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In your supply chain, good partners make all the difference. How are you positioned to:� Better manage your safety and social risks?� Improve product quality and reduce returns?� Meet changing regulatory and quality standards?
With over 30 years of experience working with some of the largest retailers and brands worldwide, we can help you. Whether your business is sourcing or making products, we have the right people in the right place for you. Contact us today.
Bureau Veritas Consumer Products Services, Inc.Email: [email protected] Phone: 508.844.2700
www.bureauveritas.com/cps
EXCELLENCE IN GLOBAL SOURCING 1
Last year at this time, the U.S. economy was in themidst of the longest recession in the post-WorldWar II era with little hope of a recovery on the near
horizon. U.S. unemployment was at 9.4 percent and con-sumer spending was down 27 percent in 2009 vs. 2008.Apparel imports were at their lowest dollar volume inmore than 10 years, and as retailers continued to reducecosts and tighten budgets, the key themes of cost reduc-tion and risk management were lifelines for companiesstruggling to stay afloat.
Today’s picture is only marginally better — one ofslow recovery, if one wants to even declare the economyis in a recovery. With the economic news varying signifi-cantly from day to day, it is not surprising that retailersare dizzy from the frequent shifts between optimism andpessimism. Unemployment rates are still uncomfortablyhigh at 9.7 percent; and yet, consumer confidence hasbeen slowly rising since February. Overall consumercredit increased 0.5 percent in April, while home startsdeclined in May to their lowest level since December2009. At the same time, retail same-store sales increasedin May to 2.7 percent, but this was still lower thanexpected given the far greater gains earlier in 2010.Analysts tie retail sales, consumer credit and housingtogether when evaluating the economy. With such mixedresults in these economic indicators in recent months,even the most seasoned sourcing professional is leftwondering how to operate in this turbulent environ-ment. As resilient as apparel companies can be, whatspecific sourcing activities are companies taking to helpthem manage in these uncertain times?
The results of this year’s Excellence in Sourcing surveyfocus on the impact the economic uncertainty is havingon sourcing strategy and the emphasis placed on costreduction and risk management. The analysis examinesthe course corrections being taken, and which levers arebeing pulled as apparel sourcing executives seek toensure on-trend products make their way to stores atexpected quality and cost levels to meet consumerdemand. This year’s survey investigates these themes,offers sound suggestions and identifies forward-lookingopportunities for apparel companies to consider as theynavigate through this uncertain economic environment.
Survey Methodology and Respondent ProfileThe sourcing survey was comprised of 40 questions
covering sourcing activities from the post-product devel-opment stage to delivery at the final destination. Surveyrespondents break down as follows:440% Retailers and 60% Manufacturers481% of respondents work in corporate operations,
product development or sourcing/procurement425% of responding companies have greater than
$1 billion in annual sales volume447% of responding companies have less than
$100 million in annual sales volume458% of the responding companies have a centralized
sourcing group in their home country or corporateheadquarters, while 40% are split between havingseparated sourcing by division in their home countryor using agents/other external partners.
www.buhleryarn.com www.wrapcompliance.org
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www.bureauveritas.com/cps
Apparel Research Study & Analysis August 2010
A Sound, Flexible Sourcing Strategy
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Apparel Research Study & Analysis
Additional Pressures Facing Apparel Sourcing Executives
Apparel imports continue to rise slowly, now exceed-ing 2009 comparable months but not yet reaching 2008levels. Trade legislation and free trade agreements (FTAs)are as important now as ever for identifying new sourcesof supply or new regions in which to conduct businessand support the successful execution of sourcing strate-gies. FTAs will continue to evolve in the year ahead andorganizations must navigate through the ever-changinglandscape to identify sourcing opportunities. At the timeof last year’s article, FTAs with South Korea, Panama andColombia were a constant in the news and the effects ofthese agreements were yet to be realized.
As this article went to press, those agreements werestill stalled and not yet in Congress despite PresidentObama’s January 2010 State of the Union address call-ing for doubling exports in five years by strengtheningtrade relations with South Korea, Panama andColombia. With China still commanding significantproduct volume, it comes as no surprise that its exportpolicies were identified as the single most monitoredtrade legislation by survey respondents, followed byLatin American/Andean and Trade Preference withVietnam (see Figure 1).
