What next for apparel sourcing?
Outlook 2021 By Leonie Barrie | 18 January 2021 Just style
Demand for greater speed, inventory accuracy and agility will drive the way products are designed, made and sold
How is the sourcing landscape likely to shift in 2021, and what can apparel firms and their suppliers do to stay ahead, remain competitive and build resilience for the future? Reimagining apparel supply chains and ramping up investments in technology and digital tools to help mitigate risk, speed up production and reduce costs are key, experts say. Also top-of-mind are rewriting the rules on buyer-supplier relationships, end-to-end visibility, and a renewed push for sustainability and carbon neutrality. Jason Kra, president, Li & Fung: Covid-19 has really shown all brands and retailers that we need to have a very good diversified supply chain. Having all your eggs in just one, or a few, baskets has caused disruption and instability for many. Some factories are having to adjust their sewing or manufacturing lines for the items that are in demand today. Bankruptcies and changes in payment terms are causing a cash flow problem for suppliers. Insurance companies are also being conservative by not extending export insurances, so some suppliers are unable to generate cash – even when they have orders to hand. Lastly, logistics is a big issue – the pandemic has caused a significant imbalance in the availability of shipping containers with a build-up in markets like the US, while China and other Asian countries do not have enough to meet demand. While this imbalance will likely correct itself, it is not clear when that will be. Overall, retailers and suppliers must learn to anticipate what is to come, listen out for signals of possible challenges ahead and be extremely agile.
Edwin Keh, CEO, Hong Kong Research Institute of Textiles and Apparel (HKRITA): One of the first victims of the 2020 pandemic was the trust between buyers and suppliers. Many companies will have to rebuild this relationship in 2021. New tools to improve transparency, new commercial agreements, and new trading terms will result in more robust and resilient supply chains. The dynamic and rapid changes that the pandemic has brought about in market demand and distribution channels have accelerated much-needed changes to design tools, purchasing systems, and distribution tools. While the demand for greater speed continues in the supply chain, this is now accompanied by the realisation that the actual goal is inventory accuracy, the agility to respond to market changes, and intelligence about local demand at the SKU level. We are seeing the end of the era of making things in the hopes that consumers will buy somewhere down the line, to a new marketplace where products are made when there is great certainty of demand. Data analytics, predictive tools, and make on demand solutions will be more and more normative. Sustainability, circularity, and carbon neutrality should feature more and more in the way we design, make, transport, store, sell (or lease) products and deal with the reuse and repurposing of post-consumer materials. Access to renewable resources and energy will determine more and more where factories are built, what materials will be used, and how products are handled. Trust in the end-to-end transparency of, and information about, the supply chain will be more and more important to the consumer – and supply chain operators will have to build the tools for real-time tracking of information, and the vocabulary for easy-to-understand point of sale communication of this to the consumer.
Matthijs Crietee, secretary general, International Apparel Federation (IAF): Geographically speaking, some of the current shifts, such as production closer to the market and a decline of Chinese market share, will continue. Trade politics is accelerating the latter, the transition to more flexible sourcing models is fuelling the former trend. From the buyer's side, uncertainty in the world demands that risks are spread across more supplier countries than before. From the manufacturer's side, a need for diversity has also arisen due to loss of trust caused by too much unpaid production and uncertainty over a client's financial health. Globally, manufacturers are broadening their customer bases. Ironically, considering what happened in the spring of 2020, the role of apparel manufacturers in the supply chain has become more strategic. To produce what the consumer wants requires upstream flexibility. Across the supply chain, partnering strategically and communicating transparently among partners is what enables faster, more responsive and more sustainable supply chains. Large brands and retailers will more often work through longer term partnerships with larger manufacturers. But similarly, small upcoming brands will need to work in close collaboration with small and super responsive suppliers, sometimes even being micro-factories right on their doorstep. New processes in the supply chain will require a new contract between buyers and suppliers, figuratively and literally speaking. Transparency will be a huge issue. Tier 1 suppliers will face pressure, but also opportunities to play an important role in acquiring more transparency upstream for their clients. Alongside the physical and financial stream in the supply chain, in 2021 the data stream will be key.
