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Mapping the Modern Supply ChainA ROADMAP FOR MAINTAINING MARGINS AND MITIGATING RISKS

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MAPPING THE MODERN SUPPLY CHAIN

Thanks to geopolitical turmoil, rising prices and shifting priorities, appar-el supply chains are on the move, and with these shifts come potential risks—both known and unknown.

Rather than simply chasing the cheapest needle, the C-suite must consider destinations that will allow them to maintain margins and mitigate risks. That means taking into consideration the complexities of each new production destination, which include capacity, capabilities, productivity, infrastructure, dis-tance and politics, as well as their stance on environmental and social issues. It’s complex calculus that must be analyzed carefully before making a move from an established, trusted entity.

“No place is at the level of China. When we look at the approach to the end of the quota system, China committed the resources in new roads and highways and ports and created a vertically integrated industry that was super-efficient and had the infrastructure for the end of the quotas. So today it’s easy, and a fast boat can get here pretty fast,” said Julia K. Hughes, president of the United States Fashion Industry Association.

With all that in mind, it’s hard to compare other countries to China, but there are worthy contenders actively vying for these new business opportunities.

As companies redraw their sourcing maps, they’re often looking to places like Vietnam, Bangladesh, India and Mexico. Here, we’ll take a look at how they stack up, what to watch out for and how each country is attempting to rise to the occasion.

Weighing the Options

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China remains the heavyweight in soft goods production. As of October 2019, the country’s share of apparel imports to the U.S. was 30.75 percent, according to the Commerce Department’s Office of Textiles & Apparel (OTEXA). While that’s hefty, that number was 36 percent three years ago.

For the year to date through October 2019, apparel imports from China declined 5.62 percent to $22.13 billion in value compared to the year-ago period. In the 12-month period, shipments from China were down 4.56 percent to $26.05 billion. Similarly, footwear imports fell by 10.5 percent to $11.9 billion in the first 10 months of the year.

Whether the trade war between the U.S. and China rages on or peters out, the reality is that China will continue to produce the lion’s share of goods bound for the U.S., especially in the short term. The reason is simple: The infrastructure and know-how are unmatched in the rest of the world. Couple that with a capacity that far exceeds even its closest competitor, and for some companies, it’s nearly impos-sible to walk away from—at least entirely.

“Even for companies who have spent a lot of time looking at the alternatives, it’s impossible for the U.S. to abandon China for sourcing. That was clear during the 301 [tariff] hearings. They talked about the fact that there is a substantial global production that is concentrated in China. That’s not going to change quickly,” Hughes said.

While an immediate exodus may be impractical, some companies are pulling up stakes even as others hunker down. For many of those fashion firms that are looking elsewhere, the tariffs have accelerated

diversification plans that had already been put into place thanks to rising wages. But lower cost locations mean trading off one of China’s biggest benefits.

“One of the reasons China is dominant today is not the reason it was 20 years ago. It was cheap labor, but it’s not the cheapest [anymore]. It’s the most popular

China

Efficiency, Capacity, Vertical Operations & Capabilities

PROS:

Geopolitical Tur-moil, Rising Labor Costs & The Pivot Away from Apparel Manufacturing

CONS:

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because it’s developed efficiency. The needle is efficient, and they have an efficient supply chain,” said Avedis Seferian, president and CEO of the non-profit social com-pliance organization WRAP.

That efficiency came as a result of the country’s investments in the apparel industry. But that support could be shifting to other sectors as China’s middle class emerges and the complexion of the workforce evolves. “There’s a real concerted effort to move away from becoming the place that makes your underwear to the place that makes your computers and your airplanes and your tech gear and buys underwear somewhere else,” Seferian said.

So where is the business going? A few countries have emerged as chief benefi-ciaries of the need to diversify.

China

SHIPPING TIME TO LOS ANGELES FROM SHANGHAI

23-31 DAYS

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China’s losses have been Vietnam’s gains. During the first 10 months of 2019, ap-parel imports to the U.S. from Vietnam increased 10.88 percent to a value of $11.67 billion. Footwear imports also saw an 11.4 percent increase in value during the same period.