In addition to trade agreements, fluctuations in com-modity/raw material prices are significantly affectingglobal business — particularly cotton and oil.Companies having spent the past year focusing on costreduction are now faced with rising cotton prices andfluctuating oil prices. According to current index reports,April 2010 cotton prices have increased in excess of 55percent over April 2009 levels, further increasing thepressure to find additional low cost sources of supply.
With the job outlook still causing consumers to ques-tion their purchasing decisions, the marketplace hasseen retailers reduce inventory to protect their marginsand reduce financial exposure until they are confidentthat a rebound is truly here and consumers are ready toopen their wallets. With inventory turn rates increasingin 2010 as compared to prior years (see Figure 2), com-panies are now challenged with ensuring that their sup-ply chains operate more efficiently in order to maintainthese lower inventory levels. Historically, the commonpractice was to have a wide product assortment (sizeand styles). Today’s economy is trending in the oppositedirection, toward smaller more targeted assortments forthe consumer at the point of purchase. This trend caus-es concern for apparel executives as they worry aboutmissed sales opportunities — a potentially devastatingresult considering the fragility of consumer purchasingand confidence. As a result of this apprehension, cycle-time reduction will play a key role by delaying order
decisions until more accurate forecasts are available.Additionally, sourcing executives will focus more oncountries with shorter lead-times to be able to reactquickly should the inventories run lower than demand.Success will depend on robust, flexible planning capa-bilities that will maintain inventories at a constant levelto avoid stock-outs.
What This All Means for Sourcing – Key Sourcing Trends
Given the uncertain macroeconomic environmentover the past year, what does this mean for sourcing?KSA’s analysis shows that sourcing organizations arebeing challenged to identify how best to source productand still meet stringent product and cost expectations.
2 EXCELLENCE IN GLOBAL SOURCING
FIGURE 1 – 2010 Trade Legislation Being Monitored(% of respondents)
Panama Trade Promotion Agreement 2% Other 2%AGOA Trade Preference 2%
Korea Free Trade Agreement 4%
Haiti (HOPE) 10%
Vietnam TradePreference
14%
Latin America/Andean 20%
China Export Policies45%
FIGURE 2 – Inventory Turns (% respondents by year)
<1.0 1.1-2.0 2.1-4.0 4.1-6.0 6.1-8.0 >8.1
<2007 <2008 <2009 <2010
Inventory Turnover Rate
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www.buhleryarns.com
The supply chain is very complex.How do you know you are buying QUALITY?
ORIGIN OF FIBER
BOSWELL FARMS
FIBER TESTING
SUPIMACOTTON FIBER
LENZING FIBER
RINGSPINNING
SUPIMA COMBED COTTON
While cost reduction and risk management were majorareas of focus in 2009, this year’s survey respondentsindicate that their organizations are increasingly ques-tioning whether to outsource sourcing activities, in part orentirely. As part of this process, organizations will contin-ue to analyze their sourcing vendors and regions to makesure performance across various metrics (cost, lead timeand quality) meets expectations. Lastly, organizations alsoare examining their current internal sourcing skills andcapabilities to ensure they are flexible enough to succeedin this difficult environment — especially when head-count budgets are under significant scrutiny for reductionand workload certainly isn’t reducing at the same rate.
The Decision to Outsource SourcingThe need to raise cash, reduce fixed costs and manage
mounting supplier complexity is forcing retailers to con-sider outsourcing their sourcing activities to agents. Thedecision can be a monumental one. If it isn’t done with aclear understanding of how to manage product develop-ment and supply with a new partner, a retailer can finditself locked in a deal that may result in higher productcosts or longer lead times.
Comprehensive due diligence is necessary for retailersto turn the use of a sourcing agent into a marketplaceadvantage. In the past few years, KSA has found thatabout a quarter of its clients were working with agents forsome or all of their sourcing programs and that the suc-cess of using agents for these retailers was directly linkedto their ability to clarify their sourcing strategy, establishthe right sourcing operating model and optimize theirside of the relationship.
Strict attention to product costing is required to ensureall costs (e.g., material, trim, labor) are in line with budg-ets and expectations, resulting in appropriate commis-sions earned by agents. Additionally, robust vendor iden-tification and management is required in order to giveretailers confidence that their agents are utilizing vendorsin line with their overall sourcing strategy while at thesame time achieving target costs, product quality anddelivering products when and where expected.
