Selecting the Right Sourcing Strategy to Sustain Competitive Advantage

June 23, 2015(prepared by Inna Zubashko)

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Low-Cost Country Sourcing is one of the most critical success factors in the modern-day Apparel Industry

For many years, Buyers and Consumers have benefitted from moving production actives to low-cost countries in the Asia-Pacific

Apparel buyers have Five main criteria for ideal sourcing locations: price, quality, capacity, speed, and risk

Recently, a series of tragic events in Bangladesh’s garment factories, focused the world’s attention on the sourcing strategy of larger players in the industry

The sector must now play a role in developing economies in a sustainable and socially responsible manner

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A 2013 McKinsey apparel CPO survey¹ indicated a number of trends, including expectations over increases in prices, sourcing countries, and destination opportunities

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76% of survey respondents expect slight to very strong cost increases (> +1 to > +4%)

72% of respondents expect sourcing share from China to decrease in the next 5 years

86% ranked labor cost advantages among the three most important reasons for sourcing in Bangladesh. Buyers plan

to increase sourcing share in Bangladesh through 2020, even an ongoing debate over safety issues.

Despite recent events, Bangladesh remained at the top of the list (top 3) for over 80% of respondents sourcing

countries and expected to grow over the next 5 years

1 The Global Sourcing Map – Balancing Cost, Compliance, and CapacityMcKinsey’s apparel CPO survey 2013

Today’s trends indicate continued rising sourcing costs, begging the question of how companies should respond and adjust tomorrow.

Today’s Trends

Three out of four leading apparel buyers expect sourcing costs to increase over the next 12 months, with labor costs as the lead driver

Sourcing at lower cost countries continues to have major compliance issues

China is remaining the largest sourcing market, but buyers are continue to seek alternative destinations in Asia, Africa, and South America

How do we adjust and respond to increasing sourcing costs?

Tomorrow Expectations

Sourcing price increases are seen as inevitable, making it difficult to keep consumer prices stable

Consumers are not willing to pay more

Retailers are not able to afford higher costs and are not able to increase retail prices

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The current “Asia League” table shows that no fundamental changes are expected:

Other promising destinations should be able to guarantee that they can take on large volumes, be able to deliver against expectations, and will provide the long term investments necessary to secure success. It is unlikely that promising alternative sourcing destinations would be able to take on any

sizeable share of the export market within the next five years.

Sourcing strategy is not just about labor cost

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To address increasing cost pressures, apparel players are seeking for paths to new sourcing options.But they need to intensify their drive for sustainable, socially responsible business models in order to meet new industry demands.

Although cost still matters inapparel sourcing, lower-cost can beachieved through means other thanseeking cheap labor.

2 ”CNN - Bangladesh vs. the U.S.: How much does it cost to make a denim shirt”http://www.cnn.com/2013/05/02/world/asia/bangladesh-us-tshirt/

Creating end-to end product making efficiency through managing

material for better end-to end supply chain

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Optimize fabric selection, which accounts for as much as 60%- 70% of the total cost of a finished garment (vs. 30%-40% of labor cost).

Use fewer yarns and weight classes to reduce fabric count and lower sourcing cost.

Uniqlo’smodel

2 ”Apparel Industry is Not All About Labor Costs”https://tmd433.wordpress.com/2014/12/14/apparel-industry-is-not-all-about-labor-cost/

Structure joint and integrated supply chain structure

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Build 15-20% of the season’s styles and pre-position about 65% of the raw materials before the season (both in-house and from production partners).

During the season, analyze sales by staying in constant communication with its stores and with the design team. Designers then create new styles by adapting the best sellers using the pre-positioned material.

Zara Model

2 ”Apparel Industry is Not All About Labor Costs”https://tmd433.wordpress.com/2014/12/14/apparel-industry-is-not-all-about-labor-cost/

Sourcing best-practices

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Sourcing

Best

Practices

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Sourcing best-practices: Cost

Innovate in product, technology, finishes – give customer more in

exchange to charge more.

Examine cost drivers. Challenge the team on how can we

influence each cost component?

Segment sourcing team by regions and challenge them to look at all styles at other regions to create friendly completion. Have dual

sourcing strategies with key product

Push down total cost of ownership. Look at smaller ports. Look at sampling turn over. There

is a real premium on planning. Leverage inventory investments and plan more precisely against

fabrics

On Cost

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Sourcing best-practices: Technology

Enforce discipline on PLM process to benefit you. Get right systems and technologies to analyse and

manage your data. Focus your human capital on things

that matter

Use technology to mitigate risk: analyse data up front

Use technology to improve supply chain visibility and collaboration

into vendor’s compliance. Companies can take advantage of

the constant shifting trend landscape

Avoid interfaces and legacies. Think about who you want to be

in a next 5, 10, 15 years. You want technology that you can

grow into

On Technology

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Sourcing best-practices: China Sourcing

China won’t be the opening price point country; Vietnam and

Bangladesh can be used for key items. But China will not be going

away

Southeast Asia has been the big beneficiary. But reasons why we source in China remain valid and

China will be a huge part of sourcing going forward.

Collaborate with suppliers in China to share the joy of sewing in “lululemon way”. Work with suppliers to

help promote the idea to their employees that sewing is cool

On China Sourcing

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Sourcing best-practices: Sourcing

Build strong sourcing in Vietnam, Indonesia and Cambodia. Pakistan will straighten itself out and come

back. Consider vendors with vertical locations for key items and

commodity business

The real question is “who is the next best guy” – not “what is the

next best country”. Stay loyal to your vendors.

Remain sourcing vested in Western Hemisphere. It can help with replenishment and fast fashion. Access duty-free trade benefits via CAFTA, NAFTA, and free

trade agreements with Colombia, Peru, and Chile.

On SourcingIn general

Key takeaways and Lesson Learned

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Vendor reliability can be a tough problem. We all have had to scramble sometimes to find an alternative vendor. It's important to keep close tabs on our vendor base, to include understanding of their financial positions and/or to have back up. Also, understand that low cost does not always translate into the best product.

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4We should challenge ourselves to ask - ‘Are we buying our product as efficient as we can?' and ‘What can we do to

improve that relationship that will eventually yield a lower price?’

Initiate at least once a year sit-down with the top 5 vendors. Have open discussions about best practices and major

mistakes. Be open for discussions and changes. 3

In the aftermath of the tragic factory fire in Bangladesh, workers safety has emerged as a top supply chain issue. Supply

chain systems should provide instant access to vendor profiles, with critical information such as each supplier's current

compliance audits, quality and performance history, and factory safety records. Systems can help proactively notify

retailers, brands and factories of upcoming audit and re-certification dates and assign a corrective action plan if factories

don't pass the audit.

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Have multiple factories around a product; you cannot be limited to one product in one country. Challenge your OS teams

to look at the region they are responsible for and think about the products you are making in other regions: ‘Can you

bring that other product into another region?’

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You must have continuity of supply. Historically we approached vendors according to our separate brands, but we

should learn how to approach sourcing more corporately. Cut out your vendor base to a reasonable amount of vendors.

Vendors are important to us, but we should be able to remain important to them from season to season.

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Questions?

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