One big benefit is that many factories in the country have been established by Chinese companies that were able to build them in their own image. For brands that have relationships with these mul-tinationals, that lends a comfort level when expanding production to Vietnam.

“My perception is it’s pretty easy to do business there, and one benefit for their industry is that it’s been developed in the last 20 years, so it is modern, the equipment is modern, and they have a young workforce. From the beginning, they started with meeting the compliance requirements,” Hughes said. “They can tick all the boxes—if you can find capacity for your production and the vendors to work with there.”

Vietnam also received an influx of investment when it looked like the Trans-Pacific Partnership would move forward with the United States as a central partner. But even without the U.S., the coun-try is enjoying the benefits of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which gives partner nations

duty-free access to Vietnam-made goods. That agreement will no doubt help the country realize its goal of exporting $50 billion in apparel and textiles in 2020.

Seferian said that, like China, Vietnam’s growth in this sector is due to the gov-ernment’s directive to focus on growing production. The investment from Chinese firms has also allowed Vietnam to leapfrog ahead in know-how and expertise.

“Vietnam is right next to China, so it was easy for people to move their produc-tion there. They built factories, mills and wholesale supply chains,” Jessie Zhang,

Vietnam

Chinese Investment, Modern Industry, Social Compliance

PROS:

Capacity, Potential Trade Uncertainty

CONS:

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sales director for UBM Americas, told Sourcing Journal during the company’s Sourcing Summit in August. “Vietnam has industry parks for footwear, apparel and textiles, too.”

But with the increased interest comes higher costs. Vietnam raised its minimum wage by 5.3 percent in 2019, taking pay to between 2.92 million Vietnamese dong ($125) to 4.18 million dong ($180), depending on the region. For 2020, wages have hiked between 5.1 percent to 5.7 percent relative to the region, taking the highest monthly minimum wage to 4.42 million dong ($190).

Beyond wages, the biggest issue with Vietnam is capacity. Though it’s not clear how close the country is to capping out, experts believe it is rapidly reaching saturation.

Another potential cause for concern is whether Vietnam could face action from the current U.S. administration over the growing trade deficit. The last thing appar-el and footwear firms need is to escape tariffs on Chinese goods only to face the same problem in Vietnam.

Vietnam

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While apparel imports from Mexico fell in the first 10 months of 2019 by 5.55 per-cent, the country held onto the top spot for denim products, with imports increasing 2.88 percent to $696.38 million. The market share for this category rose by 4.45 percent during the period.

Even with this uneven performance, Seferian, for one, is “bullish” on Mexico. And with the signing of the new United States-Mexico-Cana-da Agreement (USMCA) comes even more opportunity for the country.

“It hadn’t been as attractive for other SKUs, but between the tariffs and USMCA and the whole logistical benefits of nearshoring, it’s well placed to take advantage,” he said.

That is if the agreement goes into force—and if no other trade de-velopments become a roadblock. In May 2019, President Trump rattled relations when the administration announced it would impose tariffs on Mexico to get the country to comply with its immigration policies. Though the situation was resolved quickly, Hughes said the threat left an impression.

“That was like a dagger in the heart to companies for whom that [Mexico] was part of their plan,” Hughes said. “And now we’re in a pos-itive place [but] the damage has been done. Companies are balancing risk, and there is now a risk factor with Mexico that was not perceived

to be there before.”And the uncertainty it caused has had a ripple effect across the entire western

hemisphere, she said.In addition to geopolitical concerns, Seferian said it faces some labor rights issues.

The country has had issues with management in some cases setting up unions to prevent legitimate unions from forming, he said.

Also the cost of doing business in Mexico is on the rise. The government raised the

Mexico

Proximity, Pending Updated FTA

PROS:

Limited Capabilities

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daily minimum wage by 20 percent on Jan. 1, 2020, following a 16 percent hike that took effect in 2019. The increase took the daily rate for low-paid workers to 123.22 pesos, or $6.53 at current exchange rates.

The biggest challenge for the country will be to position itself to deliver the types of goods American shoppers want.

“It’s an opportunity for us, for many manufacturers in Mexico,” said Luis G. Lopez of Shoes From Mexico, an organization headed by CICEG (Mexican Footwear Chamber) and COFOCE (Guanajuato World Trade Commission), of the tariff increases on Chinese goods. “In some cases, with some kinds of shoes, we’re more competitive than China,” Lopez insisted, adding that “the tariffs will make us stronger in some categories, like casual leather footwear and synthetics.”

