By  on September 16, 2008

WASHINGTON — The increasing prices of goods, changing labor patterns and costs and the devaluation of the dollar on the world economic stage are driving apparel and footwear production out of traditional bases in southern China. It’s a situation sourcing executives referred to as “a perfect storm” of global economic and political factors. Oil and gas prices have increased the costs of some raw materials, and the expense of transporting those materials and finished goods. Add to those elements increased labor costs, a dollar falling against the yuan and moves by the Chinese government to shift apparel production to new provinces, executives said. Current economic pressures on U.S. consumers have added additional stresses to the situation. “Now, more than ever, companies who are navigating this period are doing so with extreme caution in how they position their offices, vendor migration plans and overall sourcing strategies,” said Peter Warner, senior vice president of global sourcing for Liz Claiborne Inc. “We anticipate the situation to remain unsettled in the immediate postelection period, so it is extremely important not to invest too much time and infrastructure in plans that you can’t change quickly.” Gary Ross, vice president of global nonbeauty supply chain for Avon Products, said, “We’re watching and monitoring the issues very closely and we’ll adjust our sourcing as we see conditions change.” Pat Devaney, chief of sustainability for Deckers Outdoor Group, which makes Uggs, Teva, Tsubo and Simple shoes, said, “There are dramatic issues for all of us that are making products in southern China. As southern China develops, the cost of goods rises, and that can only be absorbed so much by us and others before being passed on to consumers and retailers.” As costs continue to pinch in southern China, some executives said they see a shift away from the coast to northern provinces where labor costs are cheaper and the central government is supportive of industry. There has been some “natural migration” in production from the south to the north and west parts of China, Avon’s Ross said, but some of the developments have been deliberate moves by the Chinese government. “From minimum wage increases in certain parts of southern China, to tax incentives and value-added rebates [in other areas], it’s all done by design to force a migration,” Ross said. Some executives said they would or already have considered moving production to Latin America, but for many China still presents the best value proposition. Most sourcing executives admit that cost pressures and sourcing decisions are getting more scrutiny than they have in a long time. The relative stability of the last few years seems to be a thing of the past, but most say what that means in the long term for their sourcing decisions is unclear. “Maybe the model has to change in this environment,” said Richard Yamarone, director of economic research at Argus Research Corp. “China is no longer the place of nickel labor.” Places like Mexico could come into play, as well as Eastern Europe, Egypt, Vietnam, India and Pakistan, he said. “With the change in administration coming with the elections, in terms of sourcing strategy and trends we’re going to be working with the table as it has been set over the last several years,” said Mark Jaeger, senior vice president and general counsel for Jockey International. Jockey has a diversified sourcing base with facilities in Asia and closer to home in Latin America. But there are some added costs to operating in the Western Hemisphere, as well, Jaeger said, in order to meet the requirements of existing trade pacts like the Central American Free Trade Agreement. “What the correct answer is, we’ll only figure out eventually,” Yamarone said. “It has to be some combination of moving facilities to less costly countries and maybe a trend toward cheaper materials.” Increasingly, sources said, no single factor influences sourcing more than others. “In today’s environment, world class sourcing strategies cannot just focus on competitive costs, but also need to address each brand’s requirements on speed, quality and flexibility,” said Warner.

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