While keeping costs down or at least at bay is a constant struggle in the apparel supply chain, how to achieve that is a variable that regularly challenges companies.
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel, speaking at the Sourcing Summit New York on Thursday, suggested ways to hold down cost and prices, but also said fundamental changes are what is ultimately needed.
“There are lots of places where we can think about where we can have price improvements,” Keh said, notably commodities, currency, efficiency and sustainability.
He noted that cotton prices have been relatively stable in the long term—there was spike about 10 years ago that drove prices above $2 pound and a dip this year that has seen it slip below 60 cents a pound—and that demand has generally been stable for the fiber that holds the second-most market share. U.S. spot prices on cotton averaged 58.81 cents per pound for the week ending Thursday, up from 58.43 cents per pound the previous week, but down from 73.25 cents a year earlier.
N0. 1 fiber polyester, on the other hand, has seen increased demand—“we all want the functionality of polyester,” he said—but prices have been flat to down.
“So, in terms of the No. 1 and No. 2 commodities we use for pricing, there should be opportunities for pricing,” he said.
As for currency, Keh noted that the dollar is still the key currency for trading in the world and has been holding strong. He said that’s good news in general for importers but bad news for exporters because currencies of key commercial partners like the European Union and China have been weaker, making prices for U.S. exports more costly.
Turning to efficiency, Keh said in manufacturing, “There’s a lot of opportunities in automation and in being more effective in what we do. We are using less resources and less manpower, and we’re making the same product. There’s still room or growth there and the challenge is in diminishing returns—the more you harp on efficiency, it’s going to get harder to find.”
On sustainability, Keh said the area should be good news because “we’re asking people to use less water, less electricity, less resources to make the same thing. All that should flow naturally to the bottom line.”
The next stage in the development of sustainable practices in the industry is the growing importance of “transparency and intentionality,” and the need to harvest and make better use of them, he said.
Keh said perhaps it’s time for the industry to rethink the drivers behind cost.
“Some of the beliefs that I want us to challenge are the beliefs about open costing,” such as using cost sheets to break down the various costs of making a garment when much of the costs are undetermined.
“For instance, sometimes the seasonality of the business can be more effective in costing or using tools like reverse auctions to help level out the manufacturing or logistics seasonality,” he said.
In a reverse auction, the buyer and seller swap their traditional roles, leaving one buyer and many potential sellers. In an ordinary auction, also known as a forward auction, buyers compete to obtain goods or services by offering increasingly higher prices. In a reverse auction, sellers compete to obtain business from the buyer and prices typically decrease as the sellers underbid each other.
Another example is what Keh called a leasing model, which he described as working with a brand where everything else—except for the actual apparel that is involved—is leased, reducing costs and risks.
Looking at the supply chain, he noted there are three traditional types. There’s the physical supply chain that includes manufacturing, distribution, warehousing and shelf life. The financial supply chain includes cash flow and profits, and the data supply chain holds and transmits information.
“The physical supply chain is increasing—no buyer will pay more for the same product next week,” he said. “The financial supply chain is free because interest rates are zero. The data supply chain is where all the value is being created. And yet, most of us are not comfortable with the data supply chain because it’s not the same data supply chain today that we grew up with and built our companies on. In this day and age of Industry 4.0, that’s the supply chain where all the opportunities can be found.”
He cited Zara as an example of an apparel company that uses data analytics in its supply chain “to be nimble, to be agile and be able to make incremental changes and shifts to make quick decisions.” Companies need learn how to use that data and share it with suppliers to improve their supply chain efficiencies, Keh stressed.
Vitally incorporated in all of this is sustainability, which “not only drives efficiency, which is helping us get better prices, but sustainability also creates value, and creates a reason to buy for our customers,” he said. “Sustainability is one way to give our customers a reason to buy and feel good because they are contributing to the welfare of the planet. So, sustainability is not more, but better.”
The advent of e-commerce, mobile purchasing and direct-to-consumer companies means the supply chain is changing radically, Keh said.
“We’re going to go from B2C to C2B,” he concluded. “In turn, assembly lines go away and are replaced by networks, while supply chains go away and are replaced by social collaboration—a network of companies that work with each other.”