The country needs investment in tech and machinery, though the workforce is in place, Lopez said.

However, Matt Priest, president of the Footwear Distributors and Retailers of America (FDRA), is doubtful that Mexico can boost trade with the U.S. In addition to the country’s limited capacity, it’s also ill-suited to produce the bestselling cate-gories, namely sport and athleisure styles. Mexico is known for its leather sandals, dress shoes and boots, and in order to produce other types of footwear, necessary components would have to be imported into the country for assembly. That would exclude these goods from enjoying any benefits from NAFTA given how the rules of origin are set.

Footwear imports from Mexico fell by 13.2 percent in the first 10 months of 2019, when compared to the same period in 2018, according to OTEXA.

Currently Mexico only exports 10 percent of the shoes it produces.

Mexico


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Bangladesh is the world’s second-largest garment exporter after China. Its $30 billion garment sector, which produces clothing for some of the biggest retailers in the world, accounts for 80 percent of the country’s export earnings.

One big advantage the country has over some others is the vertical nature of its industry, which makes it less reliant on China for inputs.

For some, though, Bangladesh still stands as a cautionary tale. The country, which saw an influx of interest from the apparel industry thanks to cheap labor, attempted to capitalize on demand but did so in a way that led to tragedy with Rana Plaza. By onboarding too much production too quickly and with too little regulation and oversight, corners were cut.

“The lesson to be learned there really is if you’re going to grow an industry and then accelerate that growth, you need to be very careful in ensuring that the larger infrastructure and broader societal frame-work in which you’re doing so can accommodate that accelerated growth in a way that is safe and conducive to responsible sourcing,” Seferian said, adding the country has come a long way since then. “Bangladesh today is a very different place from Bangladesh in 2013.”

Seferian called the country’s garment sector “totally transformed.” Hughes echoed that sentiment, saying that in terms of worker’s rights, environ-mental issues and compliance, the country’s commitment is clear. “There may still be lingering perceptions or concerns but if we look at what is there, you can have top-of-the-line, quality factories making your product there,” she said.

And it seems some in the industry are finding success there. Apparel shipments from Bangladesh to the U.S. were up 9.98 percent to $5.09 billion in the first 10 months of 2019. And footwear import values surged by 32.6 percent over the same time period in 2018.

But while those numbers are positive, a World Bank report issued in May 2019

Bangladesh

Capacity, Vertical Operations

PROS:

Negative Perceptions, Logis-tics Shortcomings

CONS:

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suggests Bangladesh could capture even more production if the country were able to improve its logistics. The report called out the country’s congested roads and ports as well as what it deems inadequate infrastructure and “fragmented gover-nance” for hampering its competitive edge.

“By making its logistics more efficient, Bangladesh can significantly optimize its connectivity, business environment and competitiveness, putting the country on the right path to become a dynamic upper-middle-income country,” according to Mercy Tembon, World Bank country director for Bangladesh and Bhutan.

While Bangladesh has always been regarded as a low-cost option, the country did raise wages by 51 percent in 2019. Though no such hike is on the radar for 2020, it has undertaken an effort to bring 90 percent of the country’s 3.6 million garment workers under a digital wage system by 2021, which will help ensure factories’ compliance with legal wage standards.

Keeping costs low while improving infrastructure is challenging, and it’s made even more difficult by low-cost sub-contractors, which threaten the strides the country has made in terms of worker safety and also undercut prices at legitimate factories, according to Hannah Abdulla, an apparel correspondent for Lon-don-based GlobalData.

Bangladesh


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In many ways, the trade uncertainty that’s sending companies around the globe in search of new production destinations could be a boon for India. Already, apparel imports to the U.S. were up 6.9 percent to $3.55 billion through October 2019. And footwear import values were increased by 5.4 percent over the previous year period.

While India has long exhibited some characteristics like population density that make a country a prime candidate to become a major apparel exporter, the country’s clothing industry has been insular until recently. As a nation, India had been closed off to foreign investment, but in the last few years it began courting these resources. And supply chain consulting firm Weave Services Limited attributes this about-face with creating capacity in the sector.

