Welcome by the moderators
Deputy Secretary General, IAF
Welcome to the very first Fatex Sourcing Seminar. I would like to thank and hand over to Dhyana Van der Pols, the person who created this programme for you. The title of this seminar is Closer to Selling.
This seemingly simple concept actually masks complex realities that she will now explain.
Dhyana Van der Pols
CEO, Nash Int. sourcing solutions
The theme of this seminar refers to the strategy chosen by all fashion companies for earning money.
We all face the need to select our suppliers carefully. What we are seeing today, due to the economic crisis, is a concerted effort to win new customers with collections that are increasingly in step with fashion, and to optimise time-to-market.
How can we usefully align our strategies in symbiosis with our suppliers? How can we plan for the market entry of collections at lead times ranging from one week to ten weeks? How can we collaborate? The fashion industry is not evolving as fast as new technology or e-commerce. Our way forward is to discuss innovations that will enable the sector to thrive.
The days of ultra-low production costs are long gone
Mr Jan Hilger
COO and board member, Ahlers AG Pierre Cardin Jeanswear
My goal is not to unveil the next destination for your sourcing, but to share some observations that will help you to rethink the way you approach your sourcing.
Let’s look at the key developments in sourcing. I began my career twenty years ago, at Hugo Boss. At the time, sourcers’ approach was basically to roam the world with a carrot with which to recruit new suppliers. More recently, although we still have the carrot, we also have a few sticks, in that we are under the constant watch of chemistry experts, lawyers, and of course of financiers, who, although trained in numbers, are certainly not trained in the product.
This trend is not unrelated to major developments in the sourcing industry, as reflected in the statistics.
I have brought with me data from the McKenzie consultancy. Like a huge world clock, this data traces successive changes in sourcing zones used by companies in European countries such as France and Germany since the 1950s. They show relocations from Italy, Eastern Europe, Turkey, Hong Kong, the rest of Asia, Bangladesh, Pakistan, Myanmar, and the rise of Central America. And the wheel keeps turning. What does the future hold for Africa? Who knows whether today’s crisis-blighted Europe will once again become a sourcing zone in ten or fifteen years’ time?
Personally, I have not seen a new sourcing destination emerge. The financiers undoubtedly pinpoint them, but they are focused on production costs and overlook criteria as invaluable as the existence of a tradition of know-how in apparel production, and complexity and quality. These are decisive variables. As we have seen with traditional manufacturing areas in Italy, the erosion of manufacturing often heralds the drying up of creativity.
It is also difficult not to see the growing complexity of supply and measure the impact and costs of this, instead of just thinking in terms of manufacturing cost. This is reflected in the strikethrough sales that are becoming widespread.
Companies have responded to the crisis with oversupply, rather than focusing on a few well-defined products and targeted customers. Studies conducted in the United States, for example, have shown that the bulk of sales are on made basic products – polo shirts, chinos etc. – rather than on the products shown on the catwalks. Basically, our income sources are actually the exact opposite of what we showcase! Similarly, the proliferation of designs and the accelerated pace of updates raise questions.
It increases and complicates the cost structure without necessarily generating additional income. In addition, consumer research indicates that customers are put off by overabundant offers, and that they begin to doubt the genuineness of the prices shown.
Firstly, do not be afraid to use new technology that is still under-exploited. I am talking about computeraided design (CAD), for example.
Understand that in sourcing zones, the trend is not towards lower prices: everything is becoming more expensive, and fashion is no exception.
Above all, you need to think about costs across the whole value chain, rather than focusing solely on variations in production and labour costs.
Just like the success of the slow food movement in the food industry, the shift towards slowing down should also be taken seriously by the fashion industry.
It is up to each company to find solutions to suit it, but it is crucial to have a clear view of your core expertise and to rely on it.
Finally, don’t be afraid to overhaul your organisation to take it in a new direction.
Choices: where and what to buy
Antonio Barberi Ettaro
Senior sales consultant specialising in international sourcing, Modint
I am going to focus on the key developments in Free Trade Agreements and the Generalised Scheme of Preferences for the EU-28 countries. For the main producer countries, we will briefly look at current developments and their main impact on trade and the global cost of sourcing to companies in the sector.
What are the latest developments?
A trade agreement was reached in Bali in December 2013, through the WTO. It has had little impact so far. The basic tariff applicable to imports in the EU remains at 12%.
In Brussels, a number of bilateral negotiations have been instigated with the aim of overcoming the slow pace of negotiations at the WTO as part of the Doha Development Round. But the negotiating mandate and agreement ratification procedure is very lengthy. The most recent agreements concern South Korea and Singapore, which benefit from access to zero duty.
Ongoing agreements whose scope could be broader are still being discussed with India and Vietnam.