Dr Sheng Lu, associate professor at the Department of Fashion and Apparel Studies at the University of Delaware: Apparel companies' sourcing and supply chain strategies will continue to evolve in response to consumers' shifting demand, the impact of Covid-19, and the new policy environment. Several trends are worth watching in 2021. #1: Sourcing bases at the country level will stay relatively stable in 2021 overall. For example, although it sounds a little contradictory, fashion companies will continue to treat China as an essential sourcing base but further reduce their 'China exposure,' a process that started years before the tariff war. Most apparel sourcing orders that leave China will go to China's competitors in Asia, such as Vietnam, Bangladesh and Cambodia. This means that Asia, as a whole, will remain the single largest source of apparel imports, particularly for US and Asia-based fashion companies. In comparison, near-sourcing is still NOT likely to happen on a large scale, mainly because it requires enormous new investments to rebuild the supply chain, and most fashion companies do not have the resources to do so during the pandemic. #2: Sourcing diversification is slowing down at a company level, and more apparel firms are switching to consolidate their existing sourcing base. For example, the 2020 USFIA benchmarking study found close to half of respondents said they plan to "source from the same number of countries, but work with fewer vendors" through 2022. Another 20% said they would "source from fewer countries and work with fewer vendors." The results are understandable – competition in the apparel industry is becoming supply chain-based. Building a strategic partnership with high-quality vendors will play an ever more critical role in supporting the efforts of fashion brands and retailers to achieve speed to market, flexibility and agility, sourcing cost control, and low compliance risk. Thus, apparel companies find it more urgent and rewarding to consolidate their existing sourcing base and resources and strengthen relationships with their key vendors. #3: Apparel sourcing executives still need to keep a close watch on trade policy in 2021. However, we may see fewer news headlines about trade and more "behind the door" advocacy and diplomacy. Specifically:
US Section 301 actions. While the punitive tariffs on Chinese goods may not go away anytime soon, there could be a fight over whether the new Biden administration should continue to grant certain companies exclusions from those tariffs. Further, in October 2020, the Trump administration launched two new Section 301 investigations on Vietnam regarding its import and use of timber and reported currency undervaluation. The case is pending, but the stakes are high for fashion companies – Vietnam is often seen as the best alternative to sourcing from China and already accounts for nearly 20% of total US apparel imports.
The US-China relationship. We all know the relationship is at its low-point, but the fact is many US fashion companies still treat China as one of their most promising markets. China also continues to expand its role in the Asia-based textile and apparel supply chain. In a nutshell, more than ever, apparel executives need to care about what is going on in geopolitics. Hopefully, "tough times can breed positive outcomes."
CPTPP and RCEP. With the reaching of the Regional Comprehensive Economic Partnership (RCEP) in November 2020, there are growing calls for the new Biden administration to consider rejoining the Trans-Pacific Partnership (TPP) in some format to showcase the US presence in the Asia-Pacific region. To make the situation even more complicated, China has openly expressed its interest in joining the Comprehensive Progressive Agreement of the Trans-Pacific Partnership (CPTPP), commonly known as 'the TPP without the US.' 2021 will be a critical time for all stakeholders, including the apparel sector, to debate various trade policy options that could shape the future trade architecture in the Asia-Pacific region.
Brexit. Brexit will enter a new phase in 2021 after the transition period ends on 31 December 2020. On the positive side, there is a playbook to follow: the UK has announced its new tariff schedules for various scenarios, which provide critical market predictability. There might also be a new US-UK free trade agreement in the first half of the year, which will be exciting news for the apparel sector, particularly those in the luxury segment. However, as the US Trade Promotion Authority (TPA) is set to expire in July 2021, when and how soon such an agreement will enter into force will be another story. By no means will trade policy in 2021 be boring.
Julia Hughes, president, United States Fashion Industry Association (USFIA): After the disruption to supply chains that we experienced during 2020, we are optimistic that we will see some positive changes in sourcing and supply chains. The opportunity is for apparel brands and retailers, and the entire supply chain, to start now to implement what some industry insiders call the "lessons from Covid." The industry has found that we can stay close to the customer and design and manufacture the right product with less travel and more decisions made faster from the comfort of our home or office. This represents a great opportunity to take actions that the industry has been talking about for many years. After the tough times of the past year, we are optimistic that the sourcing landscape will reflect a new level of agility and flexibility, combined with social responsibility, that will improve supply chains for the apparel industry.
