The world of global manufacturing is spinning faster than ever.
This story first appeared in the October 11, 2011 issue of WWD. Subscribe Today.
Dynamic changes — from transformations in China’s production landscape to instability in raw material prices — has caused many of the crystal clear norms to become unfocused. Executives have been forced to take fresh approaches and develop new ways of thinking toward where they make their apparel.
When it comes to having a successful sourcing strategy in today’s volatile environment, Rick Helfenbein, president of Luen Thai USA, turns to none other than Albert Einstein for some sage advice: “You have to learn the rules of the game. And then, you have to play better than anyone else.”
The problem, said sourcing experts at the WWD Global Sourcing Forum, is that the rules are changing rapidly and the playing field is in flux.
So Helfenbein offered some other pertinent adages for his fellow manufacturing executives. He told them to “put your customer first,” don’t exit China too fast even though costs have risen significantly, that “the consumer doesn’t care where something is made” and that “the herd mentality is over” and “we are now in the era of analytical sourcing.”
“This supply chain game has a new challenge every day,” Helfenbein said. “The supply chain is always in transition and the transition feels uncomfortable. Nobody likes to change. We all want to come to work every day and do our jobs the same way, but that’s not how it always works. That’s why analytical or sensible sourcing is important.”
Helfenbein said the most important sourcing strategy today is not what country companies are sourcing in or how cheap they can get their production, but is a clear focus on what their customer wants.
“The consumer doesn’t care where something is made,” he said. “They care about what is made. Is it the right item? Is it the right price? Is it marketable? Is it timely? If you don’t focus on your customer, you’re going to lose them.”
With the evolution of the retail landscape and following the economic turmoil of the last few years, there are key lessons to be learned, Helfenbein said. Chief among those, he said, is that “cheaper is not always better.”
“The second is that the value-oriented customer today demands good quality,” he said. “The third is that today’s retailer is driven by a different economic model — this not fulfilling a shipment, not delivering on time is out the window.”
Peter McGrath, founder of McGrath International and former J.C. Penney Co. Inc. product development and sourcing executive, said in today’s volatile environment for raw material costs, sourcing executives should “average your season’s buying strategies into three segments to insure an averaging of volatile prices.”
“In a world of rapid elasticity, business relationships with mutually agreed-upon goals will take you much further than one that is based upon a transactional nature,” McGrath said. “With information technology helping us redefine business relationships, and structural changes such as rapid verticalization within the manufacturing portion of our supply chain, how we work together has dramatically changed. You no longer can win without partnerships.”
He said it’s important to understand and share information between suppliers and customers in areas such as margins, costs and efficiencies, as well as the ability to secure credit and the structure of payment terms.
“Changing terms on a supplier in Bangladesh by 30 days substantially increases the factory’s interest expense,” McGrath said. “But it also causes many unseen consequences, such as higher prices or delivery delays due in part to the lack of credit availability.”
Buying closer to need requires companies to be more flexible in the supply chain, he noted, so sourcing organizations must be faster and more responsive to consumer demand.
“We will have to create more product that innovates, performs and delights,” McGrath said. “This will require sourcing executives to more effectively understand the range of complexity around the products we source.”
Helfenbein also stressed that it’s all about speed to market and having the right product.
“While you’re doing all these things, you still have to be lean in your operation. You don’t have to pick a country, you have to pick a goal for your customer. You have to evaluate a level of quality that you will not stray from. If it comes in the store and it is wrong, throw it out of the store because your customer will get the wrong impression. Check your lead time. You can go longer if it’s basic. There are things that you can do to balance your sourcing strategy.”
Brooks G. Tippett, vice president of operations, and Ann Laidlaw, textile color supply chain manager, at Pantone/X-Rite, talked about the importance of having unified color controls throughout the global supply chain.
“To effectively compete in this global marketplace, it has become more essential for companies to set up a color management process that incorporates tools facilitating product speed to market, production cost efficiencies and good quality control,” Laidlaw said.
Tippett said there are four key components of an effective color management process: A high-quality color standard, a spectrophotometer, digital color communication and procedures that effectively and accurately use all of these tools.
As for the talk today about getting out of or reducing production in China, Helfenbein said not so fast.
“Maybe you should look at China instead of exiting out,” he said. “China still does a lot of things better than anybody else. They do it faster and have great skills that are able to match the needs of our customer.”
He said it’s important to note that in costing a garment, the rule of thumb is that two-thirds of the cost is the fabric and one-third is labor, “so higher labor costs don’t have to kill the garment — the problem in the last year was the fabric price went up so much.”
McGrath predicted that yarn and fabric, and to a lesser degree, garment prices, will have greater price fluctuation that will mirror market conditions in seasons to come.
“Yarn spinners will not stockpile yarn inventory as they did prior to the recession,” he said. “The ups and downs of cotton prices will prevent that from being a sound financial decision for them.”
He said one outcome of the roller-coaster cotton prices of 2011 is that polyester can provide stability in a volatile market.
“Look for a quicker conversion to polyester staple the next time cotton prices start to spike up,” McGrath said.
Helfenbein agreed that controlling costs is key, but it’s not the only consideration.
“Nobody is going to lie to you, wage rates and costs in China keep going up,” he said, citing Asian countries such as Vietnam, Indonesia, Bangladesh and the Philippines as having picked up market share from China. However, he said the problem with those countries is: “The longer we stretch the supply chain, whether it’s manufacturing in Mauritius, or Bangladesh or India, it takes a long time for those goods to get to America,” adding that the same problem exists for those exploring manufacturing in central or western China instead of the East Coast hub — it’s just too costly and inefficient logistically.
“On a fast boat, you can get goods from Hong Kong to the West Coast in 10 days,” he said. “It’s why Central America is…seeing an uptick.”
Fernando Aníbal Capellán Peralta, president and chief executive officer of Grupo M, a textile corporation with factories in the Dominican Republic and Haiti that employ 9,800 people, discussed the Codevi factory town his company built on the border of the countries.
“People told us we were crazy, but we found the right location and we feel we’ve had a big economic impact on the community,” said Peralta.
Before operations began, the Haitian town of Ouanaminthe, with a population of 100,000, had about 85 percent unemployment and high illiteracy. Now, about 32,500 benefit indirectly, and Grupo M has built schools and health care facilities for workers and the people in the community.
As Haiti has started to recover from the devastating earthquake in January 2010, apparel manufacturing has played a key role. Peralta noted that the Codevi facility, specializing in denim and twill, benefits from free trade agreements with the U.S. under the Haiti Economic Lift Program, or HELP act, and Central American Free Trade Agreements, as well as duty free pacts with Canada and the European Union.
“Haiti has the lowest wages in the Western Hemisphere,” he added. “We are two days by boat to Miami and we have a motivated workforce that gives us the ability to deliver the right clothes with the right price to our customers.”
For Helfenbein, the new world of analytical sourcing goes beyond “chasing the lowest-cost needle” to take into account a wide range of factors, which is why he’s not writing off China so quickly.
Noting that China’s share of U.S. imports has fallen just 0.7 percent to 38.3 percent in the last year, he said, “China’s not falling off the cliff so fast. You have to figure out if you’re going to work in China and why you’re going to work in China.”
It’s also important to continue to do business in China because of its burgeoning consumer market and the opportunities it will represent.
His overall advise: “Keep one foot in China, stretch your basic products to endure long lead times (to maintain a cost-quality balance) and keep your fashion items closer to home.”