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How to Make Geographically Diverse, Vertical Supply Chains a Reality

One of the key lessons that COVID-19 has taught the apparel industry is that narrow sourcing strategies are not necessarily the best approach to navigate a global disaster. Companies that relied on one nation for any aspect of their product—from raw materials to assembly—were left in the lurch as closures and stalled transportation left them without necessary elements.

As the dust starts to settle and companies begin to strategize for a post-coronavirus supply chain, diversification is top of mind. At the same time, vertically integrated production models are also becoming a more attractive prospect, giving companies more control over their entire production.

Polartec and its parent company Milliken have seen the benefits of verticality and geographic expansion firsthand. With more than 30 plants dispersed across both the Eastern and Western hemispheres in China, the U.S. and Europe, Milliken says it is able to produce closer to its customers and mitigate disruption more effectively. The company can handle everything from yarn production through to finished products, making it flexible and self reliant.

“It is a lot to manage, but it gives us the ability to really control our destiny and be able to supply our customers with what they need out of their supply chain,” said Steve Layton, president of Polartec. In the midst of COVID-19, even though demand for apparel was down across the industry, Polartec did not face supply problems. “There are things that we don’t control at the end of the day. If a government decides that a certain region needs to shut down or can’t operate, that’s where having a diversified footprint with redundant capabilities comes into play in a big way,” Layton added.

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Creating a globally diversified, vertically integrated supply chain is a complex, costly endeavor that cannot happen overnight. In reality, it will likely take years for firms to shift their sourcing to new markets.

But it can be done. While not every manufacturer or retailer may have the financial wherewithal, expertise or desire to take all elements of production in house, as an alternative, creating a more vertical supply chain can also mean establishing manufacturing partnerships in a tightly knit geographic area.

About 12 years ago, a series of producers in El Salvador created a manufacturing cluster that encompasses all elements that go into activewear, from the polyester pellets through to spinning and cut and sew, enabling faster speed to market that was crucial to convincing clients to switch business over from Asia. This also enabled the producers to take on a growing category. Juan Zighelboim, co-founder and president of TexOps, one of the cluster’s factories, believes that it is possible for other manufacturing companies to create similar specialized sourcing hubs for other categories, provided that they have the right approach and support.

This format of vertical integration also requires companies to be able to identify the other specialized players in their field. Brands can also assist in pointing out ideal producers or suppliers for a particular type of fabric or garment.

From Zighelboim’s perspective, it is also up to brands and retailers to commit to potential producers in order to justify the investment in the factories, which can exceed $100 million for one facility. “If there’s no retailer or brand driving it, it’s very difficult because you’re not going to get a group of people to invest money and build it and hope they come,” he said. Aspects such as capacity requirements will also be driven by brands’ needs.

Brand support doesn’t have to mean financial backing. To Zighelboim, it is more about guaranteeing orders and signing a long-term contract that both partners uphold in terms of work and quality. “There has to be…really serious commitment,” he said. “We’ve got to get away from this transactional mentality. It’s got to be strategic, ‘we want you for the long haul, we’re making our bets with you.’”

Owning operations

Some large companies, such as Capri Holdings, have taken supply chain support a step further, going so far as to scoop up their suppliers to take direct control. Last year, the Michael Kors parent acquired its first shoe factory.

And it’s not just happening on the brand side. Milliken is also acquisition oriented.

“You’re going to see a deal strategy from Milliken where we continue to invest in our existing assets, look for acquisitions and adjacencies that really make sense for our strategy and for our markets,” said Lee Hammond, the company’s vice president of supply chain, “and in those places where we can get more value out of a more vertical supply chain.”

Layton said that compared to the few years, it would take to build a new production facility, going the route of a partnership or joint venture could take as short as a year. However, there are limits to what can be done through acquisitions and technology transfers if a company doesn’t have the expertise in a particular area. “The experience piece is really as critical as the capital piece,” said David Karstad, vice president of marketing and creative director of Polartec.

Along with financial capital and investment, human capital and corporate culture is also important to the success of expanding globally. “You want to make sure that the core values of your company are kept and those aren’t lost when you’re going to a new location,” Layton said. “So if you have a heritage on ethics and quality, those need to stand true or otherwise you put the rest of your company’s reputation at stake.”

This ownership model isn’t for everyone. According to Zighelboim, buying factories is more feasible if a company is specialized, as it would be difficult for a brand with a wide product range to make that kind of financial commitment across all of its lines. Antonino Laspina, Italian trade commissioner, also noted that it is predominantly large companies that can engage in this acquisition and ownership strategy.

Coming home

Similar to El Salvador’s activewear cluster, Italy boasts its own pockets of apparel production, with long established, often small suppliers in close proximity to one another. Italy has already seen some companies move production back closer to their headquarters, but Laspina sees COVID-19 potentially accelerating this shift toward reshoring manufacturing.

While onshoring and nearshoring can help guard against transportation and supply issues, particularly when it comes to necessary items such as personal protective equipment, goods produced domestically can come with higher costs. However, experts agree that companies must reconsider how they are making these financial calculations when it comes to sourcing.

“[Sourcing] is not going to be just a pure economic evaluation like it has been in the past, but there will be a combination of political opportunity, political necessities, social necessity, economic necessity,” Laspina said.

Government can also play a role in making a country a more attractive apparel exporter by ensuring that policies are competitive with neighboring nations. In certain nations, this support could extend to financial backing. “If we have a country where it is strategic in terms of exports, then of course, we do expect that the government is going to give some funds and is going to provide some kind of facilitation between business,” Laspina added.

Buhler Quality Yarns, a U.S.-based yarn producer, sources most of its raw materials domestically. According to David Sasso, vice president, sales at Buhler, one of the benefits of this strategy is being able to take advantage of free trade deals, as the inputs are then also covered, whereas they wouldn’t be if they were sourced elsewhere. The company relies on being able to sell its products to other markets under NAFTA and CAFTA, offsetting lower U.S. demand. Sasso believes bringing some elements of production into the U.S. will have to be led by consumer demand.

“It’s got to get to the point where the consumer drives the options for sourcing, and they’re willing to…pay that extra value,” said Sasso. “And it’s going to take a while.”

Sasso noted that one of the hurdles when it comes to creating a localized raw material and fiber sourcing plan is the fact that certain materials are not available in particular markets due to regulations or a lack of production. For instance, some rayons cannot be made in the U.S. due to restrictions from the Environmental Protection Agency. Per Sasso, some of these unavailable fibers have alternatives that are only slightly costlier, further pointing to the need to emphasize value and quality over purely price.

“What I’ve seen is something cheap always turns out to be more expensive than you calculated,” Sasso said. This could mean costs tied to everything from late deliveries to quality issues. “Over the long run, what you know, what you can see, what you can touch, what you can react to quickly—that is the best way for guaranteeing your supply chain.”