Ukraine, which as you know is going through political crisis, is the focus of much attention from Brussels. Since an agreement signed last June, imports that were subject to the preferential 9.6% tariff could switch to zero duty following ratification by the European Parliament.
The effect of tariff policies is reflected in EU garment import statistics (woven and knitted apparel).
Unsurprisingly, China remains by far the largest supplier, despite a slight decline last year. Despite the Rana Plaza catastrophe, Bangladesh remains an important sourcing destination for European brands, while Cambodia and Pakistan are taking full advantage of access to zero duty. Turkey, which is in the European Union Customs Union, is a somewhat separate case; it has no vote when it comes to the negotiation of EU agreements, although it regularly expresses its reservations.
If the agreement concerning India is signed in 2015, we believe 2017 will be more or less the same, with zero tariffs compared with a rate of 9.6%.
The GSP+ arrangement, as we have seen, has had a very significant impact on countries such as Bangladesh. Overall, Pakistan has benefited the most this year, with quantities on the increase in all product categories. The other winner is Cambodia, which ranks 12th.
Myanmar has also been affected: in the short term, imports should continue to benefit from zero tariffs, to then change back to 12%. For Europeans who have no connection with Asia, accessing this region is not easy. In addition, we are talking about just 300 manufacturers, while in Bangladesh there are more than 5,000.
Vietnam needs to be watched closely. The tariff applied to date is 9.6%, but it could switch to a zero tariff provided it increases the proportion of its weaving production, most of which it still imports from China. The agreement must be signed in September. Other countries, such as Thailand, are on the point of exiting the GSP+ scheme and will probably return to the 12% rate.
For Africa, it pays to be cautious. Statistically, we only see direct imports to the EU, although many trade flows go through Turkey.
In conclusion, I predict that Bangladesh and Pakistan will come out on top in 2014.
We may also see significant developments in Vietnam and India.
Finally, although I often wonder about proximity sourcing, we know little about countries such as Portugal, Macedonia, Bulgaria, and Albania. A number of companies dominate in these countries, but account for very small volumes that are not accurately reflected in the statistics.
What consumers are looking for does not really match what they are given. The reality is that most global brands are obsessed with price, while the proportion of what they sell at the maximum price does not exceed 60%. It is a vicious circle that leads consumers to in turn seek the lowest prices. We must find another way of doing business. How can the industry change its way of thinking and operating?
So many contradictions! The industry is training consumers in disposability and slashed prices, while apparel budgets are shrinking, and we know that prices of raw materials will continue to rise. Can consumers change habits? It has been done in the food industry already, because people realised that what they eat has repercussions for their health. Apparel consumers have a responsibility and must change their attitude. For their part, investors always call for more mark-up, while at the same time demanding zero environmental risk, traceability etc. Can institutional representatives here today tell us what direction businesses are leaning towards?
Within the international federation, which represents a large proportion of small and large enterprises worldwide, we see that some are beginning to work differently and look beyond immediate costs, but that many of them lack the practical knowledge to do so. However, when there are concerted efforts, we see a decrease in wastage and earnings better distributed between partners. But there is still more to be done. Education also has a role to play, and our industry has a great need for more graduates attuned to this new approach.
Harry Van der Zee
I agree. We currently have a supply model, a push model, but we meet retailers who are seeking more ethics and transparency. There are real opportunities for differentiation in this area, as demonstrated by the leather industry, for example. It is a real challenge, and we are currently in midstream.
I would also like to stress the fact that companies are creating bigger and bigger collections, and that mark-ups in retail are decided from the assortment planning stage. The question that retailers should be asking continually is whether, in their planning, they are sure their products are in tune with consumer demand, and will not end up at strikethrough prices. This includes assortment depth and collection updates. When asked about shortening the timing of collections, managers often respond “speed to market”. But we must also make sure “speed from market” has been carefully analysed, and the results carefully interpreted.
Changing model is also about understanding better how customers buy today. A rather thought-provoking comment springs to mind, from the founder of Zalando, who suggested getting into a teenage mindset.
He questioned whether it was still relevant to develop whole collections! We know about and put up with the cost of increased collections, and ultimately there is a new generation of consumers who have grown up with e-commerce and are primarily product-focused. Saving 20 cents by moving production from Bangladesh to Pakistan or elsewhere has a low impact compared to that reality.
Dhyana Van der Pols
For countries presented as new profitable destinations such as Lesotho and Namibia, we should remember that there are only a few hundred companies there. Above all, these companies are struggling with the sampling volumes demanded of them by the major retailers. These collections will not reach the end of the life cycle, and are destined for markdown or disposal. In other sectors, there is dialogue with consumers. In fashion, we remain tethered to a system that imposes costs on suppliers, while 20 kg of clothes per person per year are never worn. That’s 33% of wardrobes!
Harry Van der Zee
In contrast with the ICT industry, which I come from, the fashion industry can be astonishing. We push products without always being sure of producing items that will sell. I think that the industry could draw some inspiration from technology, and use it to refine the quality of information about consumers and sales.
