Although low-cost sourcing origins remain a fundamental part of the global apparel supply chain, there is a growing trend of nearshoring and relocation. This ongoing process is driven by the pressure that companies and fashion brands face to increase their versatility and speed to market.
In the McKinsey survey, 54% of managers said that nearshoring was becoming increasingly important. Among European executives, 39% said they planned to increase their sourcing in Eastern Europe and nearly one-third wanted to source in Turkey. The focus is also on North Africa, albeit to a lesser extent.
Nearshoring and relocation.
Just as a high percentage of European purchasing managers plan to increase their sourcing quota in Eastern Europe, Turkey and North Africa, their US peers, almost half of them, plan to increase their sourcing quota in Central America.
Of course, although the interest in nearshoring is great, it has not yet surpassed the focus of companies on low-cost origins such as Bangladesh, Myanmar and Ethiopia.
Sourcing executives who foresee greater use of relocation base their decision on the need for shorter lead times and more flexible production processes to respond to customer demand for greater variety and customization. More than one-third of respondents said they expected their companies to make greater use of relocation, compared to 16% who expected a reduction.
It is important to note that significant differences are highlighted between the US and Europe. Respondents based in America were more likely to anticipate an increase in relocation, supported by government initiatives such as “Made in America”. Famous U.S. brands – especially sportswear – are investing in their own manufacturing plants.
Beyond price: 4 success factors for an agile sourcing strategy.
As evidenced by the coexistence of low-cost sourcing and nearshoring, successful fashion and apparel brands in the future will not triumph only by the “cost of sourcing” factor. As speed and agility become more important, four factors for success must be the basis of any sourcing strategy. They are:
1. End-to-end efficiency.
Organizations should design their sourcing structure to prioritize versatility rather than large production volumes. They should also optimize and flexibilize their supply volume according to markets and their exchange rates and should create higher-value models from design to reduce dependence on high-cost, high exchange rate markets.
2. Collaboration with suppliers.
A shift from transactional supplier management to strategic partnerships is needed. This requires apparel and fashion brands to establish a professional assessment of suppliers, the corresponding consequence management and to develop joint processes, as well as investments, for strategic suppliers.
Structured negotiations with a detailed understanding of costs and securing long-term prices for fabrics and key raw materials are increasingly important.
3. Selecting the origin.
Companies must strategically choose sourcing countries – balancing costs, production capacity and speed, quality and compliance – and be prepared to implement dual sourcing strategies, as well as to support decision making with data analysis. In addition, they must design their sourcing strategy to minimize the risks of external events, such as possible political-social unrest and even cyclical and foreseeable climatic phenomena.
4. Compliance and risk.
Organizations should make greater use of financial hedging instruments to protect themselves against the negative side of currency fluctuations. They must also develop clear guidelines and procedures to proactively manage compliance with social and environmental standards and optimize the location and tracking of productions to create transparency from the start of the supply chain to the point of sale.
The old fashion sourcing model is suffocating.
There is no doubt that the old margin management model, with its relentless focus on shifts of supply sources to the next cheapest supplier country, has begun to decline in its usefulness and ability to achieve positive results. Instead, fashion sourcing structures must adopt a more holistic improvement approach created on the basis of these four success factors listed above. In essence, this will enable them to react quickly to make changes; a capability that is now more required than ever. As innovation in the industry accelerates, players in the fashion sector must act quickly to improve their game; those who start the race too late are going to be left behind.
What about digitalization?
Rather than being a fifth, individual factor, digitization is a central and unifying element of the four success factors. It is a means to achieve a major change in the performance and processes of companies, helping them create a customer-centric operating model that increases the transparency that is currently lacking in the global apparel supply chain.
Therefore, it is a mistake to see digitization as a lifesaving process for the industry or the sector itself. Digitization must go hand in hand with the optimization of the four success factors. It is a technological tool that helps to boost the impact of each of these factors by generating enormous value for the companies that use it.
As expressed at the McKinsey – Hong Kong Apparel Supply Roundtable: “Digitization will be the next country of supply“. This is what we will continue to discuss in the next article.
You will also find this series of articles in my Modaes Blog.
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