Putting sourcing into someone else’s hands runs therisk of additional delays and missed handoffs, especially ifboth organizations lack the technology to link their sys-tems and product development processes. To ensure aneffective and efficient working relationship with an agent,appropriate due diligence is required, including selectingthe appropriate products, processes and approvals totransition to agents. Products that are critical to a retailer’sbrand are less likely candidates for outsourcing. Similarly,processes where in-house expertise or product knowl-edge drives marketplace distinction and advantage areless likely candidates to turn over to agents.
Products bring customers in the door, both physicallyand virtually. A sourcing relationship that goes sour canhave a devastating impact on a business. In light of themagnitude of what’s at stake, KSA strongly believes thatturning over sourcing to agents is a board-level decision.Successful deals would include the following:4Specific performance expectations along with agreed
upon quantitative and qualitative performance metrics.4Clear definition on which organization executes what
activity.4Optimizing the potential financial and strategic bene-
fits without putting the product offering at risk.
Implication to Sourcing StrategyCreating and executing a solid sourcing strategy has
always been the backbone of the sourcing function. Toensure success in the current economic environment, theelements within a sourcing strategy and the approachand tactics used during execution must be flexible. Thismeans potentially altering the strategy from previousyears. Otherwise, sourcing will struggle to realize its stat-ed goals. Survey respondents agree that intense cost
Apparel Research Study & Analysis
4 EXCELLENCE IN GLOBAL SOURCING
reduction focus areas must be adopted in order to incor-porate long-term growth opportunities and ensure thatproduct quality and time-to-market are not sacrificedwhile achieving cost targets.
Survey respondents recognized the immediate need forrisk management during tough economic times and indi-cated it will remain a significant area of focus. Of the majorrisks that sourcing operations need to proactively manage(see Figure 3), the No. 1 risk from survey respondents wasincreased labor costs. Increases in labor costs are forcingsourcing executives to seek out less expensive labor coun-tries (such as Vietnam and Bangladesh) to provide productsat expected quality, time-to-market and cost. Other signifi-cant risks to sourcing strategy include the U.S. economy anddepreciation of the U.S. dollar, the latter of which drivescosts up across countries whose currency is strengthening.
These risks are forcing sourcing teams to rethink theirvendor matrix and their penetration in various regions.The changing global landscape, increased labor costs andfuture trade legislation are all factors when choosing aregion from which to source product. Generally this willresult in a more balanced or risk-averse portfolio ofsourcing options. Survey respondents indicated Chinaand South Asia as regions with a significant percentageof product purchases, representing 47 percent of currentproduct purchases. However, Central America, Vietnamand Bangladesh are the top regions under considerationfor future sourcing (see Figure 4). Most companies con-sidering Central America are looking to reduce leadtimes and create the requisite flexibility to quicklyrespond to product or inventory needs.
When considering new sourcing regions and partners,it is important to prioritize the many short- and long-term sourcing objectives (e.g., cost reduction, enhancedquality, execution capabilities) with the strengths andcapabilities of the new partner. Overall, survey respon-dents indicated that similar to 2009, the top factors toconsider when choosing a sourcing partner are cost andquality, (see Figure 5). This year due to the economicchallenges, lead time significantly increased in impor-tance whereas product development/execution capabili-ties, critically important in 2009, dropped off significant-ly. The increase in lead time is important to note, giventhat the shorter the lead time, the greater the ability todelay product and purchasing decisions, which ultimate-ly drives improved vendor production efficiencies andlowers the resulting inventory. As a result, productsoffered to consumers will be more closely aligned todesigner and consumer demands.
