Factories have evolved to take a new, higher profile role in the apparel sourcing chain, but the rising tide has not necessarily lifted all the boats. As the traditional apparel sourcing model has evolved, industry experts say that the paradigm has been splintered into a host of complex new models tailored to meet individual company needs.
This complicated sourcing reality has forced factories to develop higher levels of sophistication, especially in the top tier of manufacturers, said Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel. What exists now is a tiered system of manufacturers, with elite factories at the top, good factories in the middle and the workaday manufacturers at the bottom.
“There’s the elite. Then there are the good guys who are not at the level of full service factories. The top tier has evolved to be a service provider,” Hughes said.
Elite factories that are in the top tier act like one-stop shops for brands or retailers, offering everything from design to logistics management.
The top tier has “pretty rarefied air” Hughes noted. She estimated there may be 50 highly sophisticated apparel factories in the world, but there are not 100. In this tier, competition for factory space can be tight.
There are still many good factories below that level that may not offer the same high service level.
Elite factories now have more discretion in which customers they choose to do business. Not every apparel brand can work with an elite factory. Small companies or newer companies could potentially have problems finding factories willing to take smaller orders for example.
Josh Green, chief executive officer of Panjiva, offered a competing narrative. He said that there might have been more of a suppliers market before 2007, with buyers complaining that factories were asking them for minimum orders. But that talk has largely disappeared since the recession.
Factories still have room to be choosy, but they aren’t turning customers away because of capacity issues. Instead, they want help finding the right new customers, Green noted.
“Certainly buyers feel a bit at the mercy of suppliers when it comes to cost structure because suppliers are, particularly in China, coping with rising wages. Still, I don’t think that gets you to the conclusion that we’re in a suppliers market … It simply means the labor force is gaining more leverage as workers in these emerging markets have more options,” Green said.
The new supply chain model also puts more value on relationships between buyers and factories.
“There are plenty of factories around; what’s happened is some of the factories are being more selective in who they take on as a customer. There is a trend towards partnerships,” said Rick Helfenbein, president of Luen Thai USA. “In a good partnership both tend to make more money. The retailer and brand get what they want, when they want and pay the price they want.”
It is a competitive market, Helfenbein said, and instantaneous communication technology has helped foster those new relationships.
At the same time, the knowledge gap between the buyer and seller has narrowed, which has helped shrink the market, Helfenbein noted.
“Whereas in the old days you found an agent, today the market is much more sophisticated than it ever was. You also have much more to deal with in terms of compliance. You have to be right on top of consumer safety, human rights and compliance. You have to ship right on time precisely to the moment or you subject yourself to costs and chargebacks,” Helfenbein said.
Middle-men are getting squeezed out of the picture, as buyers go directly to their new factory partners. Several prominent brands moved to this model relatively early, and helped factories become very sophisticated, Helfenbein noted, pointing to companies like Polo Ralph Lauren and Uniqlo as strong examples.
“What they’ve discovered is that the key word for sourcing today is not about country or wage rate, it’s about productivity. One word. How good can you make the garment and how many can they make that day?” Helfenbein said.
The productivity drivers in these new factories are much more complicated than just focusing on low wage or fast turnaround time on new orders.
The best analogy for productivity is how airlines look at airplanes, Helfenbein said. The more passengers there are on a plane, the less expensive the flight is.
“If the factory is full you make a lot of money, if it’s half full you make half the money, if it’s almost empty you lose money,” he said.
With that productivity model in mind factories must make sure they are maximizing their capabilities through partnerships.
Keeping productivity levels high and workers busy is key to the success of companies like Uniqlo, he said. It also makes estimating the cost of one specific garment item difficult because the equation must take into account not just labor and raw material costs but how productivity impacts prices.
For example, if the current wage in China is $561 a month with benefits and the current wage in Bangladesh is $123 a month with benefits, at surface value it looks like production should be moved to Bangladesh.
But if the productivity in Bangladesh is 25 percent of the productivity in a Chinese factory, the labor costs won’t work out in the end, said Helfenbein. Additionally, it adds to the lead time for products. Overall, he pointed out, it’s going to drive the price per garment much higher than the wages alone would suggest.