Damco eGuide

TRENDS IN RAW MATERIALS SOURCING FOR THE LIFESTYLE INDUSTRY How to run a healthy supply chain while sourcing and manufacturing regions shift

Stephen Xie, Regional Supply Chain Development Manager - Asia 1

Table of Content 01. MANAGEMENT SUMMARY

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02. RAW MATERIALS FOR THE LIFESTYLE VERTICAL

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The warp and weft of the lifestyle industry The larger picture: fabric in world trade Two major challenges for fabric sourcing

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03. INDUSTRY TRENDS LEAD TO COMPLICATED SUPPLY CHAINS

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Near sourcing and reshoring for speed to market A shortlist of fabric origins More complexity in the supply chain

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04. AN EXAMPLE: IMPORTING RAW MATERIALS INTO BANGLADESH

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Fragmented logistics offer room for improvement Improvements realised for a global lifestyle chain

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05. DAMCO IS READY TO SUPPORT NEW SOURCING TRENDS

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01. MANAGEMENT SUMMARY The lifestyle industry depends on affordable sources of its main raw material, textile, and on reliable supply chains that bring it to the locations where the final product is manufactured. In recent years, lifestyle brands have been exploring alternatives to the traditional fabric sourcing and garment manufacturing regions, driven by two main objectives: responding to rising labour costs and reducing time to market. The export of fabric from China is growing every year, but China is not the only low-cost country where economic developments are creating an upward pressure on wages: the trend is visible in all major sourcing regions. When selecting a sourcing region for textile, cost is not the only parameter to consider. Lifestyle brands are increasingly sensitive to a broad range of issues associated with compliance that can endanger their brand reputation, such as labour conditions and worker safety, social and gender inequalities, corruption, freedom of association, and child labour. Choosing the right sourcing area often involves a delicate and complicated trade-off. The same is true for the choice of manufacturing locations. For fashion sensitive items, near sourcing and reshoring has manifested as a significant trend. Turkey has surpassed Bangladesh as a supplier of lifestyle items for European markets while Mexico is increasingly serving North-America. The net result of all these developments is that the supply chains in the lifestyle vertical are becoming increasingly global and increasingly complicated, if only because more origins and manufacturing locations are involved. A close look at the current practices of lifestyle brands with manufacturing locations in lowcost countries reveals that there is ample opportunity for cost reduction and supply chain efficiency improvement. Damco proved this with the project “Bangladesh Import Logistics” that realised significant benefits for a global lifestyle customer.

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02. RAW MATERIALS FOR THE LIFESTYLE VERTICAL Before we can look at the current challenges for supply chains of raw materials in the lifestyle industry, it will be helpful to define the playing field. What raw materials are we talking about, how important are they, and where do they come from and go to? The warp and weft of the lifestyle industry The lifestyle vertical is based on textile more than anything else. But the textiles and fabrics that end up in the store as dresses and T-shirts are themselves the end result of a complicated manufacturing process. It all begins with some sort of fibre, either of natural origin or made in a chemical process, typically using an oil or gas based feedstock. Examples of the first category are cotton, silk, jute and wool. In the second category we find nylon, polyester, polypropylene, acrylics, and many other man-made fibres, each with its own characteristics. There may also be more specialised materials such as leather and suede (natural or PVC synthetic) or cloths such as Scottish tweed that can only originate from certain suppliers. The fibres are processed in a variety of ways to make them durable and suited for the following steps in the production process, using chemicals and auxiliaries. Dyeing is another important process step — colour is an essential element of fashion. In the final assembly of the garment, use is also made of thread and of plastic and metal hardware, for example for buttons and zippers. This overview leads to the following grouping of raw material for the lifestyle industry: • Fibre • Chemicals and auxiliaries • Fabric • Dyestuff • Thread, plastic and metal hardware Figure 1 is a schematic overview of the flow of goods that turns these raw materials into a finished garment DYE

WOOL

THREAD

COTTON

MA I

RAW MA T

FABRIC/ TEXTILE

FIBER

IAL ER

N

FINISHED PRODUCTS

SILK POLYESTER PLASTIC & METAL HARDWARE

CHEMICAL & AUXILLIARIES

Figure 1: Multiple raw materials are combined in several steps, resulting in the final product.

