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Winners will improve responsiveness while cutting costs

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Winners will improve responsiveness while cutting costs

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In today’s highly complex global sourcing environment, apparel companies must aggressively explore more opportunities, including the pursuit of new sourcing countries and partners, increasing value-added services and upping supply chain efficiency.

In today’s highly complex global sourcing environment, apparel companies must aggressively explore more opportunities, including the pursuit of new sourcing countries and partners, increasing value-added services and upping supply chain efficiency.

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Winners will improve responsiveness while cutting costs

  1. 1. Winners Will Improve While PRODUCED BY TITLE SPONSOR GOLD SPONSORS Seventh Annual Apparel Research Study & Analysis: Excellence in Global Sourcing
  2. 2. An Apparel Exclusive Report A lthough mounting consumer expectations, omnichan- nel pressure and heightened competition are driving discussions around revaluating production locations, supplier relationships and even overall sourcing strategy, cost is still king. In fact, in this year’s Seventh Annual Excellence in Global Sourcing Survey, produced by Kurt Salmon and Apparel, respondents still chose cost drivers as their top macro-econom- ic concerns, with their top three being the price of raw materi- als (occupying the top spot for the third year running), wage rates and customs logistics issues. And for good reason. Although they have come down since their peak in early 2011, raw material costs remain an area of significant concern. This is especially true for cotton, which is now showing signs of ticking up again.The result can be a serious impact to margins. For example, Hanesbrands plans to exit its unbranded apparel business in the United States and focus on its Outer Banks sportswear label in an effort to prop up falling margins, which have decreased more than nine percentage points over the last two quarters as a result of raw materials costs, according to Thomson Reuters StarMine data. Wage rates are an area of even greater potential margin erosion. According to national statistics, the growth rate for the hourly wage rate in China grew at more than 83 percent between 2007 and 2012. Compare this to other major Asian locations such as South Korea at 17.9 percent growth, Hong Kong at 12.3 percent and Japan at -4.2 percent and it becomes apparent that the trend is driving a shift in sourcing. Although China still produces the lion’s share of U.S. appar- el, footwear and furniture, annual double-digit wage increas- es have enticed many companies to shift production to lower- wage countries in Southeast Asia and Latin America and continue to look elsewhere. By Joanna Shapiro, Manager & Courtnay Thomas, Senior Consultant, Kurt Salmon 26 EXCELLENCE IN GLOBAL SOURCING In today’s highly complex global sourcing environment, apparel companies must aggressively explore more opportunities, including the pursuit of new sourcing countries and partners, increasing value-added services and upping supply chain efficiency. FIGURE 2: Percent Hourly Wage Rate Growth 2007-2012 - Select CountriesFIGURE 1: Trend of Top 3 Macro-Economic Concerns 2010 • Wage rates/issues • Price of oil • Price of raw materials 2011 • Price of raw materials • Price of oil • Wage rages/issues 2012 • Price of raw materials • Increasing internal/domestic demand in China • Price of oil 2013 • Price of raw materials • Wage rates/issues • Port/customs or logistics issues China 83.7 Hong Kong 12.3 Philippines 26.2 South Korea 17.9Japan -4.2 Brazil 57.2 Colombia 10.2 Mexico 16.1 Nicaragua 41.3
  3. 3. An Apparel Exclusive Report 28 EXCELLENCE IN GLOBAL SOURCING Finally, new to the top concerns list is a focus on port and customs logistics issues. Within a year, the importance of this topic jumped more than 10 percent as the complexity of retail- ers’ and wholesalers’ supply chains grows — along with the mounting stakes of delayed shipments. Issues such as last year’s narrowly averted port strike, which would have shut down 14 container ports from Maine to Texas, weigh heavily on the minds of many sourcing executives. These three concerns combine to create considerable pres- sure on retailers and wholesalers to rethink their existing sourc- ing and supply chain strategies. No one company has found the answer. Our research shows that companies sourcing more heavily from China and other Asia Pacific countries are more concerned about oil prices, wage rates and customs issues than other respondents. On the other hand, companies that are cur- rently sourcing in Sub-Saharan Africa list raw material prices as their biggest macro concern. Clearly, in the midst of all these issues, establishing a cost- stable value chain while also balancing quality and risk requires a shift from the way retailers and manufacturers have tradition- ally managed sourcing and supply chains. Sourcing organiza- tions have an opportunity to both cut costs and improve responsiveness, supporting overall business goals around cus- tomer experience and omnichannel fulfillment. In this new environment, traditional cost-saving measures will no longer be enough to remain competitive. Companies can only negotiate material and labor costs so low — they must also explore more creative approaches to cost saving. Three of these opportunities include pursuing new sourcing countries and partners, increasing value-added services and upping efficiency. Pursing New Sourcing Countries and Partners As discussed, rising labor rates in China are driving many companies to look elsewhere for sourcing. Our survey shows that the top three regions from which respondents are current- ly sourcing include Western China, Eastern China and the Americas. They are most interested in expanding into Bangladesh,Vietnam and Cambodia, with India and Indonesia rounding out the top five. In addition to cost concerns, favorable regulations and efforts to increase speed-to-market can also make new sourc- ing countries attractive. For example, Cabela’s is looking into moving some produc- tion into Central or South America to take advantage of DR- CAFTA regulations and shorten lead times to increase respon- siveness to customer demand. And retailers including H&M, Tesco and Primark are sourcing from Ethiopia to take advan- tage of the attractive fabric provision, which allows most AGOA countries to ship apparel made from fabric outside the region to the United States duty free. When pondering the jump to another sourcing region, respondents weigh four primary risk factors: labor costs in the sourcing country (24 percent of respondents), the U.S. econo- my and domestic consumption levels (23 percent), the stability of the sourcing region (12 percent) and capabilities of the sup- pliers in that region (12 percent). FIGURE 3: What Value Adding Services do you consider the most important expectation from your agents/importers/vendors? Cost Lead time Quality program Social compliance Product development/execution capabilities Mature, established region/historical partner relationship Accessibility of raw materials (i.e., fabrics, trim, etc.) Financial terms Trade preferences 2007 2008 2009 2010 2011 2012 2013