Robert Antoshak, industry consultant: There could be a significant bump in retail sales this holiday season. However, it is difficult to gauge whether such an increase will be permanent, a sign of pent-up demand, or merely a way for consumers to edge towards some degree of normalcy. Inventories are way down from previous years' levels, but discounting remains – mixed signals from a mixed-up economy. Regardless, while it's a near certainty that online shopping will gain, the pandemic may harm physical shopping due to rolling lockdowns in major consuming markets. But the longer-term outlook for consumer demand, and hence the overall health of our industry, remains in the balance. It's a fool's errand to venture a guess on this market's direction beyond just the immediate near-term. Much will depend on the intensity of the pandemic and government actions to curtail public gatherings. I want to think that the economy – hence demand for our industry's products – will improve as the pandemic passes. In turn, physical shopping may prove to be more resilient than appears to be the case today. Only time will tell. Nevertheless, diversification in sourcing will be essential. If the pandemic has taught us anything as an industry, over-reliance on one or two suppliers only weakens buyers over time. Buyers like to think they run things. Well, they don't. That power resides in the overall supply chain. In some ways, we're not witnessing the decline of globalisation, but the limits of globalisation's benefits. Globalisation can be a force for good – employment in the developing world, competitive prices for products consumed in the developed world. But it can equally be a force that harms the system's very roots – cancelled contracts, labour abuses, and environmental devastation, to name a few. We should re-evaluate the traditional slash and burn approach to sourcing, too. Just because things have worked for the past 25 years doesn't mean it will continue just because that's the way it's always been. Sourcing managers: wake up. Think outside what was and consider what could be – this should be a time of innovation, not cowering. Lynda Petherick, head of retail, Accenture UKI: It's no secret that the fashion retail supply chain was riddled with problems long before Covid-19 – and in fact, the pandemic was instrumental in bringing many of these issues to the fore. After such a challenging year, apparel firms have no choice but to harness technology to establish a more agile supply chain, putting them in the most resilient position possible for unprecedented events and changes to trade. We live in a social media world where consumers see a product and want it instantly, and to keep up, retailers try to respond to that. But let's not confuse this with fast fashion – if fashion must be fast, it must be good and never at the detriment of our suppliers, workers and planet. More agility means faster responses to trends, less excess stock and more flexibility. Smaller and more regular sourcing batches eliminate the need to place huge orders six months in advance and reduce order cancellations, whilst embedding ethics and sustainability throughout every step of the supply chain. Circularity is another vital piece of the supply chain puzzle when it comes to a garment's lifecycle, ensuring resource efficiency through using recycled products and extending their usability through quality and durability. Let's not forget how important visibility and transparency of a product's lifecycle is. Nowadays, consumers love seeing a garment's whole journey from the fabric maker to the shop floor – so apparel firms that can tap into this as an experience may build stronger consumer relationships whilst holding themselves to account. Rajiv Sharma, group chief executive, Coats: Pre-Covid, the apparel industry was under pressure to improve speed, lower cost, become more innovative, be more transparent, connect digitally and be more responsive to customer needs. Covid has acted as an accelerant to these pre-existing challenges. However, in a post-Covid world the industry will be faced with two more challenges: agility and resilience. 2020 demonstrated how a flexible global supply chain provides greater resilience in a crisis. It has enabled manufacturers to shift their operations away from regions with government lockdowns and effectively stay one step ahead of Covid as it tracks round the globe. Suppliers could focus on the following to stay ahead in a post-Covid world: • Build nearshoring capacity; • Digitise and automate manufacturing and warehousing; • Build manufacturing on demand capability; • Increase use of sustainable forms of energy, materials and manufacturing; • Environmental, Social and Corporate Governance (ESG). Efficiency and agility will come through digital transformation. While our industry has traditionally been behind others, it is catching up. The next five years will see extensive digitisation of our supply chain. Sustainability and ESG have moved even further up the agenda for consumers and brands. This has made it a priority for the entire supply chain. ESG is a source of competitive advantage for those who can verifiably demonstrate they have it deeply embedded in their organisation. While 2021 will continue to be economically challenging for our industry it will create opportunities for many companies that have a focus on supply chain efficiency, resilience, transparency, ESG, innovation, digital, speed and agility.