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As would be expected, fabric/textile is the most important category, accounting for 60% of the costs in clothing. By volume, 85% of the raw material is fabric. Because consequently the lion’s share of logistics spending in raw material sourcing is related to fabric/textile, including transportation and storage, that is where we will focus our attention in this eGuide. The larger picture: fabric in world trade Fabric is an important commodity in global commerce. In 2014, the value of the fabric traded worldwide was USD 649 billion – 55% more than in 2005 (see figure 2). IMPORT

400

EXPORT

300

200

100

2005

06

07

08

09

10

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13

2014

Figure 2 Year-by-year value of global fabric import and export (source: WTO, 2005-2014).

In 2014, only 10 countries together exported around 73% by value of all fabric exported worldwide, with China (35%) as the largest player. On the import side, China was the second biggest import country (6.04%), closely behind the US (8.43%). The figures show that a relatively small number of countries export fabric to a significantly larger number of destinations. The top 10 import countries accounted for around 37% of global imports. East and south-east Asia, with 24% of the total import value, are the most significant import regions (see figure 3). US

IMPORT

EXPORT

China

China

Germany Vietnam

Rest of World

Hong Kong Rest of World Italy India Japan Germany

Pakistan US

France

Hong Kong Italy

Turkey

Korea

UK Turkey

Taiwan

Figure 3 Origins and destinations of fabric by country: China has a dominant position as an exporter (source: WTO, 2014)

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Two major challenges for fabric sourcing In our conversations with global lifestyle brands, we find that they all share two major concerns when it comes to sourcing of fabric. The first is the rising cost of labour, in China as well as in other Asian countries, and the second is the growing need to ensure compliance through the entire supply chain. Wages rise in China and low-cost countries China initially won its position as the dominant supplier of fabric/textile largely because of the availability of cheap labour. Over the past decades it has strengthened its offering with mature supply chains, skilled workers and a growing domestic consumption. The downside of its economic development was a rise in labour costs that has forced many manufacturers to look into other sourcing possibilities. 700 598

600 500 402

400 300 230 185

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58

59

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63

Sri Lanka

Vietnam

Pakistan

Cambodia

Indonesia

94

103

China

53

India

64

51

Bangladesh

100

Mexico

200

Hong Kong

Turkey

Colombia

Malaysia

Myanmar

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Figure 4 Monthly minimum wages in the lifestyle vertical in 2013, in EUR: the level in China is twice that of Bangladesh (where actual payments often fail to meet the official minimum level). (Source: ILO Regional Office for Asia and the Pacific)

A recent McKinsey report1 mentions that many players have already shifted significant parts of their sourcing to other regions. According to the report, almost three out of every four buyers are considering moving parts of their current sourcing activities from China to lowercost countries. But there is no straightforward answer to the question of where to go, because wages appear to be rising everywhere in south-east Asia. Several developing countries have seen factory workers revolt and successfully claim better wages. The most striking example is Bangladesh, which announced a 77% increase in its minimum wage in 2014. In Cambodia a rise of 25% was agreed; other countries have followed with less dramatic increases, or are expected to follow soon. Details aside, the overall picture is clear. Wages in low-cost manufacturing countries are rising and in the lowest-cost countries production can be disrupted by strikes and other actions of labourers in search of fair wages. The resulting uncertainty about manufacturing reliability and the level of cost puts pressure on the supply chains for fabric/textile. 1    

The global sourcing map – balancing cost, compliance, and capacity, McKinsey’s Apparel CPO survey 2013

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Compliance, a critical factor for lifestyle brands For lifestyle companies, their brand reputation is an invaluable asset. They are becoming increasingly aware that media attention to social issues, underpayment, violations of safety standards and unhealthy working conditions can do great damage to their brand. NGOs, representative bodies and politicians, spurred by the general public, are adding to the pressure by scrutinising the behaviour of global companies in their sourcing regions. One example is the UK’s Modern Slavery Act which from April 2016 requires companies with a turnover of over GBP 36 million to report annually on their efforts to eliminate slave and child labour from their supply chains. Freedom of association 4%

Child and/or forced labor 4%

Other 4%

General work condition and labor rights 41%

Low wages 24%

Safety 23%

Figure 5 Social issues with suppliers. (Source: Société Générale Cross Asset Research, 2014)

Consequently, manufacturers don’t only look at wage levels when considering whether to move their production to new locations, but also evaluate the potential social risk that working in a particular country may expose them to. This involves a wide range of issues, including social and gender inequalities, a comparison of minimum wage and cost of living, corruption, freedom of association, and child labour – and this list is far from exhaustive.

