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The Sourcing Strategy Everyone Wants to Know

Sorry to disappoint, but it doesn’t exist. If there is anything we can learn from studying successful supply chains, it’s that they are unique to business needs and each one is slightly different than the next. The mistake companies make is trying to emulate someone else’s sourcing model without first considering whether the other company’s consumer wants, margin needs or logistics

While there may not be one strategy for every business to follow, there are a few things everyone can consider.

1. You do not know it all, nor does your VP of Sourcing or overseas office

Just because you’ve been in the business for 30 years and have run a successful office out of Shanghai or Hong Kong doesn’t mean the knowledge will transfer directly into working in Peru or Pakistan. And that is OK. No one can be an expert in every region. But don’t make the mistake of having your HK office manage your Latin American production, and do not think the culture and style of working in Dhaka is the same as it is in Mexico. One must understand the culture, the pros and cons of the country, and how to work there in the most efficient way possible. If you want to break into a new region, find the best agent or factory partner possible. Hire third party QC. Do not go in blind. And do not let someone convince you they can manage your Bangladesh production while sitting in Korea. As companies expand from the coastal region into new areas of China, they may want to consider having a seasoned partner. There are obstacles to overcome and challenges that the North may present that you are not used to in your previous dealings in China.åÊHands and feet must be on the ground!

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2. Challenge your resources

Challenging your resources does not mean abusing them. Hurting or jeopardizing your current vendor base “just because” isn’t the objective here. Ever wonder why some of the largest retailers in the world have both agents and company-run offices in Bangladesh? You would think their office is more than capable right? Just because you have locals working in a region doesn’t mean they are doing their due diligence on every order, and doesn’t mean they necessarily have all the best relationships. Just like anyone else anywhere in the world, people become complacent, and they like to work with their friends or the vendors who make their lives easy. The same can be said for agents. Perhaps they feel entitled to business because they assume season after season they have gotten your orders. Using both agents and company-run offices in the same region may keep everyone honest and on their toes. Agents don’t get paid unless they get orders, so they have every incentive to work hard and find the best solution for your business, which could be considered a threat to your office. The mistake companies make is allowing their local offices to manage the agents. No one wants to look bad, so if an agent has better resources and better prices, will you know? Would your office want to expose that for the past few years they could have been saving you money? Maybe yes? Maybe no? Just something to think about. No one should take your business for granted. And no one will watch your business like you will.

3. Know the region

Do you order Italian food in a Chinese restaurant? Sounds ridiculous, right? Every country and every region within a country has its strength and weakness. The long staple pima cotton growing in Peru will certainly have different properties than the short staple crop in Pakistan. Peru is a country that is not discussed much today and may be overlooked by many. Some of the most well-respected brands are making beautiful knits there for a reason. It’s not that they can’t source it cheaper or quicker, but the quality, the attention to detail and, most importantly, the raw materials that grow in that country, are outstanding. Try to duplicate the same polo in Guatemala and you may be disappointed. Vietnam is a growing region experiencing vast increases in export volume. Understanding its infrastructure and business culture is key to being successful there. First you have to understand the country’s strengths. Their skilled needlework is the reason they are able to handle the performance wear, outerwear, and active wear, for example. Then you have to note that a good portion of the factories work strictly on a cut-make (CM) basis. So having strong fabric relationships may be key when working there. While factories may not outright demand full-year commitments, they prefer partners who will provide business during both their busy and low seasons. So if you are utilizing a factory for outerwear during their peak season, are you helping them by providing production to keep the capacity filled during their slow season? Ever walk into a big retailer and see their cargo shorts made in Vietnam? Your first thought might be: Why not Bangladesh? Yes, apples to apples it probably would be less expensive in Bangladesh, but if you understand the peak and off-peak seasons in Vietnam and how to truly work there, you need to be sensitive to the two seasons. Retailers will partner and flow product year round to their vendors in Vietnam so they can secure capacity. Having the ability to plan accordingly and place sweater orders in Bangladesh during the off-peak season could be a substantial savings opportunity. Factories are willing to offer a lower CM to keep often-idle machines going during down time. If you want to compete in the commodity sweater business and your competition is taking advantage of these off-peak CM rates and you aren’t, that could be an issue. Instead of chasing the cheapest vendor during peak production season, maybe figure out how to take advantage of the seasons and manufacture key staple products you feel safe placing. Understanding how and why your competitors are sourcing is key. It’s not just about location, but how a company operates within a country that is important. We also have to change our perception of countries. Bangladesh is no longer just a source for basic commodities: many high-profile brands are working there and making high-priced items. The world is evolving, so should our supply chains.

4. Vendors are the new kings; Mean something to somebody

Apparel manufacturing is not a business that many countries or entrepreneurs are keen to invest in.åÊAs the middle class continues to grow in developing countries, finding workers to work in the garment sector will continue to be a challenge. As real estate prices increase, building a factory may not yield the highest rate of return. Therefore, I would not expect much of a near-term increase in global capacity. In fact, I expect a decrease. And as countries like China designate more factory space to local brands, total capacity available to American and European brands will shrink. The tables have turned on who is in demand. Good factory partners are hard to find, and if you have one, you should be careful not to chase them away over five cents. They may have more potential clients knocking on their door than you have factories begging for your business.

5. Understand new pricing models

Forever 21 recently announced that it’s developing an off-price format. In their announcement, the retailer mentioned T-shirts would be available for $1.80 and denim for $7.99. It’s kind of hard to believe that a company could source and sell product at those prices. What we don’t know is Forever 21’s margin requirements. It’s safe to say that they aren’t buying a jean for $1.50 or a T-shirt for a dime. Instead, we have to assume they are working short. I am always challenged by clients on how wholesalers can source and sell a jean for $7.50. It isn’t that their competitors are getting a jean for $3.50, they are making it for $5.50 and taking the order from their buyer for nine points. Before you turn off a factory by asking them to make you a $3.00 jean, understand the market and what your competitors are doing, so you can decide if it makes economic sense to your business model.

6. Stay educated

I created Sourcing Journal because I couldn’t find the information I needed to make informed purchasing decisions. And my clients didn’t have authoritative resources to reference. So it was always my word against theirs, and of course they always knew best. Today we need to not only stay informed, but to also know how to analyze and use data. Raw material prices may be flat, but maybe currency fluctuations are causing an increase in costs. Are you tracking electricity and gas prices, wages, shipping rates, raw materials and factory demand? Each of these price components cannot be studied in isolation. All of them must be taken into account when making pricing decisions. Make sure you research these factors (preferably on Sourcing Journal!) so you can make intelligent decisions and pick your battles over pricing with your factories and agents. I have said this many times both in my talks and in my blogs: Nothing beats traveling to the source. You will gain more insight, knowledge of your supply chain, and even knowledge of your competitors’ supply chains by getting on a plane and traveling than by any other means. Some of the talking points above may seem rudimentary or basic in concept, but despite their simplicity or obvious subject matter, most are overlooked and sometimes even disregarded by many. I hope at the very least this creates internal conversation, gets you thinking about how you source and, for some, validates what you are already doing.