Trends always emerge from influences of past and current happenings that shape how the industry will move ahead. The pandemic has been a wake-up call for every aspect of life and business, and sourcing is no different… bringing with it new directions and fresh perspectives.
The background that propelled the trends
The biggest exposure in the sourcing matrix, whether for international retail or local retail during the past 4 months, has been the unfair and one-sided nature of the sourcing process. As markets started closing down, one country after the other, manufacturers were hearing only three things from the buyers – ‘we have to cancel orders, or defer payments, or we have gone bankrupt so no payment at all!’
It hit the manufacturers really hard that buyers who have advocated transparency, sustainability, responsible manufacturing, worker engagement and collaborative growth were not ready to share and shoulder responsibility to ensure that workers are paid. For the first time ever, Bangladesh actually took the stand to blacklist buyers who were not paying dues or were moving to fresh suppliers without closing accounts with previous suppliers.
The sentiments are not reserved for any manufacturing destination or supplier, the feelings are universal. In India too, the clamour is getting louder with manufacturers using different and new ways to negotiate out of the mess from playing the relationship card, even threatening of blocking future business, and looking at options to forming a consortium so as to have a common stand of choking supply chain of buyers who are cancelling.
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This changing mindset signals a new era of more balanced sourcing practices where the supplier will not consider the buyer as supreme, but equal partner in the supply chain. So, from sourcing always being driven by norms dictated by the buyer, the supplier has become more vocal even as the process by which sourcing is done has also taken a hit.
Though many more developments in sourcing are expected in the coming days, some key directions that have already emerged are stated below…
1. Push for better buying practices in sourcing
As the old relationship parity between the buyer and the supplier crumbles, there is a growing demand for new guidelines for better sourcing/purchasing practices. This has become even more critical, as there has been an overall decrease of order volume relative to previous orders or seasons; also, the smaller volumes are being demanded at the same price, while for same product lower target prices are being quoted.
Having suffered the consequences of the current sourcing parity, a strong movement has begun to build better purchasing practices. Supported by international NGOs, trade bodies and governments, the clamour for major changes in current practices is getting louder. And this is not only about terms and conditions of business, but also the complete process from how orders are placed, to factory audits, to sharing the risk.
Among the many initiatives in this direction, the most supported one is The Better Buying initiative, which is a unique system for suppliers to communicate with their buyers about purchasing practices that are working well and those that need improvement, without risking their business relationship. The system provides clear, relevant, transparent, and timely information, and analysis of buying practices. It takes into consideration seven steps of the sourcing process – planning & forecasting, design & development, cost negotiations, actual sourcing & order placing, payment & terms, managing the process, and win-win sustainable partnerships.
We can expect to see more such initiatives in the coming years that will not only evaluate the practices, but also set new guidelines.
2. Rise of safer payment options in international sourcing
Not only is the supplier looking at ways that the sourcing process can be more balanced between the buyer and the supplier, but has also demanded a re-look at contracts and payment terms. The balance is currently strongly in favour of retailers. In this crisis, declaring insolvency has probably become the easiest escape route for the buyers, but the manufacturers at the receiving end are now demanding change in the terms of contract and payments.
Sadly, even the Bank LC agreements, Open Account and DP arrangements that are common in international trade failed to protect the suppliers during the ongoing crisis. To draft the policy for safeguarding the payments of the suppliers, we should ensure that there is a provision for credit insurance, as mandatory. Also, there is an option for what is known as ‘Third Party Finance’ which implies that a third-party is introduced to the transactions to remove the payment risk and the supply risk.
A relatively new finance option for businesses is the early payment programme or EPP, which has yet to pick up in the garment business, but has over the last decade managed to leave an indelible mark in other industries.
This is not the first time and will certainly not be the last time that manufacturers will be left in a lurch because of a clause in the contract which they did not read or take seriously. The cancellations have thrown light on an issue which has cropped up time and again, but exporters in their enthusiasm to grab business often ignore or overlook the significance. We are talking about what is commonly referred to as the ‘A Force Majeure clause’.
3. Consolidation of buying and sourcing operations
As a general practice, the buying and sourcing teams are two distinct departments, and while the buying team determines what to buy for the upcoming season and how much, the sourcing team adds value by placing the order at the best price and delivery for better margins. Working in tandem, the two departments ensure that the products on the shelf are picked up by the customer for a wholesome combination of in-trend design, quality, and price.
For any retailer, the most critical function for retail is buying the right product. In the ongoing crisis, while the bigger retailers have maintained the sanctity of both departments, the smaller organisations looking at what minimum is required for business survival have clubbed the two departments into one with buying experts also undertaking the sourcing responsibility. Of course, it helps that in most cases, buying teams can do sourcing also.
