Nearshoring and automation have been bandied about as buzzwords in recent years, with some companies embracing each to advance their efforts in optimizing apparel production, and others still reeling and wondering which foot to put forward first.
But whether they’re prepared or not, new findings from McKinsey & Company indicate mass-market apparel players must make “bold” investments in nearshoring and automation “immediately” if they have any hopes of success in today’s altered industry.
“Mass-market apparel players that aim to win tomorrow should have started yesterday,” said McKinsey’s report, “Is Apparel Manufacturing Coming Home? Nearshoring, automation and sustainability—establishing a demand-focused apparel value chain,” launched at the Sourcing Journal Summit in New York Thursday.
Today, mass-market apparel brands tied up in their traditional supply chain processes are competing with niche and nimble online startups built for better response to consumer demands and changing trends. So far, it’s proving an uphill battle for brands that can’t get out of their own way to compete with these new companies quickly gaining both market share and clout.
What’s more, increasing pressure on profitability as the promotional market drives full-price sell-throughs down, as well as rising concerns about overproduction, point to an even greater need for speed to market and in-season reactivity, which McKinsey says is “more critical than ever.”
“While fast fashion has been the success formula for some verticals since over a decade, the need for speed is now becoming an imperative for large parts of the industry and is what’s driving nearshoring attractiveness,” said Karl-Hendrik Magnus, partner at McKinsey and Company and co-author of the report.
Digital consumer journeys and e-commerce have fueled more spiky demand, according to Magnus, and best-selling items can be gone in a matter of hours rather than weeks.
“Faster reactivity through reduced lead times is likely the biggest lever apparel brands can pull to prevent the painful inventories and markdowns of the recent seasons,” Magnus said. “In addition, nearshoring holds a huge opportunity to reduce waste and produce what is actually sold, thereby driving the important sustainability mission of the fashion industry.”
Costs at a crossroads
Twenty years ago, it was en vogue for apparel brands and retailers to move production to Asia to secure the greatest cost advantage, and over the years move from China to its even lower-cost counterparts. But chasing cheap has become outmoded of late as low-cost has, in some cases, become synonymous with low-quality and low-compliance in a world where transparency and ethics are in high demand, too.
“Today, the industry is at a crossroads, where speed beats marginal cost advantage and basic compliance is upgraded to an integrated sustainability strategy,” McKinsey said. “While the traditional supply chain setup is now being challenged as labor costs converge, mass-market brands and retailers are starting to more broadly rethink their sourcing and production models.”
What’s come to the fore for many in light of this reexamining, is that the new supply chain setup will have to involve nearshoring and automation in a big way.
“Moves to increase nearshoring and more automated production models have the potential to further enable sustainability and to support the adaptation of a circular economy in the apparel sector,” the report notes. “Mass-market apparel players that embrace automation technologies to become faster and more sustainable will likely be tomorrow’s winners.”
These players will likely also see the greatest bottom line benefit.
“As the mass-market apparel sector moves to a demand-focused, agile supply model and labor costs increase, automation will play an important role in increasing labor efficiency, throughput and flexibility,” McKinsey said. “Automation will be crucial to increasing the financial visibility of on-demand near- and onshoring models.”
A changing of the guard
It’s one thing to know what’s necessary and quite another to actually implement it—which has largely been the problem for many of the apparel industry’s players that have spent recent years discussing the changes today’s business demands without making any of them.
But the confluence of market shifts, as McKinsey puts it, may force their hands as they face an ever-encroaching fast and efficient fashion future.
And the first step will be addressing speed, though surviving in a market where the definition of fast has moved from six months to six weeks, will require a delicate balance.
“By no means should mass-market apparel brands and retailers aspire to apply speed models to their full assortment—to be successful, they will have to strike the right balance in a multimodal sourcing strategy in which low-cost countries and traditional production will continue to play a big role,” McKinsey noted, adding that, “While moving to a demand-led model requires apparel companies to pull levers in all phases of the fashion cycle, bringing production back closer to consumers with near- or onshoring offers the opportunity to eliminate big chunks of lead time.”
