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Sourcing in 2018: The Predictions, The Challenges, The Hard Truths

There’s been a general consensus among those in sourcing that after the year of uncertainty that was 2016, 2017 was the year of realization, decision, and action—a pivot toward embracing what’s happening at retail and moving toward becoming the vessel to deliver on new demands.

In the year ahead, companies will be looking to redefine their supply chains and retailers will be looking to redefine themselves. And whichever side of the fence you’re on, everything will be about digitization.

We spoke to three leaders in sourcing—William E. Connor II, CEO of The Connor Group, Marc Compagnon, group president and executive director of Li & Fung, and Raymond Tan, CEO of Luen Thai Holdings Limited—to get their thoughts on what 2018 will bring to the sector.

SJ: What defined sourcing in 2017?

Connor: There was no single major takeaway, but rather a continuation of the changes we’re been witnessing over the past few years. Business is generally flat, particularly for bricks and mortar retailers. Tighter inventory control coupled with demands for lower cost and increased speed to market have placed greater pressure on vendors and sourcing partners. There is a continuing demand for lower MOQ’s.

There is heightened demand for added-value services from sourcing partners, most particularly in the area of product development and design and the empowering of sourcing partners to undertake product approval decisions. In some cases retailers and brands are asking their sourcing partners to function as their de facto import department.

Given market challenges, retailers are focused on delivering best possible value for the end customer. While the value proposition is variable by retailer and category, the one constant is a focus on delivering the very best quality/price product value to the customer as seamlessly, and as rapidly, as possible. Having visibility from concept to delivery is more crucial than ever.

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Compagnon: Speed, speed, speed. The continuous growth of e-commerce has  consumers playing a more critical role in what brands and retailers produce and thus affect how they source products. Brands and retailers continue to place more orders but in smaller quantities and they need to do it faster. When we speak to our customers, speed is the core message in the conversations and they are looking for ways and partners who have a diverse global vendor base, strong industry knowledge and are flexible in sourcing near shore as well as off shore, to help them move faster and provide new products to consumers with a shorter, lead time. To us, speed is the new currency at retail. At Li & Fung we are focused on being more agile and producing results more quickly by simplifying processes, using technology and embracing new ways of working with our customers and other industry partners.

Apart from speed, during 2017 the geopolitical landscape continued to be a key consideration for the sourcing industry overall. Events like Brexit, uncertainty in the U.S. and the rise of populism around the world are issues that have impacted not only sourcing decisions but also global trade policies and agreements.

A key lesson from this is that retailers and brands need a diverse sourcing strategy, leveraging multiple production markets to best manage the ongoing shift and moderate the uncertainty.

Tan: There aren’t any surprises about online taking up bigger market share globally and the industry restructuring in the U.S. and EU. For those who didn’t know about this in 2016 and took action facing 2017’s business environment, they are most likely out of business or on the way out by now. I guess the biggest lesson learned in 2017 is the importance of the Chinese market and the new business model Nike announced recently. It is now very clear that those brands with the right China strategy and execution continue to do well, which is being reflected in their share price. The Chinese market growth allows global brands to offset some of the challenges they face at home. With Nike drastically reducing its customer base and building a direct to consumer model through e-commerce, it will transform the industry, which we all must face in the years to come. How would the future supply chain be with Asia (especially China) being more important than ever and how would our supply chain look when brands start to sell directly to its customers, bypassing the traditional distribution channels? These are two very important questions we need to ask ourselves.

SJ: What will be the key challenge facing sourcing in 2018?

Connor: More of the same…Many of our retail clients are redefining their product and brand position to meet changing customer demand. This requires a nimble supply chain that can quickly identify and secure vendor capacity across multiple production origins. We will see more product customization and product differentiation, all part of a greater emphasis on private label.  

Compagnon: In some ways, keeping up with the pace of change alone is the key challenge. During 2018, companies will need to cope with a continuation of disruptive macro trends such as demographic shifts, more orders in smaller quantities and shorter lead time, rapid advancements in technologies, the pressures of e-commerce and fast fashion, a mixture of sourcing near shore and off shore, the need for manufacturers to upgrade their capabilities, including the digitalization of their processes. Companies cannot stand still. They will need to continue to evolve quickly, move faster and be innovative to meet the changing marketplace. Otherwise, progress will be challenged.

Tan: Change is a must. The question is how and how fast. A lot of investment is being made in automation hoping to generate faster speed, more flexibility, and better quality at lower cost. It takes time to plan, invest and execute these investments but there is so much new technology which could totally wipe out your investment in a very short period of time.

SJ: What will sourcing in 2018 look like?

Connor: We can expect a continued focus on aggressive first cost reduction, speed to market and best in class quality product. While labor rates and raw material costs may increase in 2018, they are relatively stable at the moment. Fluctuating exchange rates may also play a role, albeit not a big one in our view.

We are implementing vendor consolidation programs for many of our clients to leverage their spend with strategic partners to control capacity, reduce cost and accelerate deliveries.

Private label is delivering greater margin than most national brands. We will see continued growth in private label for both traditional bricks and mortar and e-commerce sectors. While there are no untapped or “new” production origins, many countries are improving their speed, quality, and design capabilities in particular India, Bangladesh, Vietnam and Indonesia. Africa is emerging as a strategic origin for large volume apparel programs given favorable duty rates.

Compagnon: Disruption is accelerating and retail will likely look completely different by the end of 2019. There may be further consolidation in the market, more movement from online to offline, and a true omnichannel model will emerge. It is very difficult to predict what the future holds but without a doubt it will be marked by constant change and evolution as well as a need for increased speed to market to meet the quickly moving demands of global consumers, who will, in reality, be driving more of the design and production processes than ever before.

Tan: I believe digitalization will be critical for sourcing in 2018 linking up the “small data” from one end of the supply chain (fabric mills, trim suppliers and OEMs) to the “big data” at the end of the supply chain, creating a smart supply chain. The ability to link up the entire supply chain with full transparency is going to become the key competitive edge of any brands moving forward.