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Sourcing Costs Are Set to Rise, And Only Data Can Offset the Increase

In the short term, sourcing costs could be sent soaring on the heels of one tweet. Over the longer term, costs will still climb, though there will be ways to mitigate the impact of the increases as companies look to focus on more than just price.

“The industry has definitely started to pivot away from price and cost as the only factor to the suite of multiple dimensions that are really important—the speed, the quality, the innovation and the price,” Christopher Moses, senior director of strategic sourcing and product innovation at Gap Inc., said speaking at Sourcing Summit: Hong Kong last week. “What will happen, I suspect, is that of course you will have prices increase in terms of labor costs and also the complexity of doing business for online demand patterns…What has to happen simultaneously with the retailers and the people selling the product is they have to get better at extracting economic value from different strategies.”

The days of extracting that value from the post-quota era have been gone for some years, Moses said, so now brands and retailers will have to get savvier about saving on price, particularly as new duties and tariffs can pop up at a moment’s notice, further squeezing already strained margins.

“We’re kind of in the early stages of that transition now, so sometimes it reverts back to price,” Moses said. [So sourcing costs are] inflationary, but I think that they key will be to extract more possibilities from different capabilities.”

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One capability Brandix has turned to in order to offset cost increases, is data.

“Price, currency, trade wars—all of these things are naturally occurring. Now, what we’ve done as an organization is actually try to use the power of data to really attack it,” said Afham Ali, director of supply chain, for the Sri Lanka based apparel manufacturer.

Roughly 65 percent of a product cost is made up of direct charges and raw materials, Ali explained. Of the remaining 35 percent, 20 percent is labor cost and 15 percent is tied to investments and any waste. Breaking costs down like this, Brandix is able to take actions that are very specific to the cost line item of the product. What’s more, through a partnership with Accenture, Brandix has outsourced services to the global management company to help it streamline back office processes and tap into analytics for operational efficiency.

“It’s about automating the process, not really robotic production,” Ali said. “There’s a lot of promise there and we’re seeing the power of that.”

It’s also about having greater visibility into the supply chain and what it takes to make it operate at the lowest possible cost.

“I think the price is definitely something affects all of us,” said Jamin Dick, head of supply chain, North America for Alibaba B2B. “You won’t be surprised to hear your supply chain guys talking about supply chain in this regard because it is one of the biggest cost levers people use to manage costs when they are under pressure.”

One thing companies aren’t considering perhaps as much as they should be, however, is looking at cost mitigation through the lens of customs clearance.

“There are a lot of people paying too much, to the brokerage or for duties they’re not aware of, or things like the first sale program allowing you to pay duties on the ex-factory costs instead of the fully landed cost, or duty draw back programs. They’re also not using free trade zones effectively,” Dick explained. “This is an area that can get complex, but a lot of costs can be brought down in that area, so I think it’s something we need to be looking at.”

When it comes to the drive for faster everything and the costs that come with that, Dick said brands and retailers shouldn’t all be striving for next-day and free shipping. That he said—despite the apparent demand for buy now, get now—is a mistake.

“Amazon and others have made that relevant but…there are people who are fine to wait a little bit if the product is very unique and special. If it’s lightbulbs then you better get it there fast,” Dick said. “If you’re a large Fortune 500 company, I think moving your product out to the edge of the network where it’s closer to customers is almost a must. But if you’re a smaller company or you have a lot of SKUs, that doesn’t work, so then you’re going to have to figure out how to ship it faster to the end consumer without spreading your inventory around.”

One of the fastest growing trends Alibaba has seen, Dick said, is an increasing amount of direct to factory shipping—which the e-commerce company itself has helped with via new logistics solutions for its customers that have seen product ship from a factory in China to the end customer in less than a week.

Companies, Dick said, are ramping up their use of local and regional providers as opposed to having just one big relationship with a FedEx or UPS.

“It’s a little more complex than it used to be if you have more partners to work with, but it’s a strategy that’s working. Especially in the U.S.,” Dick said.