The factors for choosing a sourcing partner mirror theresults of metrics that define success for the sourcingfunction (see Figure 6). Quality improvement and
Apparel Research Study & Analysis
41%Increase in source country labor costs
U.S. economy/domestic consumption
Depreciation of U.S. dollar
Supplier capability/capabilities
Potential trade agreements
Stability of countries/regions
Financial viability of supply base
Product quality/recall risk
FIGURE 3 – Risks to Sourcing Strategy
FIGURE 4 – Future Sourcing Regions (% of respondents)
Indonesia 2%
Thailand 2%Other3%
South Korea 2%
Sri Lanka 3%
Middle East & Turkey5%
Eygypt 5%
Haiti 5%
Pakistan 5%
Cambodia 6%
India 8% China (includes HK)19%
Americas/Central America
13%
Sub-SaharanAfrica10%
Bangladesh10%
Vietnam10%
39%
28%
19%
17%
16%
14%
11%
6 EXCELLENCE IN GLOBAL SOURCING
reduced lead time remain the top two metrics, similar to2009, and have increased significantly in importancefrom the previous year. Delivery performance, althoughstill a top metric, dropped slightly and is now in line withcost reduction in terms of importance. With 100 percentof the companies surveyed responding that their organi-zation has undertaken an overall cost reduction effort inthe past year, the increase from 2009 to 2010 comes as nosurprise. As a result, sourcing must use a balancedapproach that incorporates the emphasis of each of thetop metrics (quality, lead time, delivery and cost) to man-age its performance as well as managing its relationshipswith its key vendors.
Implication to Internal Sourcing CapabilitiesSourcing departments, after struggling through 2009,
are being forced to figure out how to do more with less,particularly given the organization-wide scrutiny beingplaced on headcount and the fact that workload will notreduce anytime soon. Slowly but surely, sourcing execu-tives are realizing that current staffing levels are becom-ing the ‘new norm’ and will not return to prior staffinglevels anytime soon. Efficiencies realized in turbulenttimes will be expected to remain —– both in the supplychain (reduced cycle times and costs) and in headcount(doing more with fewer resources). Survey respondentswho have undertaken a cost reduction effort are seeing
Apparel Research Study & Analysis
8 EXCELLENCE IN GLOBAL SOURCING
FIGURE 5 – Factors for Choosing a Sourcing Partner/Region (% respondents by year)
<2010 <2009 <2008 <2007
Cost Qualityprogram
Lead time Socialcompliance
Matureregion/history
Raw materialsaccess
Tradepreferences
Other Financial terms PD/executioncapabilities
40
35
30
25
20
15
10
5
0
FIGURE 6 – Top Metrics that Define Sourcing Success (% respondents by year)
<2009 <2010
QualityImprovement
Reduced Lead time
DeliveryPerformance
Cost Reduction IncreasedMargins
Improved FOB$ Pricing/IMUImprovement
ImprovedInventory
Lower Risk
30
25
20
15
10
5
0
%o
fre
spo
nd
ents
an average sourcing cost savings of 3 percent to 6 per-cent. Their challenge will be to sustain the momentumgained in cost reduction — with the remaining sourcingresources having the requisite cost management expert-ise — without sacrificing product quality and lead time.These companies are addressing the importance placedon cost management by supplementing their currentcapabilities with additional deeper costing, quality andproduct capabilities.
As expected, the majority of companies surveyed arecapturing fabric, trim, packaging and labeling along withduties and taxes during their costing process (see Figure7). However, companies looking beyond today’s costs arealso capturing factory overhead and mark-up, washingand finishing and packing charges.
Once cost components have been captured, sourcingorganizations are sharing results with other functionswithin the organization (e.g. design, product develop-ment, merchandising) to educate and collaborate on costtradeoffs and using the cost components to negotiatetop-line costs with vendors. These cost components arecritical to ensure that decisions on product design meetmargin expectations prior to line approval — for exam-ple, identifying the cost implications for selected trim and
fabric. In addition, having a cross-functional discussionon cost components will help improve vendor efficiencyby reducing reworks and improving approvals to productspecifications.The majority of the survey respondents arecapturing costing components via a PDM/PLM systemor an integrated template with other forms/templates.This is a key opportunity to improve costing capabilitiesgiven almost one in five respondents indicated they cap-ture cost components manually.
ConclusionThis year has proven to be an exciting yet challenging
one — especially for those who forecast the economyand attempt to predict the future. For apparel sourcingexecutives, attention and focus is best placed not on thevarious economic reports and whether housing startshave recovered to prior levels but in keeping an eye onhow flexible their sourcing strategy is and how soundtheir sourcing execution is to accommodate such uncer-tainty. As first century Roman philosopher Seneca, said,“Luck is when OPPORTUNITY meets PREPARATION.”
These words still ring true today, with sourcing usingits preparation to help organizations seize futureopportunities.
