There is no doubt that the sourcing landscape is undergoing a shift, but the reality is also that Asia will remain at the centre of global sourcing, though the hotspots within the region will change. A recent survey by the Fashion and Apparel Studies Department, University of Delaware indicates that retailers and brands are consolidating their sourcing to fewer vendors though countries remain the same, to optimise their existing supplier base. Many more interesting facts that AR has been suggesting for some time found reflection in the survey.
The 2021 US Fashion Industry Association Benchmark Study, conducted from April 2021 to early July 2021, covered various business types in the US fashion industry – retailers, brands and importers/wholesalers. The study reflects the shifts that are happening, and also emphasises that the pandemic-induced responses are now giving way to long-term strategies that will not be transitional but will set the pace for sourcing in the next decade.
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China plus policy
Even before the pandemic, buyers had started the discussion on ‘China plus one’ strategy and why going forward it would be critical. Now the experience of the pandemic and harm that a single country policy can do in the sourcing supply chain is for all to see. When production started moving out of China, Vietnam was an obvious choice and when Covid broke out, since Vietnam was able to contain the spread, it got many diverted orders. The survey indicates that in 2020, 29 per cent of companies sourced from Vietnam while it was 25 per cent in 2019.
However, the story is not complete and Vietnam is not the only choice. In fact, another interesting indicator of what is happening is the fact that in 2020 the China plus Vietnam sourcing combined was 20-40 per cent, down from 40-60 per cent a year earlier. So, it is obvious that only 60 per cent of business is now between these two countries for many retailers and the rest 40 per cent have gone to new destinations. In 2021, as Vietnam has taken a beating during the second wave with factories closing down, the sourcing matrix could again see a shift moving ahead.
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The lowest cost destination is still Bangladesh
According to the study, moving into 2021, four Asian countries have attracted attention on parameters of sourcing cost combined with flexibility and agility. And India is one of them, the other 3 being – Indonesia, Sri Lanka and Cambodia. Unfortunately, all four countries have shown weakness on parameter of ‘speed to market’, while Sri Lanka is the only country among them that fairs average on parameters of social and environment compliances, the other three being still below average on these parameters.
Significantly, the only destination which has shown strength on parameter of sourcing cost is Bangladesh. Despite the increase in various input costs including transportation cost, the sourcing cost from Bangladesh remains the lowest, though speed to market and flexibility are not so great.
Fewer but strategically aligned vendors
Most recent market research agencies have indicated that apparel sourcing is consolidating, and the University of Delaware survey reinforces the same. The survey shows that there is a (-) 9 per cent decline in the strategy to increase the sourcing basket, both in terms of countries and vendors. There are two strategies that are gaining popularity. The first is to streamline supply base in existing sourcing bases to be more meaningful, meaning leveraging business with fewer suppliers. And the second is to increase supplier base in fewer countries that are reliable. The key is to establish stronger strategic supplier relationships across the entire matrix, so as to continue to build flexibility and dual sourcing options.
In terms of strategic priority for sourcing – 83 per cent of respondents in the survey claimed their top priority was to strengthen relationship with key vendors, while 70 per cent felt that there was a need to emphasise on agility and flexibility in sourcing, while 53 per cent put emphasis on adoption of more digital tools and technology in the sourcing process. Thankfully, in 2021, less than 10 per cent of the retailers cancelled or postponed orders for sale in second half of 2021.
Near sourcing is not a threat to Asia, yet
It cannot be denied that ‘near sourcing’ is gaining popularity, but the movement is still too young to be a threat to the current, well established sourcing network. According to data provided by OTEXA – for the period Jan- July 2021 vs. 2020, there has been a 1.4 per cent increase in imports from Western Hemisphere in quantity and 2.9 per cent increase in value terms, but in absolute terms, 72 per cent of sourcing is from Asia, 18 per cent from Western world and remaining 10 per cent from smaller destinations around the world.
Dr. Sheng Lu, Associate Professor, Fashion and Apparel Studies at the University of Delaware feels that near shoring will be able to make a noticeable impact only if raw material availability is more accessible to Central America, the most competitive manufacturing destination in Western hemisphere. Production in the US is far too expensive and flexibility of quantities and multiple styles is not the strength of the region. “The FTA rules of origin are much restrictive in addition to many countries having unstable political conditions, insufficient sourcing base and speciality of apparel categories… all of which are hampering production increase in Western hemisphere,” says Dr. Lu.
It is worth mentioning that Mexico which is the nearest and also most competitive for sourcing does 90 per cent of tops, that too mostly T-shirts. With such limited product basket, how can retailers afford to depend on near sourcing? Even production that has shifted to the US is in limited product categories and more boutique in nature with technology as the driving force.
China will remain the undisputed leader for textile intermediaries
Around 80 per cent of respondents in the survey admitted that they still source textile intermediaries from China and few additional Asian countries- India being one of them. Dr. Lu shares that moving ahead, China may actually decide to move out of low cost and competitive apparel manufacturing and focus more on textile intermediaries like yarn and fabrics which are specialised and require higher investments and R&D cost. Already there are only a few countries that are strong in textiles and instead of competing on a product that is quickly shifting to lower cost countries because of low labour wages or duty-free trade agreements, China will put more resources on products that are increasingly becoming expensive and hence exclusive. In 2021, the cast of textile raw material has increased 100 per cent, a clear indicator of what can happen moving forward if China decides to aggressively out pace other countries in this category.