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Esquel CEO John Cheh Says It’s Time for Sourcing 4.0

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Growth in retail has slowed globally, and that downward trend won’t likely let up until sourcing completes the transformation that’s upon it.

That was the message Esquel Group CEO and vice chairman John Cheh delivered at the United States Fashion Industry Association’s (USFIA) Annual Apparel Importers Trade and Transportation Conference in New York City earlier this month, adding that the path won’t be the easiest to navigate as the unfavorable facts about the current state of the apparel sector aren’t exactly few and far between.

[Read more from the USFIA conference: “Uncertainty” Over Trump Policies Makes Frenemies of Importers, Domestic Producers]

Retail sales in the U.S. have come down in recent years and the sluggish trend has deteriorated further, according to Cheh. What’s more, e-commerce players are taking more and more market share from physical stores and getting into their own private label lines, further increasing competition, not to mention discounting has reached an all-time high—or low, depending on how you look at it.

Last year, Cheh said, citing a 2016 Cotton Incorporated Retail Monitor survey, fast fashion retailers were selling an average of 8 percent of their apparel product at a discount, for mass stores it was 16 percent, specialty stores 42 percent, and department stores were selling a whopping 73 percent of their apparel at a discount.

“What’s the point of lowering your cost, squeezing your suppliers for 5 cents or 10 cents or 30 cents,” which rarely ever amounts to much more than a 1 percent discount, Cheh explained, and all the while the discounts at retail are closer to the 30 percent to 40 percent off mark. “The markdowns are so much bigger, so what are we talking about in terms of keeping your costs down?”

These factors all considered, Sourcing 4.0 will be the way for retail to work its way out of this rut.

There are four key elements to Sourcing 4.0, Cheh explained: product, quality, time and price.

Where many retailers have missed the mark while they’re busy scrambling to ward of Amazon and fast fashion, is that they’re not delivering a product consumers actually want to buy.

“Everybody talks about fast fashion, shorten the lead time,” Cheh said to a room full of apparel executives. But, he said, “Look around you. How many are wearing fast fashion items? We’re all wearing core.”

That isn’t to say that fast fashion shouldn’t be a focus at all, but retailers need to understand the right product balance between core and fashion, and figure out how to deliver both on better timelines. That balance should follow the 80-20 rule, according to Cheh, where 80 percent of the product mix is core running items and the rest is fashion designed to “dazzle and attract the consumer.”

From there, the focus should turn to quality, another area that for some has fallen by the wayside in the hunt for ever cheaper product from whichever country can make it.

Companies have to work with suppliers to get quality right the first time and every time—which also means finding a formula to deliver on proper fit. As Cheh explained, “It’s not downgrading your product, but it’s how you find the right quality that sells well and sells profitably.”

When it comes to timing, suppliers can’t be left to bear the brunt of doing everything faster. In Supply Chain 4.0, speed comes with partnership.

“The key on timing is collaboration,” Cheh said. It may not be news that the bulk of supply chain delays come from internal setbacks, like designers and merchandisers taking too long to decide on the exact right shade of blue, but many companies haven’t put the processes in place to cut some of this idling out of the equation. “It’s not always fast fashion or short lead time, we need to be agile. But think about it, it’s jointly how we reduce lead time. It’s not just passing the buck to the supplier.”

On price, Sourcing 4.0 will mean companies consider unit labor cost, rather than labor cost alone.

Taking China, though labor rates are rising, the country has remained competitive from a unit labor cost perspective. Where labor in China may be higher than in Bangladesh, if the worker is more productive than her counterpart in Bangladesh, the labor cost per unit in China could come out cheaper. It’s only on low value-added products where labor is the highest component and fabric is a commodity, where China ends up pricier. As such, lean manufacturing will be vital going forward, and so will higher productivity and line balancing to reduce non value-added work.

“Just looking at labor costs I think it’s the wrong variable,” Cheh said.

The future for sourcing—and maximizing productivity for cost—will lie in automation, deskilling supply chain operations and handing them over to robotic lines, sustainable manufacturing, synced and transparent dat, and employees that are elevated to technicians rather than solely workers.

There are 60 subprocesses in making a shirt, and at one of its factories, Hong Kong-based Esquel has managed to deskill 45 of them and link up close to 20 of the subprocesses in a robotic line it calls the integration unit. There, the company has one line with just a few workers producing 600 shirts a day.

“It’s about redefining the sourcing strategy,” Cheh said. “If we have data exchange, sell through, positioning, inventory management, then all of a sudden you have the product at the right time,” Cheh said.

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