HONG KONG — The economic downturn has forced retailers to reevaluate how to utilize the role of the sourcing company, resulting in suppliers being under greater pressure to inject more value into the overall packages they deliver to boost their competitiveness.

This story first appeared in the March 23, 2010 issue of WWD. Subscribe Today.

Differentiation is becoming increasingly more important and, in line with this, there will be a marked shift in production focus from what sourcing firms call OEM, or original equipment manufacturing, into ODM, or original design manufacturing.

Bruce Rockowitz, president of global sourcing giant Li & Fung Ltd., stressed the importance for sourcing companies to offer “value-added services” and explained how the company already has begun to implement in-house design teams.

Rockowitz said manufacturers will have to increase investment in technologies such as automated equipment in production lines, advanced management systems and computerized systems for research and development in order to boost overall capabilities. There also will be a greater push toward connectivity. Li & Fung has developed a wireless system that gives all those involved in the supply chain access to real time information for improved efficiency.

Christina Ong, textiles and garments division director at HSBC, believes developing product design capability is essential to survive in the supply chain in the coming years. Bundling design and merchandising services will enable sourcing companies to attain higher profit margins and customer loyalty. This also helps fend off competition as buyers become dependent on the agent for product development.

New technologies now have become inextricably linked with sustainability. Ong said consumers are more aware of environmental matters and expect retailers to provide products manufactured by compliant factories and will have to look to reforming highly polluting and resource-consuming industries such as tanning, dyeing and electroplating.

“A few large sourcing companies maintain audit teams to assess manufacturers on behalf of buyers,” Ong said. “It is believed that achieving sustainable manufacturing will soon become an essential factor for vendors. Sourcing agents who introduce noncompliant vendors will likely suffer from serious reputational impact.”

But in order to ensure sustained growth, building a global reach is the key. Rockowitz cautioned that with the appreciating Chinese currency and ongoing changes in the export environment, companies that rely on China too much could suffer.

Esquel Group, a cotton shirt manufacturer servicing clients such as Hugo Boss and Abercrombie & Fitch, has conducted a number of pre-audits to review the company’s risk exposure levels to trade actions. Vice president and chief executive officer John Cheh said Esquel Group’s vast production network covering China, Hong Kong, Vietnam, Malaysia, Sri Lanka and Mauritius allows it the flexibility to move products from one location to another in the event of any sudden export changes.

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Since the end of the quota era in 2005, production has been steadily moving away from China and into lower-cost countries such as Vietnam and Bangladesh. This is a trend that is likely to continue, although China will remain an important player in global production, he said.

Cheh feels for value and product quality, China is still unrivaled, and in order for other emerging markets to compete, much more investment needs to be made in training and production facilities.

Rockowitz also noted the untapped opportunities in western and central Chinese provinces, including Sichuan, Hubei, Jiangxi, Hunan and Henan.

“As traditional manufacturing hubs such as Guangzhou and Shenzhen are experiencing increasing labor and land costs, it makes sense to look at the space in interior China,” he said. “The problem is, there is a lack of resources and infrastructure. Development seemed to be delayed, as companies were so quick to move to newer markets such as India. But China will get there, it will just take time. In the long run, companies need to stay flexible by sourcing from multiple countries.”