03. INDUSTRY TRENDS LEAD TO COMPLICATED SUPPLY CHAINS Lifestyle companies attempt to respond to the sourcing challenges they face by changing their sourcing strategies, and by improving the efficiency of their supply chains and optimising their cost structures while mitigating the risks they identify. But in the lifestyle vertical there is another factor to be taken into account: speed to market. Brands decrease the response times to market changes by near shoring: moving the manufacturing of finished goods closer to their final destination. The combination of near shoring and sourcing fabric/textile from new locations complicates the supply chains of the lifestyle industry. Near sourcing and reshoring for speed to market A large share of the lifestyle vertical is fashion driven. Demanding consumers want the latest design, and they want it now – today’s hot T-shirt is next week’s cleaning rag. Lifestyle brands are responding by shifting manufacturing activities to locations closer to the market: Turkey and North Africa for Europe, Mexico and Latin America for the US and Canada. Turkey has rapidly become the second-largest supplier of lifestyle goods for Europe, after China (see figure 6). 7

Others, 4% Tunisia, 2% Pakistan, 2% Morocco, 2% Sri Lanka, 2% Cambodia, 4%

Portugal, 4% China, 39%

India, 6%

Bangladesh, 17%

Turkey, 18%

Figure 6 Top lifestyle sourcing countries for the European market: Turkey has surpassed Bangladesh. (Source: Eurostat 2014)

One has to keep in mind that near shoring is not a ‘one size fits all’ solution; it is most relevant for specific product categories that require short and controllable lead times. Sourcing closer to the destination market will increase efficiency and speed, but this will probably come at the expense of higher labour costs. And while near shoring shortens the downstream part of the supply chain, it increases the distance between the origin of the fabric/textile and the manufacturing location, adding pressure to the management of the upstream segment. A shortlist of fabric origins In our experience, a few countries deserve the special attention of retailers in the lifestyle segment looking to optimise their fabric supply chain. • Cambodia, with a growth of 132% over the past five years, has become a key country for fabric sourcing. • China is still the most important country for fabric production and export. • Vietnam realised a double-digit year-on-year growth in the past three years. Its import of fabric ranked fourth in the world. • Bangladesh is globally the 11th largest country in fabric import. The country’s import of fabric grew 179% in the last 10 years. • Indonesia grew 669% in the last decade and only recently shows signs of slowing down. It is a key country for fabric import in south-east Asia. • Turkey, playing a key role in European near sourcing strategies, is becoming more and more important for apparel production, and fabric import volumes into the country are growing. More complexity in the supply chain The factors we mentioned – logistics cost, lead time, efficiency – and others, such as inventory optimisation and visibility, are bound to make it difficult to decide on the optimal supply chain strategy. Some retailers have policies in place allowing no more than a given percentage of goods to be sourced from very high risk countries. For companies that have their centre of gravity in basic products, less sensitive to fashion, it is easier to shift production to lower cost countries than for their fashion driven counterparts. In some countries the disadvantage of higher wages may be offset by improvements in infrastructure that increase manufacturing

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mobility. Examples are the deep water shipping capacity that is being added across southeast Asia and the improved railway infrastructure that is opening up the western regions of China.

