When McKinsey asked 38 procurement officers in the apparel industry if they plan to increase their nearshoring share, 71 percent said yes. Of those, 13 percent cited plans to increase penetration by more than 10 percent. It’s not surprising. From increased shipping prices from Asia, to Customs and Border Protection (CBP) and legislative actions banning cotton products from China’s Xinjiang Uyghur Autonomous Region, it makes sense to de-risk one’s sourcing map. Throw in duty-free countries just across the border that are also receiving government and private investments to improve vertical infrastructure and skills, and the options grow.
But nearshoring needn’t be an all-or-nothing proposition. Companies just need to figure out what makes sense for their company big picture—per category, per material, per season, factoring in timing and price as well—and then forge a hybrid model.
To help make sense of it all, Sourcing Journal gathered Peter Bouyounan, principal industry solution advisor, manufacturing, Oracle Netsuite; Kimberly Glas, president and CEO, National Council of Textile Organizations (NCTO); and Scott Lercel, VP of global sourcing, Dick’s Sporting Goods, for the webinar “The Nearshoring Boom: Myth or Reality?” Here, they share their expertise and dispel some common misconceptions.
Myth: Price is the most important Factor
Reality: It’s easy to be swayed when citing cheaper Asian production prices vs the Americas, but companies need to look at the bigger picture. In an analysis from Werner International, a cotton T-shirt with an Ex-Factory price of $1.61 (China) vs $1.73 (Honduras), ended up with a higher landing price once duties were factored in. “It’s not just about cost,” said Dick’s Sporting Goods’ Lercel. “Initial cost and landed costs are good points of measure, but it’s also about margin.” He explained how increased speed-to-market rates from sourcing closer to home can boost profits. “If you can shave 60 days off shipping, you can add 60 days to the selling duration,” he said, which translates to fewer markdowns.
Other factors that can offset price: sustainability and visibility. There’s no argument that it takes less fuel to bring in goods closer to home, meaning less emitted greenhouse gasses, but closer production also means greater insight and visibility into operations. “Sustainability impacts happen very far upstream in spinning, knitting and dyeing, well before it gets to the cut-and-sew phase, and you have better insights when you’re not thousands of miles away,” Lercel said. Plus, newer facilities being built in the Americas must meet newer standards, so there’s an inherent confidence built in.
Myth: Central America can only do basics and doesn’t have the skills to be competitive
Reality: No one will dispute that China and Vietnam have the advantage of tremendous verticalization and sophistication, but the Central American region is increasing in this realm due to massive dollar investments. So while basics remain important, the capabilities of the region in cut-and-sew have been expanding. “Years ago, such thoughts on basics might have been true, but today, we continue to push manufacturers in the region on our expectations,” Lercel said. “Now we have them producing goods that have knit collars, button-front pockets, or full-zip hoodies. There is more CMT [cut-make-trim] and we are seeing increased capabilities from a workmanship standpoint as well.”
Myth: The region isn’t getting the investment it needs to scale up
Reality: At the end of last year, Parkdale Mills, a major U.S. cotton yarn spinner, made a significant investment with a Vice President Kamala Harris initiative of a $150 million investment in yarn spinning in Honduras. And last week, the State Department announced that Honduran companies and other regional companies were making $350 million of yarn and fabric investment in the region. “Overall, we’re aware of $900 million to be invested in yarn and fabric this year, and that’s not even quantifying the cut-and-sew investment,” said NCTO’s Glas, adding that for every textile job created, about 20 jobs are supported in cut and sew. “This will have an exponential employment impact, and when there’s more sourcing in the region, it helps the U.S. industry too.”
Even overseas companies are getting into the action. “Some of our key vendors, who are Asian vendors, have made investments in the region, which is quite telling,” said Lercel.
Myth: The region can only do cotton and naturals
Reality: While Peru for example is known for Pima cotton and beautiful alpaca fiber, there is increasing capacity for synthetics. “For the last 10 years, Peru has been advancing their techniques and have been equipped with the ability to use fabrics like modal, micro modal, tri-blends, polyester,” said Oracle Netsuite’s Bouyounan, adding that they’ve also been supporting major brands like Hugo Boss, Polo by Ralph Lauren, Burberry and many others in this high-end realm. “So, Peru certainly has the ability to source and to support manufacturing of these blends.”
Myth: Poly chips for synthetics must still be sourced from Asia
Reality: While 85 percent of manmade fiber is coming from Asia, this can hold up lead time for factories producing garments south of the border. “We have to help feed the yarn and fabric supply in the [Central America] region,” said Glas. “It will come over time.” Lercel agreed, noting that about 50 percent of Dick’s production in the region is poly based, and Dick’s actively pushes to have more locally sourced poly chips so nothing gets held up waiting for China imports. “It’s up to us as leaders in the industry to help guide our vendor partners,” he added.
Myth: Cotton is cotton
Reality: With various laws cracking down on unethically sourced cotton, not to mention consumer sentiment turning against non-compliant brands and retailers, companies need to de-risk their cotton sourcing. About 20 percent of the world’s cotton is grown in Xinjiang and has been linked to forced labor, and the CBP has been given more resources to stop the goods and enforce labor laws.
“We need to understand where our cotton is coming from, and this is a real shift,” Glas said, touting the fact that the region uses a lot of U.S. cotton and a lot of regional cotton, which help companies make commitments on transparency and ethical sourcing as well as environmental commitments. “When you source from Honduras, the raw materials are right nearby, which helps de-risk as you’re not waiting on inputs from Asia that are held up.”
Myth: Nearshoring is a Covid stop-gap measure
Reality: It’s true that many companies did turn to the region as a stop-gap measure during Asian pandemic supply chain disruptions, and some will likely return to Asia when things resume because that’s what they know. But others discovered the benefits of sourcing closer to home and will fold it into their matrix. “Most people are seeing over the horizon and understanding that how we did business prior to Covid has got to change, and will change,” Glas said. “I think retailers who got out front on that issue are going to be the ones who reap the benefits.”
Click the image above to watch the full webinar on demand.