Intermediaries are having a moment.
Little has changed in the fundamental laws of transaction. It’s simple supply and demand. What has been improved upon in recent years are the delivery methods for facilitating those transactions via third-party involvement.
Some of the most innovative companies today are following this model, whether it be Uber, Airbnb, Seamless or DoorDash—the setup is the same. These companies don’t produce any goods or hold any inventory. What they do do, and quite well, is provide a way to bring two parties together to the benefit of both. They offer a consistent experience with competitive pricing and solid customer service. The ideas aren’t new, but the method of delivery has evolved.
In my years of experience in and around the sourcing industry, I’ve been fortunate enough to hold a number of roles. I have worked as an agent, worked factory direct, and ran my own wholesale business where I leveraged both my agent and factory relationships. I’m in the somewhat unique position of knowing firsthand the pros and cons of each.
Presently, there’s been a lot of debate from observers and inside companies themselves as to the best approach to handle the sourcing of product. Historically, this work has been farmed out to a partner, known as a buying agent, until swinging 180 degrees over the past 10 years or so as brands began to set up their own in-house offices. I’m not saying there is a right and wrong way to go about it. But it’s clear the terms “agent” and “trading company” have fallen out of favor, as today’s players have been rebranded with titles such as virtual manufacturer, intermediaries and sourcing companies. Having been on both sides of the aisle, I think the current circumstances are leading to an industrywide shift.
I don’t think the sourcing agent is dead, and in fact, may see a resurgence accelerated by Covid.
When it comes to pricing, we’re in a deflationary environment. This only reinforces the fact that everyone is out to get the best product at the best price. Oftentimes this leads to the conclusion of streamlining and a “do-it-yourself” mentality. This may work for some, but for most, it lies outside their area of expertise. This is where the opportunity lies for a virtual manufacturer, who frankly, can do it better than you can.
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Let’s say across the entirety of production maybe 20 percent of factories are A+ manufacturers. Great….if you’re working with them. But in reality, their clients are the top brands, paying premium prices. They offer a wide-range of services, from R&D to design, all in the most sustainable way possible. That leaves the rest of us working with the remaining 80 percent.
All is not lost, however, as virtual manufacturers have the know-how to bring you similar levels of service, price and production from their partners. Having relationships with this tier of suppliers means these players can offer assistance on everything from quality control and compliance to expedited runs at levels that would never be achievable if working with the factories on your own. They bring a consistency of product through channels where that often might not be the case. They also provide improved communication and unified account management.
There’s an old saying in the industry, “You are only as fast as your slowest factory.” This adage continues to be true. What these intermediaries can do is speed up processes all along the supply chain, making your weakest links that much stronger.
The role of the agent from the 90s and 2000s has changed. It’s no longer just calling in an order, selecting a factory and making sure your goods make it to the port. There is true and tangible value added by these providers. Many of the more modern ones have invested heavily in technology. While one or two of the factories you work with may have 3D sampling capability, intermediaries that use this tech bring the ability to all the factories in their matrix, thus elevating the offer for all.
There’s a lot of talk out there about a number of traditional agents having a tough go of it. While this may be true, in those instances its likely due to either a mono-client based model or plain, old-fashioned poor offerings. Listen, if you are in bed with dying or struggling retailers, you’re probably losing sleep.
Many sourcing companies I’m in touch with on a regular basis are flourishing. Here’s why.
Cost control
I’ve heard from retailers, brands and agents that firms are considering closing down their sourcing offices as they look to lessen fixed costs and achieve greater flexibility in an effort to diversify their supply chain. When it comes to the latter, local knowledge is irreplaceable. Utilizing an intermediary can bring assurance that someone else is looking out for your best interests. Without naming specifics, I know of many RFPs circulating out there where companies are doing due diligence to measure the cost benefits of having an office in, say, Hong Kong versus a variable cost model via an agent. Over the past few years, as prices have increased in China, currency fluctuations have become more common and political unrest is a greater issue, people are questioning the need to have an office in a location that might not be as relevant in the years ahead. Particularly one with a high fixed cost. If we learned anything from the past year, it’s that liquidity and access to capital are key and must be an integral part of your strategy.