Rick Horwitch, vice president - global retail lead & supply chain strategy, Bureau Veritas Consumer Products Services: Given the events of the past year, the answer to this question is summed up as: disrupted, digitised, innovative and flexible. In March and April the global supply chain practically stopped. Then, out of necessity, pivoted to meet the sudden change in demand and shopping. How the consumer engages with the retailer has changed, forever. To meet this opportunity, strategies must be built around demand and supply: speed, efficiency, regional balance and transparency. Collaboration and a commitment to trust across the entire chain can no longer be a catch phrase – this needs to be a foundational principle, for the greater good. The key is to create a collaborative value equation that addresses the entire product cycle (concept to consumer to post-consumer). We are living through an amazing retail renaissance that is driven by choice, innovation, digitisation, product and social justice and high quality products and processes. What is not changing is the fact that we, as consumers, have certain basic expectations when making a purchase. One is the assumption of quality. We expect that the products we buy, regardless of the outlet, timing and price point, work and won't harm us. The push for speed, sustainability, reduced inventories and margin pressure can have a negative impact on the entire process. This doesn't need to be the case. Digitising processes, harnessing the power of data and collaborative communications will drive significant improvements in speed, cost, quality and customer satisfaction. Most retailers and brands have moved to a balanced sourcing strategy. However, moving production from China to other countries (such as Vietnam) is the "easy" part. The challenge is that the infrastructure (ports, logistics, fibre, yarn, textiles, trims, quality services and production/workforce capacity and capabilities) could be lacking. I believe 2021 will see an acceleration in:
Chinese, Korean and Taiwanese suppliers continuing to invest and expand abroad (Vietnam/Southeast Asia, AGOA, Americas) to verticalise these regions.
Regional sourcing closer to the consumer will continue to expand (Asia for Asia, EMEA for EMEA, Americas for Americas).
Enhanced collaboration and communication through the adoption of digital tools for every aspect of the chain (design, samples, fit, colour, product development, quality etc).
Stephen Lamar, president and CEO, American Apparel & Footwear Association (AAFA): Diversification, dexterity, and digitalisation will be the watchwords for successful supply chains in 2021 and beyond. Being nimble, employing technology smartly, and minimising risk will be critical to thrive and successfully navigate obstacles in the Covid-19 era. Some of these obstacles are already known. Trump era tariffs on China, and possibly on Vietnam, that persist into the Biden administration will mean continued costs imposed on importers. But some of the biggest obstacles are still unknown. Changing regulatory requirements, at either the federal or state level, will also affect supply chains. AAFA will ensure that these governments recognise the critical role of responsible global value chains, creating well-paying US jobs. We will also fight harder than ever to convey how tariffs and poorly implemented and enforced policies harm US companies in our industry and the more than 4 million US workers they employ. While trade policy may take a lower profile in the Biden administration initially, it will be pursued in a manner that is less chaotic, more predictable, and more multilateral than the past four years. The Biden administration will be tough on China – but "smart tough" – to advance well-articulated American goals. Job number one will continue to be recovery from Covid-19. This means stimulus policies to sustain the economy until it can sustain itself and common-sense Covid-19 management until a vaccine is widely distributed. We also need to future proof our supply chains, building and funding those public-private partnerships that ensure our industry stays resilient in the face of future such threats.
Mike Flanagan, CEO of apparel industry consultancy Clothesource:
Globally: Four themes will remain constant in 2021: China will continue to dominate rich-country clothing imports; production is still not "coming home"; Africa isn't the "future of clothes manufacture"; and robots aren't going to make all – possibly not even some – of our clothes. But, with the US set to rejoin the Paris Climate Agreement, attention in the climate debate will switch towards using technology and global cooperation to develop resilience where people need it most: in the desperately poor countries most reliant on exporting garments. There's also China, which has no respect for laws, and needs to be dealt with. The US, EU, the UK and Japan are far from agreeing how – but do completely agree they must lead on dealing with the menace. Ultimately in any market: the supplier must bend to the customer.
Brexit: To all intents and purposes, no clothing sold in Britain is manufactured in Britain. There will be some increase in the cost of European clothing (because many garments made in the European Economic Area (EEA) will no longer qualify for duty-free access: they won't meet the origination requirement). And delays at British ports, whose costs (says Tesco) will be borne by suppliers, not retailers. The timing of how Britain adjusts to Brexit is currently very unclear. Britain's clothing industry will, of course, adapt to it – when we know what "it" is – but I think adapting will include forcing Boris Johnson's government to honour his post-Referendum promise of staying in the Single Market. But in the first six months, the downside of that decision will certainly be visible. Shops will be closed for much of the year anyway – so there will be lots of government cash to help businesses restructure for the retail boom in 2022.
EU: Because we can't tell how long it will take for the reality of Brexit to become clear, we also can't tell how long the EU's negotiation resources will be tied up with the disappearance of its second-biggest trading partner. But it's difficult to see any major developments in the EU's clothing supply chains – except to join its Western peers in putting China back in its box. At the end of 2020, the Comprehensive Agreement on Investment (CAI) the EU signed with China was criticised. This is just a reminder that those Western peers dominate the world's trade because they tolerate criticism, not in spite of it. China's still far poorer than them because it doesn't.