Wage increases and capacity pressure in traditional sourcing juggernauts like China have widened the playing field for several countries, most notably Bangladesh, according to industry sources. Sources said Bangladesh will continue to grow, but only with continued commitment from apparel companies to circumvent existing challenges and more investment from the government to address systemic infrastructure challenges.
Industry experts say that political and labor instability and the long-lead time required to source garments remain the major hurdles. Bangladesh may never be a one stop-shopping destination for all retailers, but it will have a strong place in a diversified global sourcing strategy.
A recent survey conducted by McKinsey & Company found that sourcing decision makers at major apparel firms almost unanimously favor shifting production out of China, creating a tremendous opportunity in the region for countries like Bangladesh to step up and shoulder more production.
However, McKinsey said sourcing executives surveyed expressed concerns about five specific challenges in Bangladesh: lack of or subpar infrastructure; compliance issues; rising labor costs and a quality or capability gap; political and economic instability; and a reliance on imported raw materials.
In 2010 Bangladesh exported $15 billion USD worth of apparel. Annual apparel exports grew at an average annual rate of 12 percent between 1995 and 2010, according to McKinsey research. Bangladesh more than doubled its apparel exports to the U.S. and Europe in that time, solidifying its spot as the fourth largest U.S. supplier and the third largest European supplier.
Major apparel retailers have been sourcing from Bangladesh for almost two decades, and they have increasingly shifted to a direct sourcing model, with many companies establishing their own offices in Chittagong and Dhaka. Bangladesh has easily satisfied two of the major factors apparel suppliers use to make sourcing decisions – price and capacity – particularly for basics and some value products, sources said.
Regarding capacity, McKinsey noted Bangladesh has 5,000 operating ready-made garment factories that employ 3.6 million workers. The quality is sufficient to make mid-market and basic products there, and the challenges that exist in speed-to-market and risk can be mitigated with careful planning, sources noted.
Infrastructure Challenges and Long Lead Times
Because of a lack of inland infrastructure in Bangladesh and limitations because of the size and depth of ports, industry sources said one of the major challenges to sourcing in the country are the long lead times.
McKinsey found that, “buyers today are forced to carefully select the type of products to source from Bangladesh, since congested roads, limited inland transport alternatives, and the lack of a deep-sea harbor add inefficiencies to garment lead time. With the aim toward sourcing more fashionable, shorter lead time items in Bangladesh, reliable and fast transport is becoming extremely important. The transport issues need to be solved quickly in order to avoid a collapse in the transport network as volumes continue to grow.”
For now the safest strategy for most companies is to put production of basic items into longer lead countries like Bangladesh, said Munir Mashooqullah, chief executive of Synergies Worldwide. Because items like denim garments and basics don’t change as rapidly and don’t require the same fast turnaround that fashion-oriented items do, it is easier to give the level of commitment to factories and to order the necessary fabric and other elements far enough in advance to produce in Bangladesh, he pointed out. Bangladesh benefits from its proximity to China, which is still the main source of textiles for its ready-made garment industry.
Even an anecdotal survey of labels in most apparel stores shows that basic items are primarily manufactured in Bangladesh, Pakistan and China, Mashooqullah noted, while “fashion” items come from countries like Turkey, Morocco, Portugal and Tunisia that are closer to their final destination market.
Despite the existence of modern, systems driven factories in Bangladesh, worker productivity, especially compared to China, can also be a challenge, said Rick Helfenbein, president of Luen Thai USA. Some cite productivity as low as 25 percent compared with China, which can undercut the lower labor cost and lengthen the time it takes for garments to reach stores, which has ultimately held many developing countries like Bangladesh back from competing with China, he said.
However, Helfenbein noted, making strategic decision about which products are manufactured in which countries based on the specific strengths has helped many companies move away from seeing China as the only viable source, he said.
“As worker productivity continues to improve in developing countries, then these decisions will become harder to make,” Helfenbein said. “For longer lead time items like basic pants/shorts, or outerwear, a country like Bangladesh can be a solid choice. For shorter lead times – fast turn items – like fashion tops or intricate design, then China is generally considered the main contender.”
There are also electricity supply challenges facing the apparel industry in Bangladesh, but the government has indicated that it plans to address all the existing infrastructure challenges in the coming years, and has already begun adding additional power capacity to the country’s grid.
Instability and Compliance Challenges
Labor compliance challenges are also a major concern for apparel companies. As a developing country it is subject to a fair amount of scrutiny of labor and environmental practices. But heightened consumer awareness means sustainability issues and compliance problems can quickly become a public relations headache.
Earlier this year H&M, which sources almost 1/3 of its goods in Bangladesh, publicly scolded Cambodia and Bangladesh for their low wages, only to find itself on the receiving end of a public lashing when media reports about violations in its own factories surfaced.
Beyond social compliance, reliable labor capacity has also been an issue. Workers frequently strike, which carries with it not only the threat of unforeseen work stoppages but also an inherent risk of rising wages. If wages increase faster than productivity or quality levels in Bangladesh the risks could start to outweigh the benefits of sourcing there. Port workers have also gone on strike, further complicating the infrastructure problems suppliers face.
“A gap between customer requirements and supplier capabilities/investment plans is emerging. Buyers want to expand their sourcing product mix into more sophisticated categories, such as outerwear, tailored products, ladies intimates, and functional clothing,” McKinsey found. However, less than 100 of the thousands of manufacturers in Bangladesh currently have both the ability to produce those products and the productivity and compliance levels that major apparel suppliers require.
Financial Supply Chain Challenges
In addition to the time delays created by infrastructure issues and other challenges, there can also be delays in the financial supply chain. Bank of America Merrill Lynch issued a report earlier this year, which pointed out that the flow of documents and payments in Bangladesh challenges financial supply chain efficiency by adding numerous steps to the payment process. A slow financial supply chain can contribute to a slowdown in the flow of actual, physical goods from manufacturers to the ultimate retail destination.
“As a normal part of their sourcing strategy large retailers will continue to rely on various countries for their sourcing locations and many of these countries have dynamic regulatory issues,” said Maureen Sullivan, North American trade sales head for global trade and supply chain solutions at Bank of America. Regulatory issues often develop out of policies designed to protect foreign currency or properly manage export sectors, she noted.
For example, Bangladesh has implemented strict rules about how exporters deal with bills of lading in an effort to minimize fraud, money laundering and foreign exchange control circumvention. The process is cumbersome and relies on letters of credit. The slower flow of documents can translate into a slower flow of goods or additional financial costs, Bank of America said in its report. Most retailers have moved away from using letters of credit, but they still have enough familiarity to adjust their strategy to use them when needed, Sullivan said.
The government has taken some proactive steps to address some of the barriers Bangladesh’s apparel sector faces, including infrastructure investments, but sources agreed that the government needs to do more to help support the industry to keep its rapid growth from stalling out. Industry experts noted that apparel suppliers and their partners can do a lot to mitigate the current risks by establishing strong, long-term relationships and encouraging or requiring the kinds of policies and procedures that can smooth over the existing challenges.