Deciding where and how to get your goods has become a difficult equation. In addition to first cost, companies now must consider numerous risks and regulations, including geopolitical upheaval, transportation disruption and new trade policies.
During the United States Fashion Industry Association’s 2022 Trade & Transportation Conference, speakers from sourcing, manufacturing and the legal community discussed the challenges and changes most affecting sourcing operations.
One difficulty in dealing with risks, according to Ron Klein, principal at PwC Advisory Services LLC, is the siloed approach to preparedness. Each department has its own area of focus—whether it is sustainability teams concerned about social compliance, sourcing departments worried about supply of goods or supply chain management teams tracking logistics. “The challenge for companies now is how do they coordinate and develop a consistent framework and measurement of how we think about risk across the enterprise,” Klein said.
In a panel, Akiko Inui, former senior vice president, value chain strategies at PVH Corp., said that one risk mitigation tactic is spreading sourcing across multiple countries. If possible, establishing vertical structures also helps to reduce supply hiccups.
Tara Hoffmann, managing director at Spectra Private Brands, added that companies should consider diversification in each category, including balancing onshoring, nearshoring and offshoring. She expects prospects for broadening the sourcing map to grow next year. “There’s going to be potentially a lot of open capacities out there, and a lot of these countries that have been very full up until this point,” said Hoffmann. “So while there may be sales headwinds, there should be lots of opportunity to try out new countries and strategies, really expand supply chains in a way that maybe you weren’t able to do over the last couple years.”
Per Inui, onshoring does not need to require a huge investment in all vertical capabilities. “Onshoring doesn’t have to be setting up a massive infrastructure; it could be that last mile processing to make sure you have the right product, at the right time, in the right quantities to deliver to the customers and the market,” she said.
Reflecting the growing prioritization of diversification, new supplier development was among the top capabilities mentioned by sourcing professionals in a PwC survey. Reflecting this strategy, companies are creating new sourcing offices overseas, particularly in Southeast Asia and South Asia, with the top destinations being Singapore, Vietnam, India and Malaysia. When choosing where to open, the PwC survey showed the key priorities are location, labor and capabilities. “Sourcing leaders are obviously feeling the impacts of the focus on cost due to inflation and thinking about where should they put boots on the ground to increase surety of supply, and still working on overall speed to market,” said Klein.
Diversification is not without challenges. Klein shared an anecdote of a Hong Kong-based sourcing professional who was working to diversify his supplier base into Southeast Asia. The company’s chosen country for expansion had a coup d’état half a year later, forcing them to abandon the existing plans. “The countries where we traditionally have gotten goods from, these are not easy places to operate. They’re not necessarily the most transparent when it comes to regulation and have challenges when it comes to investment in infrastructure,” said Klein.
Rather than the traditional model where companies relied on suppliers to make the needed investments for production, it now needs to be more of a partnership. “The capacity is not to be found, you need to co-create it with some of your strategic suppliers,” said Klein.
Weighing in on partnerships, Inui said, “There’s a limitation to what one company can do, even if it’s a large company. It’s really important to get strategic suppliers and like-minded brands, and necessary organizations, associations to all come together and work toward that.” One idea from brand and retailer discussions is having the same strategic supplier present across multiple geographies so that the same partner can produce big batches offshore and smaller replenishment runs closer to the retail market.
Agreeing on the place for partnerships, Hoffman added, “Oftentimes we have large customers coming into countries building infrastructures that work really well for them and their models but isn’t able to be duplicated around a large segment of customers.”
There has been diversification away from China, but the country is still the biggest player for U.S. apparel imports. Despite tariffs on Chinese imports, Klein noted it remains “cost competitive.” Another thing in China’s favor is its size, and the resultant capacity that comes with a large population. “When you think about that type of competitive advantage, it’s not one that can be found overnight in any other new geography,” he said.
Since the Biden administration entered office in 2021, Kelin said the industry was waiting to see if there would be a “reset” of the relationship between the United States and China, which did not manifest. “Tensions will remain high. And there could always be unforeseen events or escalations in trade relationships that make it more difficult for us to do business together in the future,” he said.
A risk within China sourcing has been the nation’s zero-Covid policy. Efforts to tamp down the virus’ spread have caused sudden closures at factories, grinding production to a halt, per Peter Tirschwell, vice president, maritime, trade and supply chain at S&P Global Market Intelligence.
Another concern for supply chains that rely on China is the escalating tension between Beijing and Taiwan. While Klein pointed out he is not predicting war between China and Taiwan, he could foresee a conflict following the “same playbook” as the Russia-Ukraine war, in which “the world will kind of split into new spheres of action and new types of relationships.”
“Forty percent of every ocean container that comes into this country comes from China,” said Tirschwell. “What happens if China goes to war with Taiwan?”
Legislative movements are also impacting how attractive or complicated certain sourcing destinations are.
Regarding the Section 301 tariffs, David Spooner, USFIA Washington counsel and partner at Barnes & Thornburg LLP, sees the potential for legislation during the lame duck session that would require the U.S. Trade Representative to consider exclusions. There is also a challenge in the Court of International Trade to tranches three and four that include apparel, which will be decided this spring. The USTR is also currently performing a required review of Section 301, and the International Trade Commission is conducting a study on the financial effect of the tariffs.
In free trade agreements, the Indo Pacific Economic Framework launched in September. Spooner is “skeptical of the success of this initiative” because “the objectives are ill defined, the United States has made it clear that [it] will not offer tariff concessions, and countries can opt in and out of what negotiating tables they want to participate in.”
Ethiopia’s AGOA benefits were suspended due to the conflict in Tigray, but there was a recent cease fire agreement. “I haven’t heard any news about AGOA benefits being reinstated for Ethiopia, but it’s something we need to keep an eye on,” said Spooner.
CAFTA-DR has been a focus for the White House. “In part to help stem the flow of migrants from Central America, the administration has been eager to consult the industry about what can be done to improve the apparel portion of CAFTA-DR, particularly the so-called short supply provisions,” Spooner noted.
Spooner expects that congress may review two expired trade programs during the lame duck session: the Generalized System of Preferences and the Miscellaneous Tariff Bill that would temporarily suspend tariffs on certain products.
In addition to where goods come from, policy also affects how goods enter the U.S. John Pellegrini, USFIA customs consultant, cautioned that companies must be careful when buying on delivered duty paid (DDP) terms, which might be suggested by shippers as a means to circumvent duties or forced labor regulations. There was a recent court case in which a foreign supplier imported merchandise under the buyer’s name. “If you’re buying on DDP terms, you want to make sure at a minimum that the importer does not name you as the ultimate consignee on the 7501,” said Pellegrini. “If you ever need DDP, make it a real domestic transaction.” This means buying from someone with a U.S. address and making payment domestically.
The Federal Trade Commission is also cracking down on false labeling of goods as made in the U.S. “If the product is assembled in the U.S., you’re going to notice you probably have to in some instances tell the consumer where the product’s made,” Pellegrini said.
Legislation—whether pending or in effect—and transparency demands have made supply chain visibility a requirement. “In the past, it might have been more of a nice to have, but today it’s a necessity in order to do business. You have regulations coming up, being discussed and actually being implemented, you have scrutiny from investors and NGOs, and consumers are becoming much more demanding,” said Akiko. “It is going to be very important to have sustainability and traceability, transparency as part of your sourcing strategy going forward.”