The move has also been perpetuated further by the fact that vendors are having excess capacities, and hence, are ready to pick up business at sharp prices, so two important aspects of a sourcing profile are automatically addressed. One doesn’t need too many people. Also, since there will be more of core styles in production in the near future, as demand of fashion for social gatherings is practically non-existent, the execution can be aptly done by less people and only a few need to be sourcing experts.
Though this is currently ongoing with smaller retailers, experts agree that this may be a temporary development and sourcing experts have proved to be very critical to retail operations, and hence, once the business is on track, the sourcing team and department will again be distinct but coordinated.
4. Sourcing process goes virtual from digital samples to online inspections
Though the digitisation of the sourcing supply chain had already begun prior to the pandemic, the disruptive reality of social distancing has accelerated the trend to a point of not being a choice but a necessity. Now the process of sourcing is seeing acceptance of digital approvals not only on designs, but also on colours and fit. Virtual samples are being made and accepted by the supply chain. Technologies that were sitting at the fringe have been seeing huge demand. Companies are trying to get the systems in place to ensure they feature as preferred suppliers.
Another movement is in the direction of virtual inspections, and though there are some reservations regarding virtual inspection, it is not difficult, and ensuring quality is very much possible with the right selection and use of technology. In addition to immediate reporting, digital inspections also save both time and cost, besides being eco-friendly and having the edge of multiple location handling by the same person for result consistency. So, if a factory in Bangalore and a factory in Dhaka are making the same product, one person can evaluate both with the same barometer.
The digitisation of the sourcing process has been in the pipeline for a long time, but with the pandemic, it has come out strongly as the only way to work today, but moving ahead, the advantages will only ensure that the process will not only be a preferred way to work, but become a norm.
5. Buying offices evolve role to catalyst of change in sourcing
The buying/sourcing community is witnessing a complete transformation of the way global fashion business was handled a few months ago, and players are increasingly convinced that the role of buying houses is key to ensure its seamless transition. Leaders of the business stress that buying offices will need to work much more closely and in-depth with buyers and suppliers to create a sense and discipline of fiscal security. Payment terms cannot remain one-sided, supplier interests have to be protected in forward contracts.
It is critical that buying houses act as catalysts for technological transformation of the entire supply chain. Right from digital colour approvals, virtual fitting of apparel, virtual showroom presentations, creating design collections in 3D, putting in place fool-proof e-files, managing TnA’s without being onsite, shipment audits via video… the list is endless.
Buying houses also need to enlarge their role in the context of global supply chain shift. There is a strategic opportunity available mostly because of shifting business from China, and buying houses need to rise to the occasion with a roadmap of how to grab this business. For sure, it cannot be done by the buying community alone, so we can expect more collaborations along the supply chains and more out-of-the-box approach, elevating the role of the buying houses post the crisis.
6. Growth of virtual platforms for sourcing
With travel plans put on hold, the process of sourcing has gone digital. Most all, sourcing fairs planned for 2020 have gone ahead with a digital show, though most are looking to get back to a physical show as soon as the situation permits. While some believe that virtual sourcing shows are temporary arrangement, many see the future of sourcing in the format with increasing focus on digitisation and social distancing.
Virtual sourcing options from virtual showrooms to live virtual exhibitions have certain advantages over a physical sourcing trip that the industry is now appreciating. These digital interventions save time and also because of being online, stakeholders are saved from hassles like travel, putting up a physical booth and making it eye-catching and relevant, among other things. At the same time, these shows have served the purpose of generating business. In addition, feedback from buyers have also been positive. Though they missed the touch and feel of physical shows, with detailed descriptions and many pictures of the products, things became easy for them. What is needed is better technology and greater adoption of technology to make the experience livelier.
7. The movement away from China intensifies
The industry has been talking about buyers looking at new sourcing destinations, as China is no longer an attractive proposition, for the last 2 years. First, it was the fact that China manufacturing had become expensive; then, reports suggested that China was interested to move up the value chain, so apparel was no longer a priority. Last year was all about trade wars between the US and China with the world waiting to see how things panned out, and this year, China has become villain no. one in the pandemic period.
There is no doubt that the movement of ‘China plus one’ in sourcing has shifted to ‘out of China’ and buyers are looking at options. This time, it is not only the governments, but even the consumers who are reluctant to buy ‘made in China’ products. Reports from China indicate that manufacturing has taken a hard hit and byers are really serious on pulling out business from the country, which has been their mainstay for decades.
The Indian subcontinent is emerging as a preferred choice. Will India be able to grab the opportunity is something everyone is debating on, but one thing is for sure, it is now or never.
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