By and  on April 28, 2009

It’s a shrinking world — and one likely to get even smaller for manufacturers and retailers alike.

“Everything we do and talk about with our customers today is smaller,” said Rick Darling, president of sourcing giant Li & Fung USA. “Smaller number of stores, smaller number of orders, smaller quantities per order, smaller prices, smaller everything.”

The description of the new landscape was one of many observations Darling and other speakers made to the more than 130 sourcing executives gathered in New York on April 15 for the WWD Sourcing & Supply Chain Leadership Forum. Speakers at the event focused on the key issues and trends likely to impact sourcing decisions over the next three to five years, including:

• Deflation
• An oversupply of the world’s apparel manufacturing capabilities, accentuated by falling consumer spending.
• The need to find value in the supply chain beyond simply capturing the lowest prices.
• The rising threat of protectionism at home and abroad.
• Managing risk in sourcing hot spots like Pakistan and Bangladesh.
• The necessity of brands and retailers to fully fund and incorporate corporate social responsibility programs.

Overriding all of these, however, was the continued recession and the question of when it might be over.

“I don’t think there’s an economist or a business person of significant stature that is right now thinking there’s any hope of a turnaround that we’re going to feel in 2009,” said Darling. “Generally, people feel this is going to be a tough economy.”

Crumbling global economies have brought the oversupply of the world’s apparel manufacturing capabilities into focus, an imbalance that had existed prior to the downturn and is expected to persist. The purchasing power of the U.S. market in particular has been hard hit and shows no signs of making a quick recovery. According to the U.S. Department of Labor, the unemployment rate reached 8.5 percent in March. About 5.1 million jobs have been lost since December 2007, and the number of unemployed Americans is upward of 13.2 million. More than half of the uptick occurred in the four months through March.

Darling said Li & Fung expects the next 18 months to be defined by deflation rates of between three and six percent.

As conditions have worsened, companies have returned their attentions to sourcing in Asia, according to Darling. Over the last several years, brands and retailers had been exploring alternative sourcing areas outside of Asia in an effort to maintain diversification and chase lower prices. In China, rising costs for energy and labor spurred a gradual shift away from the country. Not any longer.

“We see that trend now reversing fast in a significant way,” said Darling. “Frankly, to a big degree, it’s based on price.”

Darling said Asia’s prices have become more competitive over the last 18 months. He also contends that in some cases suppliers in the Western hemisphere missed their opportunity to seize a greater share of the market by failing to deliver on higher-quality items.

“What’s happened is a major change in attitude toward what we’re calling a flight to quality,” said Darling. “It’s not just the quality of the product but the quality in terms of how goods are made and how quickly goods are made. Factories and countries that may have been considered expensive are all being rethought and put in the mix in terms of what additional value they provide beyond price,” he said.

There is a shift going on within China as well, as the government looks to push its apparel manufacturing capabilities further inland. The Pearl River Delta area, once the heart of China’s southern apparel region, has seen thousands of textile and apparel factories shutter their doors since 2008, and more than 20 million jobs have disappeared. The Chinese government is in the process of transitioning the manufacturing base of the area to higher-level products like technology. Darling predicts Dongwan will eventually become China’s equivalent of Silicon Valley.

Improved safety, sustainability and environmental practices will play a prominent role in how brands’ and retailers’ assess value.

“I actually think [corporate social responsibility] is becoming very much an assumed trait,” said Darling. “The debates about whether it costs money or doesn’t cost money are no longer valid.”

Li & Fung is in the process of determining the carbon footprint of its factory base, a tall task for a company sourcing products in 80 countries with a network of 10,000 suppliers.

“I think sustainability will probably be, along with quality, the two main decision-making premises for most sourcing decisions that are going to be made over the next five to 10 years,” said Darling.

The rise of protectionism in the face of economic decline is also something he believes the apparel industry will need to confront, and not solely in the U.S. Darling perceives the proliferation of bilateral trade agreements as a different form of protectionism that will further complicate the industry.

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