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Who Stands to Gain from 71% Jump in Nearshoring Plans?

With supply chain disruptions rocking the apparel industry, it would seem the oft-talked about shift to nearshoring is gaining steam.

In a McKinsey & Co. survey of 38 chief procurement officers at clothing companies, 71 percent said they plan to increase their nearshoring share, including 13 percent who expect to do so by more than 10 percentage points. Twenty-four percent plan to increase reshoring in their sourcing strategy.

In Europe—the home of two-thirds of the survey’s respondents—the attention to nearshoring has translated into increased interest in Turkey. When the consultancy asked CPOs to rank countries according to sourcing potential over the next few years, Turkey took the third spot, marking the first time in the survey’s 10-year history when a near-shore country landed in the top five.

For U.S. companies, Central America ranks highest on the list for future nearshore activities. Roughly eight of 10 North American apparel players—nearly one-quarter of respondents are based in the region—plan on increasing their company’s sourcing value share in Central America.

An “advantage of nearshoring is that the shorter transport routes increase sustainability while lowering greenhouse emissions,” Saskia Hedrich, the report’s co-author, said in a statement. “Nearshoring also allows more flexible in-season production, which helps to reduce overproduction.”

The increased interest in nearshoring aligns with the latest data on denim imports from the Commerce Department’s Office of Textiles & Apparel. According to OTEXA, blue jeans imports from Western Hemisphere countries to the U.S. rose 43.46 percent through September of this year compared to the same period in 2020 to a value of $610.5 million. Overall imports, by comparison, rose 28.56 percent to $2.54 billion.

Asia, of course, continued to dominate executives’ sourcing plans, with Bangladesh and Vietnam leading the way once again. When asked what countries they see as “top 3 country hot spots” over the next several years, 61 percent of respondents selected Bangladesh, including 24 percent who ranked it first. Vietnam came second, with 34 percent of CPOs naming it, including 13 percent who placed it first. Turkey also received the support of 34 percent of the executives, but received fewer first- and second-place votes. Indonesia and China came fourth and fifth overall, both receiving the same percentage of first-place votes—11 percent—as Turkey.

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“Harbor shutdowns, port congestion, container shortages and capacity issues in sea and air freight are putting the fashion industry under massive pressure,” Karl-Hendrik Magnus, a senior partner at McKinsey and the leader of its Apparel, Fashion & Luxury practice, said in a statement. “For the first time, shipping disruptions are becoming the biggest cost driver.”

When allowed to select five demand forces and supply risks impacting their company’s future approach towards speed and supply-chain flexibility, 74 percent of respondents named shipping disruptions. An “overall increased volatility of demand” came in second, with 66 percent placing it in their top five concerns and 24 percent ranking it first—well above the 8 percent who said the same for shipping disruptions. McKinsey specifically called out the impact of pent-up demand due to Covid-19 and the pressure the growing income gap is putting on the mid-price segment. The pandemic arrived in third with 61 percent of the vote, including 13 percent who placed it first.

In fact, though shipping disruption was the most-cited factor overall, it received the same or fewer first-place rankings than “disruptions in raw-material supply,” “geopolitical supply-chain risks,” “growing online share” and “increased competition by new generation of fast-fashion players.”

When it comes to sourcing-cost inflation, however, shipping costs are clearly the largest concern for procurement executives, with 63 percent saying they expect them to have a “very high impact” on sourcing cost development within the next 12 months and 19 percent saying they anticipate they will have a “high impact.” Sixty-nine percent said they expect the cost of fabrics and yarns to have a very high or high impact. Labor costs came in a distant third with 21 percent.

“The era of sourcing continuous cost improvement is being challenged as never before and there’s an increasing focus on other competing goals”, Patricio Ibáñez, co-author of the study and partner at McKinsey, said in a statement. “Fifty percent of companies have already embarked on extensive transformations to increase sourcing speed and flexibility.”

For example, Crocs has been vocal about diversifying its matrix to include production in Indonesia and India while Nike, by contrast, is doubling down on manufacturing in Vietnam, where it lost at least 10 weeks of output in the wake of extended factory closures.

The transformations Ibáñez hinted at include changes to the role of sourcing offices—one-quarter are planning a “very high” degree of transformation by 2025—assortment planning, sampling and supplier partnerships. One in three companies plan to improve demand planning by 10 to 20 percent by 2025, and 13 percent are aiming higher. Fifty-eight percent of respondents said they hope to boost the share of products sold at full price by more than five percentage points.

Most companies surveyed plan on following what McKinsey called a “less is more” approach that includes greater in-season reactivity, but fewer assortment options and complexity. One-third of respondents said they plan to trim their products by 5 to 10 percent over the next four years. More than one-fifth expect to cut down by 10 to 20 percent. Almost three-quarters of “midmarket players” hope to decrease their assortment by up to 20 percent.

McKinsey published the results of its sixth Apparel Chief Purchasing Officer Survey Friday. The survey’s respondents represent a mix of international apparel and sportswear brands and retailers who together command roughly $100 billion of sourcing volume.