TODAY

Regardless how the many trade-offs involved work out in any particular case, it is evident that they will make the lifestyle companies’ supply chains themselves more global and more complicated by introducing more origins and manufacturing locations (see figure 7). Supplier (fabric/textile)

ORIGIN

fabric/ textile

TOMORROW

fabric/ textile

Manufacturer (finished goods)

finished goods

PRODUCTION

DISTRIBUTION CENTER

finished goods

STORE

finished goods

PRODUCTION

New Production Location

ORIGIN

fabric/ textile

finished goods

PRODUCTION

DISTRIBUTION CENTER

finished goods

STORE

Near sourcing

fabric/ textile

finished goods

Figure 7 Introducing new production locations and near shoring into the supply chain introduces significant additional complexity.

04. AN EXAMPLE: IMPORTING RAW MATERIALS INTO BANGLADESH Most of the garment manufacturers in Bangladesh – the third largest clothing exporter worldwide – need to import the bulk of their raw materials. On average, imports constitute approximately 75% of the total volume, and most of this originates from China. Fragmented logistics offer room for improvement When looking more closely into the situation, we found many opportunities for improvement. Manufacturers have individual arrangements with large numbers of suppliers, making consolidation and optimisation extremely complicated. Dealing with multiple local forwarders at both ends of the supply chain requires much communication and many touch points where things can go wrong, for example because of a lack of communication between parties at origin and destination.

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We also found other things that could be improved in the areas of documentation, visibility, monitoring, control, reporting and tracking. Furthermore, significant improvements could be made by reducing delays and transit times. Improvements realised for a global lifestyle chain To test our ideas we launched a project, “Bangladesh Import Logistics”, and approached one of our customers to see what improvements we could realise in their supply chain. This customer is a top global lifestyle brand importing over 80,000 TEUs of garment raw materials yearly, both FCL and LCL. They told us that timely delivery of raw materials, with no uncertainties, is a key factor for their supply chain and consequently for their commercial success, because the production of fashion sensitive requirements is run to predetermined production and shipment plans. Producers of garments in Bangladesh are usually obliged to buy their fabrics and yarn from suppliers that are nominated by their customer. The customer also has the authority to request that these nominated suppliers use Damco as the freight forwarder for their raw materials imports from China. By doing so they enabled us to deliver a range of benefits: • • • • • • • • •

One single point of contact for everything between origin and destination One single desk in charge of consolidation and optimisation Correct documentation (allowing faster release of cargo) Enhanced visibility, proper monitoring, effective control Adequate information, reporting, and notifications Eliminating delays by using direct services with fixed transits Minimal use of sea/air and air Lead time cut by one week Proactively managing contingencies

05. DAMCO IS READY TO SUPPORT NEW SOURCING TRENDS Finding ways to optimise the sourcing part of supply chains is one of the things Damco does on a daily basis. We have gained a thorough understanding of the challenges of the lifestyle industry from working with leading lifestyle companies – Damco is providing supply chain management and freight forwarding services for Nike, Adidas, Inditex, H&M, Fast Retailing and many other companies in this vertical. We can leverage our existing relationship with these lifestyle retailers to approach their finished goods manufacturers and even their raw material suppliers. Damco is experienced in partnering with lifestyle retailers to launch logistics programs that support and improve their business. These activities are backed by a network of more than 50 commercial offices and 13 customer service offices providing business development and operational support in east and southeast Asia (see figure 8) and elsewhere.

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CO LOCATIONS

CSO LOCATIONS

CO & CSO LOCATIONS

Figure 8 With offices in all significant locations, Damco supports intra-Asian business as well as developments in global sourcing.

Significant improvements in sourcing can be realised by taking an integrated look at the supply chain, going beyond a simple comparison of rates when selecting suppliers. To this end, Damco offers a complete range of supply chain development services that can help our customers to identify improvement areas in the supply chain that, when implemented, not only lower the costs but also improve its efficiency and reliability.

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About the author Stephen Xie is the Supply Chain Development Manager at Damco Asia and is based in Shanghai, China. He has over 10 years of experience in the logistics and supply chain industry and held various roles in import, export, domestic logistics, airfreight and express. His specialties are supply chain modelling, design and analysis, transportation, warehousing and project management. About Damco Damco, one of the world’s leading third party logistics providers, specialises in delivering customised freight forwarding and supply chain solutions. The company has more than 300 offices in over 100 countries and employs 11,000+ people. Damco is part of the Maersk Group. More information about Damco can be found on www.damco.com

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