In addition to cut-and-sew capabilities, the country is building up its vertical resources. Already India is a leading cotton producer, growing 26.5 million bales of cotton in 2018-2019, making it equal to China. And as of 2019, 74 textile parks had been approved, with 18 currently operational and 32 under implementation, the firm noted.

“I definitely think folks are looking at India, and for those companies that already have a sourcing office there or that are working with an agent who is on the ground in India, I think they’re looking for more ability to do more business there,” Hughes said.

She characterized India’s factories as “state of the art” and making great strides on the sustainability front.

Seferian is a big proponent of India and thinks the country’s pros-pects are bright. “The general track record is quite good. In places as big

as India and China, you’ll have bad actors but they’re not representative of the larger landscape,” Seferian said.

While there are some societal issues affecting women’s wages in the textile sector, Seferian said they’re less prevalent than they used to be. And thanks to the country’s

India

Modern Production Facil-ities, Sustainably Minded

PROS:

Infrastructure Issues, Trade Threats from the U.S., Labor Challenges

CONS:

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democratic government, issues like this are being rooted out by the “free and robust press and strong NGO movement” that continues to pressure lawmakers to act.

The latest example of this is the government’s movement to inspect thousands of factories and mills at the urging of a human rights group that cited numerous inci-dences of poor working conditions in April 2019. Another area the administration will need to confront before it becomes a crisis is its water system, which is inadequate for the size of the country and its population.

And India is facing trade issues of its own with the U.S. In Spring 2019, the U.S. ended India’s designation as a beneficiary developing country under the Generalized System of Preference program. More actions could follow as the administration eyes what it deems to be a trade imbalance and exorbitant duties on U.S. goods entering the country. So like many U.S. allies, India could now be vulnerable.

“When you’re looking at them, there’s a high risk of a 301 case against India. I don’t think that’s weighing much on people’s minds right now as they look for where to diversify their sourcing, but that could be an issue,” Hughes said.

India


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The Bottom LineWhile production options abound around the globe, no destination is without

its potential drawbacks. Sourcing executives must weigh the pros and cons against their needs and the level of risk they’re willing to undertake. While the current trade firestorm that precipitated much of the recent movement could abate at any time, it has illustrated the need for an agile, diversified supply chain.

And these results were achieved because better data means better decision making.

For instance, with insight into the skills of each operator, Augusta has been able to balance its production lines. By tracking each operator, section and area, the company can gauge efficien-cy, flag any jobs that are dragging productivity down and make course corrections before small

issues become big problems.The platform also allows

Augusta to remain compet-itive in today’s quick-turn environment. “We are able to plan very short lead times and have developed process-es that help us expedite any special orders, such as custom orders, inventory replenish-ment, etc.,” Jiménez said.

With production in Mexico, BlueCherry supercharges a

supply chain that is already built for speed and flexibility. The company is able to pass the benefits of low transportation costs, short delivery windows and low labor costs onto its partners.

“Service is the main driver of competition today; we work every day on inventory availability and speed to ensure we can service our customers by being a complete source for performance and athletic apparel and uniforms,” he said.

Augusta Sportswear Supercharges Production with Shop Floor ControlWhile determining where to source is a vital part of designing a modern supply chain, the mandate for all production destinations is the same: Create as many efficiencies as possible.

For Augusta Sportswear, maker of team uni-forms and apparel, the key to speed to market and agility was gaining insights into its production process. By employing the CGS BlueCherry Shop Floor Control solution, the company can monitor, ana-lyze and act on production needs in real time.

And the system enables the company to avoid infor-mation overload by allowing the team to create custom queries that deliver the right data in usable formats.

“Using these queries, we developed new indicators and are able to use graphic and statistical tools, such as control charts, pareto charts and histograms, to analyze and compre-hend better the data. As a result, we take better decisions,” said vice president of manufacturing Oscar Jiménez. “Our plants have become very flexi-ble; we can adjust capacities very efficiently using the data we obtain from BlueCherry.”

The payoff was a 10 percent boost in efficien-cy from January 2017 to October 2019.

Boost in efficiency from January 2017 to October 2019

10%