  4. 4. When it comes to assessing capabilities, it can be difficult to balance the desire to cut costs with other concerns, including lead time, quality and social compliance. This year, the impor- tance of cost in that equation rose to a seven-year high, with 35 percent of respondents choosing it as the most important factor. Increasing Value-Added Services Companies are also looking for sourcing partners that can provide key value-added services, including QA management, product development and design and deep raw material knowledge. QA management in particular is becoming increas- ingly important as companies look to manage their brand per- ception to avoid negative press and potential recalls. Product quality and safety as well as social compliance are rapidly occu- pying the minds of sourcing executives as QA management topped this year’s list, and experienced 10 percent growth in importance from last year. By outsourcing these activities to overseas agents or sourc- ing agents, companies are then freed up to focus on more valu- able areas of the product development process. Upping Efficiency Finally, it is well known that efficiency can drive cost sav- ings.This may sound obvious, but the survey reveals that many companies have significant room for improvement here — especially larger companies. For example, 40 percent of mid- sized companies report sourcing more than $3.5 million per FTE but only 28 percent of large companies source at that level. Of course, enabling these key strategic shifts will also require new organizational capabilities, processes and support- ing technology. Evaluating capabilities to ensure strategic use of the sourcing organization and transitioning other tasks to a more shared service model can begin to evolve the organization toward more efficient sourcing operations. Additionally, leaders are cultivating more strategic relationships and tiering their supply base as a means to simplify sourcing, where possible. Technology is even more important as the classic definition of “supply chain” grows to encompass even more elements in need of something to tie them all together. For many respon- dents, a truly world class supply chain is cost competitive, differ- entiated and structured to facilitate continuous improvement. These measures all support a top-notch customer experi- ence. In fact, 29 percent of respondents said customer fulfill- ment effectiveness was the most important measure of supply chain success. Achieving this will require multiple technology solutions — each targeting a separate component of the supply chain — and seamless integration between them. But the benefits are well worth it: streamlined communication, improved collabora- tion, increased speed of activity completion and increased con- trol and visibility. In addition to these initial benefits, technology can unlock additional value if it is supported by organizational and process changes. For example, very few retailers and whole- salers (only 29 percent) are thinking about using technology to drive better decision making, but we see this as a key com- petitive imperative in the very near term. An Apparel Exclusive Report 30 EXCELLENCE IN GLOBAL SOURCING >$5M per FTE $3.5M-$5M per FTE $2M-$3.5 M per FTE $1-$2M per FTE <$1 million per FTE FIGURE 5: 2013 Sourcing Efficiency by Revenue Band More than $1 billion $101 million to $1 billion Less than $100 million 20% 8% 24% 24% 24% 33% 7% 10% 30% 20% 8% 11% 10% 7% 64% FIGURE 4: Value Added Services - 2012-2013% Change Transportation/customs management 1% Niche regional or product knowledge -1% Inventory ownership 1% Financing or extended payment terms 1% Raw material knowledge or vendor base -2% QA management 9% Product development and design -3%
  5. 5. An Apparel Exclusive Report 32 EXCELLENCE IN GLOBAL SOURCING FIGURE 6: A World Class Supply Chain Is . . . FIGURE 7: The most important metric to measure Supply Chain success for my organization is . . . 40% All of the above 37% Cost savings 33% Competitive differentiation 29% Structured continuous improvement 28% Structured supplier relationship management 27% End customer service 22% Customer Fulfillment Effectiveness 29% Agility and Responsiveness 25% Operational Effectiveness 18% Financial Effectiveness 14% Efficiency 13% Velocity 1% Cross-functional metrics 21% Managing trade-offs 20% Supplier segmentation 14% Segmented supply chains FIGURE 8: Expected Results of Supply Chain Technology Implementations 56% Improved communication & collaboration 56% Increased speed of activities 48% Increased control and visibility 41% Increased ability to perform activities 30% Increased standardization 29% Improved/new decision making 26% Improved risk management 24% Advanced ability to do new activities 5% Other 7% Stockless initiatives Yes, the myriad challenges facing today’s sourcing execu- tives can seem daunting. But they also represent a consider- able opportunity to improve efficiency and cut costs while bolstering the sourcing organization’s strategic role in sup- porting business objectives. Realizing that opportunity will require a clear roadmap that prioritizes future changes, including organizational, process and technology changes, based on overall supply chain goals. ABOUT Kurt Salmon is the leading global management consulting firm specializing in the retail and consumer products industry. The firm leverages its unparalleled industry expertise to help business leaders make strategic, operational and technology decisions that achieve tangible and meaningful results. For more information go to www.kurtsalmon.com. ABOUT THE AUTHORS JOANNA SHAPIRO and COURTNAY THOMAS advise the world’s leading retailers and consumer products companies on their sourcing and supply chain strategies. They can be reached at joanna.shapiro@kurtsalmon.com and courtnay.thomas@kurtsalmon.com.

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