bet on China. They have a major initiative going in the five major ports to increase capacity, not only for the number of containers that have to be moved, but [to increase their] deep-water capacity.

Kirby (Oxford Industries): During the crossover period, or even further into '05 as the trade volumes build from China and across the Pacific, battle No. 1 [will be] getting an empty box. . Then you'll have battle No. 2, which is getting your box on a ship. If you win that battle, you'll think you're home free, but the biggest choke point will continue to be the West Coast ports, specifically L.A. and Long Beach. We're going to continue to have recurring episodes of this congestion backlog, and I'm not sure what the long-term solution is . to handle the increased volume.

Davis (Liz Claiborne): Additionally, the same types of issues are occurring for all the cargo that has to move MOB on the rails. There are just not enough cars to move it.

The security wild card

Apparel: How are the new customs and security requirements, "hours of service" trucking regulations and other measures affecting your operations?

Davis (Liz Claiborne): There has been some action to rescind those new [trucking] rules, and . they'll [probably] go back to the old rules. . But the trucking problem is big because the truckers . are looking for pay adjustments to cover their fuel expenses. [Without pay increases], the truckers don't even find it worth their while to be draymen out of the ports, let alone do cross-country hauls. . We're all from apparel or soft goods here, but we're competing with every other importer, from e-goods to general merchandise, for those spaces and those truckers.

Gabbe (Carole Hochman): Homeland security is another wild card. On Monday it's worth an hour, and on Tuesday it's worth 72 hours.

Davis (Liz Claiborne): It's even worse than that, as they target different products for outward processing. For example, now they're doing country of origin, Great Britain, for the knits that go through additional processing in Asia. They're not only slowing them down and pulling them for exam. Three or four days later they put them into detention and demand all the records. [For any] advance notices [we receive] from CTPAT, [we assume] we're going to have a problem, and we start planning for it. . [Regarding LDP vs. FOB], the word from customs is that they're going to scrutinize more LDP shipments, and so we're better off working on an FOB term. We do the majority of our business on FOB. The factories that we're doing LDP with have been our partners for a very long time, but we are looking at switching them to new terms. We have to consider everything that might slow down the movement of goods as a threat to cycle time and respond to it proactively, before we get caught in it. . We're doing constant review. Everything's changing right now, and we don't know quite how it's going to settle out.

Kirby (Oxford Industries): One of our frustrations is trying to develop transit time and lead time models for our sourcing and merchandising people. You can pin most things down except that giant wild card of customs clearance. . While normal customs clearance is one or two days at the most, if a particular shipment is selected for an exam, it could be seven days, 10 days, two weeks, you never know.

Gabbe (Carole Hochman): We tell our partners that once the ex-factory date is agreed upon, it is their responsibility to make up for any late time - unless they can document that we caused it - and if that means flying the goods, it's at their expense. That goes a long way to reducing cycle time. No factory in the Far East that's charging $3 to $10 a garment FOB wants to absorb $1, $1.50 per unit cost for air freight. So the disincentive becomes a real incentive to their getting the product made on time.

Davis (Liz Claiborne): There are so many events that impact our ability to stick to our dates. For example, [in mid-August] . truckers [in India were] not going into the ports . and the carriers [said it wasn't] looking good for a contingency [plan]. We also source in Jordan, and between the strikes in Haifa [Israel] and Aqaba [Jordan], you have to [ask yourself:] "Why am I sourcing here?" There seem to be more and more [hurdles like this] every year that take up an incredible amount of time and impact the way you have to evaluate your sourcing.

Sheely (Gold Toe): Because "wild card" things do pop up, we've taken it upon ourselves to dual source, at least on critical items, and replenishable items. So when those things do pop up, we can pull from a second source.

Sattler (Phillips-Van Heusen): It's almost - I don't know if the word is a crime or a shame. The best region in the world for [U.S. companies] to do quick response is Mexico or Central America and the Caribbean, and here we're talking about these issues in Jordan, and all over the world, yet there's a CAFTA bill that hasn't been pushed through. [Potential] textile investment in these countries either won't happen or is being delayed, [and we're losing] a great opportunity for all of us to increase our production in those regions.

JORDAN K. SPEER is senior editor of Apparel. She can be reached at [email protected].

Editor's Note: Additional highlights about technology solutions, security and more from Apparel's Sourcing & Logistics Roundtable will be featured in the Oct. 13 edition of the Apparel eNewsletter and online at www.apparelmag.com. The Participants Moderator:

Apparel Magazine

Jordan K. Speer

Senior Editor

Apparel Business Participants:

Carole Hochman Designs

Peter Gabbe

Executive Vice President and COO

Gold Toe Brands Inc.

Bill Sheely

Executive Vice President, Operations

Grupo M

Laura Trueba

Strategic Planning Coordinator

Kellwood Co.

David Falwell, Strategic Sourcing

Leading Lady Cos.

Francie Buckles, Supply Chain Manager

Liz Claiborne

Lois Davis

Vice President, Global Logistics

Oxford Industries

Mark Kirby, Director of Global Logistics

Perry Ellis International

Daniel Gazitua, Import Manager

Phillips-Van Heusen

Ted Sattler, Group Executive Vice President of Foreign Operations

Roka Apparel

Larry Stone, President

Tandy Brands

Stan Ninemire,

Executive Vice President

David Lawhon,

President, Operations and Distribution, Men's and Women's