Apparel Research Study & Analysis
10 EXCELLENCE IN GLOBAL SOURCING
67%Fabric
Trim
Packaging & Labeling
Duties & Taxes
Factory Overhead/Markup
Washing & Finishing
Packing Charge
Inland Transport to DC
Transport to Import Port
Insurance
Landing charges
Belt & Embroidery
Vendor Overhead/Agent Commission
Entry Customs Clearance Charges
Hanger Cost
Yarn
Freight to Export Port
Finance Charge
Deconsolidation
Hanger Duty
Other
FIGURE 7 – Cost Components Captured (% respondents)
66%
64%
52%
47%
44%
41%
39%
39%
38%
36%
36%
34%
34%
31%
31%
30%
28%
17%
14%
5%
Alan S. Pincus Senior Manager, Kurt Salmon [email protected]
Alan Pincus is a member of Kurt Salmon Associates’(KSA) Retail and Consumer Products Practice with afocus on product development and sourcing. He has
almost 20 years of experience helping consumer productscompanies address their most significant product development andsourcing issues. Alan has worked with many clients to realizesignificant quantitative and qualitative benefits in establishingeffective sourcing/category strategies, improved strategic sourcingprocess and organization redesign, improved vendor management,enhanced supply chain collaboration as well as improved sourcingand supply chain systems utilization via package evaluation,selection and implementation. A resident of Succasunna, NJ, Alanworks from KSA’s New York office.
Amy L. Burns Senior Analyst, Kurt Salmon [email protected]
Amy Burns is a member of KSA’s KnowledgeResearch Services. With more than 10 yearsindustry experience, she has worked with leadingretail and consumer products manufacturers to
conduct market analysis, benchmarking and best practices inproduct development, sourcing and supply chain strategy. Amy wasinstrumental in the development of and actively manages KSA’sproduct benchmarking database. She is a member of the Society ofCompetitive Intelligence Professionals (SCIP). A resident of VillaRica, GA, Amy works from KSA’s Atlanta office.
Kristie L. Tippner Senior Consultant, Kurt Salmon [email protected]
Kristie Tippner is a Supply Chain Managementprofessional with more than 10 years industry andconsulting experience in the product development
and sourcing areas. At KSA, Kristie's work has focused onconsumer product categories in product development and sourcing.She has helped clients realize benefits through cycle time reduction,raw material planning, vendor management, organization designand integration of product development and sourcing processes.
ABOUT APPAREL MAGAZINE
Apparel magazine has been the industry’sleading publication for 51 years. It offerstechnology and business insight from conceptto consumer, providing competitive,actionable information to executivesrepresenting the world’s most successfulapparel brands, retailers and manufacturers.Apparel’s targeted content addresses RetailIntelligence, Supply Chain, Sourcing &Logistics, Concept-to-Spec and Fiber-to-Fabric. An Edgell Communicationspublication, Apparel also produces Apparel’sSourcing Summit, the Apparel ExecutiveForum, Apparel’s Tech Conference, Apparel’sTech Conference West, apparelmag.com andnumerous web seminars, research reportsand newsletters.
Apparel Research Study & Analysis
ABOUT THE AUTHORS
PUBLISHERSusan S. [email protected]
EDITOR IN CHIEFJordan [email protected]
ASSOCIATE EDITORMichael D. [email protected]
ART DIRECTORRobin [email protected]
SALES MANAGERCindy [email protected]
ACCOUNT EXECUTIVEMarla [email protected]
CHAIRMAN & CEOGabriele A. Edgell
PRESIDENTGerald C. Ryerson
VICE PRESIDENTJohn M. Chiego
VP, MEDIA INTEGRATIONRob Keenan
FOUNDERDouglas C. Edgell 1951-1998
TECHNOLOGY GROUP
www.edgellcommunications.com
ABOUT KURT SALMON ASSOCIATES
Tailored Solutions. Accelerated Value. Kurt Salmon Associates (KSA) is the premier global managementconsulting firm focused exclusively on the retail and consumerproducts industries. We work closely with our clients to createaccelerated value through our tailored solutions for businessgrowth, margin management, inventory efficiency, productivityimprovement, and technology effectiveness.
EXCELLENCE IN GLOBAL SOURCING 11
