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Texworld USA: Edward Hertzman Discusses Why Sourcing Costs Will Rise in 2014

Speaking at a Texworld USA seminar Wednesday, Sourcing Journal founder and publisher Edward Hertzman spoke to an audience of industry professionals about the pressing issues facing the apparel and textile sectors and how those issues are affecting the sourcing supply chain.

At the seminar titled, “Breaking News: The Top Textile and Apparel Stories,” Hertzman said, as sourcing executives, “Our lives are becoming increasingly more difficult.” With constant wage issues, striking workers, new rules for compliance and the increasingly important role of sustainability, sourcing and manufacturing, Hertzman said, “Is becoming less garmento and more of a thinking man’s business.” The industry is now required to take a more academic approach to how they source product, inventory and retail product, he said.

Hertzman explained that 2013 could be considered “the year of the worker,” but not for any good reason. The Rana Plaza building collapse and the Tazreen factory fire last year sparked industry-wide outrage over substandard labor conditions.

The issue of poor working conditions is not a new one, Hertzman said, but now that what’s happening in factories is being publicized in the media, brands and retailers are now forced to make changes to how they source product or face media scrutiny and potentially jeopardize the integrity of their brands.

While the seminar was centered on news that made headlines, Hertzman wanted to address the issue he felt everyone in the room wanted to know, which was what will happen to the costs of goods in 2014.

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This year will bring an increase in FOB costs, Hertzman said. Wages hikes have happened all over the world, specifically in manufacturing countries. The monthly wage in Cambodia went from $80 to $100, garment workers in Bangladesh saw a 77 percent increase in pay and in Indonesia, the monthly minimum wage is set to increase an average of 19 percent across the provinces, Hertzman said to name a few. “The industry is well aware of the increases, but what they want to know is he do these wage increases affect the FOB costs.”

Hertzman drew on a comment Synergies Worldwide founder and president, Munir Mashooqullah made at Sourcing Journal’s 2013 Summit. He said, quoting Mashooqullah, that every 10 percent in wage increases amounts to a 1 percent increase in FOB.

And it’s not just wages that are going up. Power and energy costs are increasing and so are land costs, Hertzman said. “Costs increases are 100% inevitable, and if you don’t agree you are in denial, he added.”

Another issue Hertzman raised was that the new generation of entrepreneurs are less interested in opening new factories. While the current factory owners may add an addition sewing line or washing plant, there’s not going to be a large increase in the amount of capacity available. As demand for apparel in emerging markets increases, these countries too will seek factory space and we’re going to experience capacity crunches.

American brands and retailers are also overlooking the E.U.’s newly granted GSP Plus status for Pakistan. “We look at that and think it has nothing to do with us,” he said. “But it does.”

Instead of an E.U. retailer buying denim fabric in Pakistan and shipping to Bangladesh for sewing, it may be easier for them to keep the production in one country. As the E.U. takes more of the Pakistan capacity as a result of the duty savings, this will leave less room for super price sensitive, bargain-hunting American clients. Factories can become more selective in who they want to do business with.

While Hertzman preached the importance of strategic partnerships with factories and thinking twice before moving an order for $0.10, he also urged the audience to become more involved in the selection of factories and challenge their local offices and sourcing agents. A lot of retailers use local offices to source product and the problem here is that, once a tech pack goes out, there’s no guarantee that it’s being sourced the best way. “Like anyone else, people become complacent with your business,” he said, and sometimes they don’t put forward the effort to source the best product with the best manufacturer.

One way to combat this, Hertzman said, is to get out to the factories. “Americans don’t like to travel,” he said. Europeans, on the other hand, will spend time in the countries where they source, visit the mills and check out the factory where their goods are made while Americans sit in their offices yelling, “Where’s the DHL package?”

American retailers reject labdips, go back and forth multiple times, and once in danger of not meeting a ship date, have the nerve to tell factories they need to air the goods, Hertzman said. Brands need to be more efficient with how they manage their supply chains moving forward as factories will become increasingly less tolerant.

“We’re not communicating properly,” he said. “And the Zara’s of the world make decisions quickly while we’re waiting for eighty-five people to make a simple approval.”

Hertzman said brands will not see much change in where they manufacture in 2014. China, Bangladesh and Vietnam will continue to be the major exporters of garments to the U.S. this year.

“I don’t think there is a China plus one or two stragety.” Hertzman said. “It may be a China plus 5 or 6 or 7 other sourcing locales. You may make your twelve-gauge basic sweater in Dhaka, your jacquard sweater in Ludhiana, your $6.50 FOB jean in Karachi, your $12.50 jean in Ningbo, your bras in Sri Lanka and your sherpa-lined fleece in Lahore,” he said. “There are no simple sourcing solutions. Every city has strengths we need to consider when sourcing.”

Compliance has been a hot-button issue in the industry and while some say retailers will ultimately pay the price of not being compliant, Hertzman argues that there is a considerable up-front cost to being compliant. Some argue that the cost comes from not being compliance, like the risk of losing brand integrity, but that still doesn’t mean there are not costs involved with becoming compliant. Hiring compliance executives in the U.S., local representatives and auditors to inspect factories overseas and using better factories and requiring them to upgrade their infrastructure also costs money. “And there is no way to think this is not reflected in final costs,” Hertzman said. “By no means am I negating the importance of compliance and the responsibility brands have to enforce it, I just disagree when people say there is no cost involved.”

There’s a big difference between compliance and ethics, Hertzman said. “When we visit a factory, we know in our gut what’s right and what’s wrong whether or not a box is checked on a compliance form.”