Giving nearshoring added appeal, global trade tensions and rampant tariffs have cast a pallor over offshoring—in addition to its already obvious hindrances to speed—as in the U.S. in particular, there’s little telling when bringing an input or article of clothing in from China could suddenly cost 25 percent more.
Nearshoring by 2025
In a survey done in partnership with Sourcing Journal in September, including insights from industry experts and the readership, McKinsey found that 79 percent of respondents think it’s likely that there will be a step change in nearshoring for speed by 2025.
For North America, the U.S. will be the biggest winner, with 30 percent of respondents indicating the country would be the most important nearshoring market by 2025, followed by Mexico with 20 percent, and 7 percent who count Haiti and Guatemala among the winners.
In the European market, 29 percent of respondents expect Turkey to be the biggest winner in nearshoring for the region, with Morocco coming in next with 10 percent, followed by the 7 percent who believe the U.K. will be the key market.
The biggest setback for many companies in considering bringing more product closer to home has long been labor costs, with lack of capability and capacity trailing as close seconds.
However, as McKinsey notes, the gap between manufacturing labor costs in Western countries compared to places like China, is shrinking.
“Whereas hourly manufacturing labor costs in Turkey were more than five times higher than those in China in 2005, the factor diminished to only a factor of 1.6 times by 2017,” according to the report.
And looking at things from a landed cost perspective, it continues to make the case for nearshoring being economically viable.
For instance, McKinsey notes, “a U.S. apparel company that moves production of a basic jean from either Bangladesh or China to Mexico can maintain or even slightly increase its margin, even without higher full-price sell-through. For Europe, unit costs still remain significantly lower when sourcing from Bangladesh, but reshoring from China to Turkey is economically viable. Landed cost prices for denim, for example, can be 3 percent lower when sourced from Turkey.”
The economics of nearshoring are gaining attraction, and according to McKinsey, a 5-percentage point increase in sell-through would make up for the higher labor costs encountered closer to home.
“Costs are equalizing, even in shifts from low-cost countries, such as Bangladesh, to nearshore markets,” McKinsey said. “If a U.S. company were to source a pair of jeans from Mexico instead of Bangladesh, the product’s margin before SG&A would increase by about 3 percentage points.”
By 2025, 82 percent of respondents in the McKinsey-Sourcing Journal survey expect to move more than 10 percent of their total sourcing volume to nearshoring locales.
And when factoring in automation, as McKinsey puts it, it could level the playing field in terms of costs, making Mexico competitive with Bangladesh.
If all talked-about automation technologies are realized as tools for the apparel industry, automation will be able to cut 40 percent to 70 percent of labor time out of the supply chain, according to McKinsey.
For a pair of jeans, automation could cut the production time per pair from 36 minutes to 20 minutes looking at things conservatively, or that time could drop to 11 minutes in a more optimistic scenario, since sewing accounts for more than half of the labor time in producing a pair of denim trousers.
Translating all of this into potential cost savings, it could range from a 20 cent per-pair savings on jeans sourcing in Bangladesh, up to $14.80 for denim produced somewhere like Germany, depending on how widely adopted the technologies become.
“Automation of denim production in Turkey, a main nearshoring country for the European market, will achieve cost savings of between $1.30 and $2.00 per pair of jeans, whereas automation benefits in lower-cost Mexico, a nearshore market to the U.S., will fall in the $0.60 to $0.90 range,” McKinsey noted.
Arguably, the bigger impact on costs will be the higher full-price sell throughs and resulting margin improvements that brands and retailers will be able to achieve thanks to greater speed to market.
Collectively, the cost savings and the quickened lead times make a case for implementing advanced manufacturing technologies in nearshore and onshore markets. But there remains quite a bit to be done to get the apparel industry from here to there—including developing a Tier 2 and Tier 3 supply landscape in key nearshoring locales, with capabilities for manufacturing at scale.
“Nearshoring and automizing production are long-term shifts. First, local capabilities and fabric supplies need to be sorted and technologies need to mature,” Magnus said. “What we expect in the short-term, however, is that more and more leading companies will get off the balcony and step onto the dancefloor to run sizeable pilots for selected garment types with higher nearshore shares and new technologies. This will allow them to test and learn while they develop a clearer perspective of their long-term supply chain strategy.”