Breaking up is hard to do
Diversifying the supply chain, and using smaller factories for smaller runs and quicker turns, requires know-how that virtual manufacturers are better equipped to handle. They possess access to a bigger network of known factories, across a wide range of countries. And the more specialized the product—be it bras, outerwear or shoes—the more vital that reach and knowledge are. There are entire companies that solely work in these product categories, and re-creating that experience and product knowledge is virtually impossible. They are able to better leverage economies of scale, whether it’s the capacity at a factory, or the fabrics or trims when compared with a monobrand manufacturer that might not be able to get as many SKUs with low MOQs executed at the same cost, if at all.
Better to stick with what you know
A lot of DTC brands, for example, have succeeded in marketing and consumer acquisition and even having the right product at the right price, but their origins are not in supply chain or logistics. As they scale, the need to optimize is crucial and it’s often better to defer to the expertise of virtual manufacturers and buying offices. As legacy names continue to lose market share, and that volume gets spread to smaller up-and-comers, this need becomes even more apparent. In many cases, DTCs are relying on partners for everything from raw material sourcing and factory selection to financing and even delivery and clearance.
Location, location, location
It is becoming increasingly important to validate your claims. With sustainability, traceability, fair labor and human rights issues at the top of consumers’ minds, you have to be able to justifiably stand by your product. It’s difficult to do that from halfway around the world. You need technology, yes, but what you really need are boots on the ground and on-site visits. The type of thing that only being local can bring.
You never know what’s coming next
While this pandemic may be a once-in-a-generation catastrophe, contingency planning is a staple for all businesses. With the onset of Covid shutdowns, there was little or no travel, no factory visits. For many it became all but impossible to do product development, exercise quality control, test fabrics, etc. Again, all things that are much easier to handle with a local agent. Having access to a major network also comes into play when you never know where the next lockdown will hit. In speaking with some sourcing companies during Covid, it became clear that capacity is being booked in multiple locations to ensure on-time delivery in case of an outbreak. This can only be done if you have access to a large network.
Nothing is given, everything is earned
It may be counterintuitive to pay to outsource something you can do on your own, but this is where economies of scale again come into play. It’s not necessarily the cheapest needle that wins. True cost takes a broader assessment.
With an agent, you only pay when they deliver. The system becomes incentive-based to your benefit. The manufacturer has to have the right fabric, be innovative and deliver on time, or you can easily take your business elsewhere. Everyone you work with needs to bring a competitive advantage or no order is a given. Its no longer the 90s when you got a tech pack and are just quoted a price. To stay competitive you have to be out in the market, be able to provide R&D and assist in product development. This also brings in fresh perspectives and forces competition among both in-house teams and hired firms.
It’s also not just about quoting you a price. It’s about working with the factories and design teams to reverse-engineer products and offer suggestions. Sometimes a small tweak in design, a different fabric recommendation or sewing down a bellow pocket could significantly change an FOB.
People like to call the traditional model outdated, and claim that these companies are past their usefulness, but I wouldn’t count them out. They have long histories, a deep understanding of product and vast networks of connections and factories. It’s hard to put a price on institutional knowledge.
And it’s not just the old guard. I would also keep my eye on relative newcomers like Lever Style and Oculas Global, which are truly innovating the industry and offering services to a whole new generation of brands and retailers.
Having a singular approach is a flawed methodology. An open mind is needed. Perhaps having a sourcing partner is the quickest way to enter a new country, perhaps having a dual approach to encourage competition is the best route. I don’t have all the answers, but I do know that these are questions every business must be asking right now.
Edward Hertzman is founder and president of Sourcing Journal and executive vice president of Fairchild Media Group. Hertzman earned a degree in economics from New York University and spent more than a decade working as a top executive for major sourcing companies all over the world, including Synergies Worldwide and Pearl Global.