Historically the stereotype of the apparel industry has been a strategy of chasing the lowest cost of needle: low labor costs, low production costs and low material costs. Companies looking for ever lower production costs expanded the garment industry into a global industry that drove infrastructure advancements in many developing countries and created a supply chain that for many years was centered around that one factor. But a new era is dawning in apparel sourcing, and the dominant value equation and focus are rapidly shifting.
Now, concepts like capacity, speed-to-market, risk, quality and capability are all factoring into sourcing decisions, along with price. Today’s savvy apparel company isn’t just chasing the lowest cost of needle, they are making decisions using a complex matrix that change from brand to brand, season to season and product to product. Efficiency and quality have taken their place alongside price in sourcing executives’ minds.
Many of the factors that are important when making sourcing decisions are also variations of price, pointed out Josh Green, chief executive officer of Panjiva.
“You may get somebody who can produce something at a lower price, but can’t produce it nearly as fast, or free of defects. Ultimately the price you’re paying to get the goods you ordered isn’t going to be cheap,” he said. “Those are variations on the theme of price. If you look beyond the actual costs of manufacturing, one lens to look through is the different risks that sourcing creates for your business.”
A factory that can’t deliver on time means your product won’t be in the stores when you need it there, Green noted. That failure could reduce the apparel company’s ability to get full price for the product, which in the long run will impact revenue. Cost matters, he said, but looking at just the price of manufacturing is an over-simplification.
“In our discussions with retail clients regarding sourcing strategies what we hear is that price isn’t the only consideration when they’re evaluating their supply chain partners. Of equal importance is the implication of obtaining the right product, which is driven by quality considerations,” said Maureen Sullivan, North American trade sales head for global trade and supply chain solutions at Bank of America.
All the pieces together – right price, product and quality – create a successful supply chain, Sullivan pointed out. The specific equation that will work best naturally varies, she added, but many of the companies she works with now evaluate their strategic sourcing partners using a scorecard of important attributes.
Sullivan said the scorecard assessments are based on several factors that vary from client to client, but can include any combination of the following supplier attributes:
– ability to deliver on quality;
– history of activity or length of how long the supplier has been in business;
– ability to satisfy compliance issues, such as stringent child labor and environmental rules;
– track record with on-time deliveries;
– ability to conduct satisfactory factory inspections;
– financial strength and stability; and
– overall reputation in the market..
“Through those scorecards retailers get a sense of the reliability of the supplier,” Sullivan noted. These factors are relevant for companies up and down the supply chain in evaluating potential partners and themselves.
Sourcing decisions must take into account a complex web of factors that extends both inside and outside the specific factory to include infrastructure, government regulations, trade rules and a host of other elements.
“The new buzz words, or key components for sourcing executives making critical decisions, are ‘worker productivity’ and ‘infrastructure’ as it relates to geographical location choices,” said Rick Helfenbein, president Luen Thai USA. “Worker productivity is becoming a very practical way to measure international sourcing decisions.”
There is significantly more information and data available to help companies make the difficult sourcing decisions they are faced with, sources pointed out. Not only are decisions getting more complicated, but the evidence used to support those decisions is more varied and complicated. Even the information available about the old decision drivers like the cost of labor have more depth and breadth to them.
“The Internet has changed the world from local to global, and the same experience has prevailed in the sourcing component of apparel…especially in terms of available public information on global wage rates. Employees are more cognizant of what the current rate should be, and employers of world class factories strive to maintain a competitive position on wages,” Helfenbein said.
Where the quest for the lowest wages once drove a lot of apparel companies to developing countries, the shift in focus has made other priorities equally as important. “Going all the way to … developing countries only solves some sourcing problems, and often it creates others. Those involved in sourcing and retailing must never lose sight of the goal: right product, right time, right price,” Helfenbein noted.
Green says most of the companies he speaks with say their decisions now come down to “the three c’s”:
– capability: can a facility or company produce what you want when you need it;
– certifications: are compliance and sustainability taken into consideration; and
– customers: does your partner work with people throughout the supply chain that inspire confidence.
Beyond all the buzzwords and new trends, industry sources point out that many of these new concepts are simply more sophisticated ways of looking at many of the factors that always did matter but may not have received the same lip service as price. Geography still matters, for example, if a company is sourcing somewhere that may be politically unstable or faces a significant number of natural disasters. Similarly, a lack of infrastructure for most companies is a significant hurdle to overcome, and a piece of the puzzle that has always figured prominently in sourcing decisions.
What has changed, sources noted, is that price is no longer assumed to trump all other considerations. The understanding of the financial risks and the potential risks to brand integrity (itself a newer concept) have deepened, and allowed sourcing executives to make room in their decision equation for other factors. Each company is different, and what’s right for one brand is unlikely to be exactly right for every other brand. Ultimately, sources pointed out, every business needs to develop the strategy that is best for them.
“The organizations that are doing it right are very self aware. One fundamental distinction which I think really matters is do you really want to be on the cutting edge, taking risks on sourcing in the hopes of getting a competitive advantage. Or, do you simply want to stay equal to the competition on the sourcing front and win the battle elsewhere. I think you see strong sourcing in both camps,” Green said.