Beyond tools, companies’ sales departments already hold a wealth of information about what sells.
This information is simply not used. Perhaps due to selfishness, policy, or even ignorance.
Dhyana Van der Pols
The knowledge your supplier holds should no longer be overlooked. Cooperating also means being prepared to share information.
The winners in retail are those who are atypical and disruptive
Harry Van der Zee
CEO, Micro Fashion-brands Michaelis & Profuomo
What we are seeing now is a market that has shrunk by around 15% in seven years, with stores closing down, aggressive competition, the arrival of new entrants, the web, and intense pressure on prices. At the same time, we are seeing an incredibly widespread use of markdowns, which now make up 50% of the calendar in the Netherlands. What impact does this have on supply and on how we get closer to selling?
Firstly, we are seeing an extremely complex supply chain flanked by regulations, environmental standards and subject to consumer pressure regarding ethics and transparency. To succeed, major investment needs to be channelled into a supply chain that meets these demands. However, it is very costly – in time and money – to change production bases.
We are also dealing with incredible paradoxes. For example, consumers who want both a better price and more services; fashion retail businesses that are struggling to achieve margins, but who nonetheless tie up a lot of money in their inventory. This is complete paradox when we consider the difficulty of securing bank finance for investments in stores, strategy and purchasing budgets.
So yes, change is needed. But how?
At our company, 50% of which focuses on private label and has two own brands, change required a collaborative approach throughout the chain, from the supplier relationship to in-store planning. In addition, we moved from running our business on a push model, driven by costs, to a vertical approach more focused on final sales (sell out) than on B2B trade (sell in). Finally, technology has enabled us to analyse sales, to look at assortment planning in detail and to refine collections accordingly, the proportion of basics, the time to market.
The result has been radical; our sales have increased by 12 to 20%. However, there are multiple ingredients in this recipe: involving all internal (financiers, sellers, buyers etc.) and external stakeholders, transparency throughout the chain, and finally a proactive vision that is shared by all.
Study: global sourcing and 2014 subcontracting trends
Senior manager, Kurt Salmon
We will look at global sourcing zones before outlining avenues to explore in the near future. On the demand side: increasingly complex consumer demands, expanding product ranges, pressure on prices, accelerating innovation, volatility and unpredictability of demand in Europe. On the supply chain side, issues of availability and raw materials prices dominate, as well as the rise in manufacturing and labour costs and in supply risks in many regions of the world, including Eastern Europe.
There are also other significant global trends. The proliferation of lines and products offered to
consumers faced with too much choice (there were 6 brands of jeans in 1980, and over 800 today!).
There are some positive signs on the exchange rate side, but this is still very unstable. There are also small variations in the manufacturing costs of the major sourcing regions; we have seen the production of certain products such as T-shirts shifting away from China, and the newfound attractiveness of destinations such as Ethiopia and Myanmar, where low costs do not compensate for significant deficiencies in infrastructure and capacity.
We can identify three emerging trends.
On the retail industry side, it is essential to start by analysing the market and consumers, but this must relate to a globalised demand and allow a trade-off between different consumption zones. We also point to consumers’ involvement in product design (mass customisation is also becoming a serious channel). As regards time to market, I am struck to hear managers declare spectacular reductions in lead times without being able to measure the benefits drawn from this.
The sourcing options themselves need to be re-evaluated in the light of assortment depth, response time objectives and the impact on updates planning. This applies to design, quality and responsibility, and requires flexibility in managing the supply chain and greater collaboration with suppliers.
It is time for companies to take advantage of new technology. The examples of Nike, Adidas and Hugo Boss demonstrate progress in the prototyping enabled by 3D printing. Similarly, given the complexity of the processes, extended collaboration systems such as PLM (planning lifecycle management) are tools to be deployed. And we can’t help but worry about the modest level of investment in this field (which is between 1.5 and 2.5%).
The roadmap for the immediate future could be summarised as follows:
• increasing speeds, not only by using sales data, but by scanning multiple data sources (stores,
partners, the internet, production tests, social networks). The most difficult task being extracting
relevant information to make the right decisions.
• working towards more integrated sourcing;
• ensuring that stakeholders are working to improve efficiency in order to shorten the various
• being more transparent;
• consider optimising processes and analyses by investing in new technology.
Portfolio management and strategic partnerships: turning designs into products
CEO, BTI innovation and consulting
I invite you to examine your company in depth. I am here as a representative of a consulting firm specialising in strategy, quality management and knowledge management, and I am going to briefly explain the benefits and results achievable through systematic risk management.
Managers often say they are seeking responsible, yet inexpensive, sources of supply, but nobody is questioning the risks of such an attitude. The figures help to understand the current scope of the risks.
We have calculated that the number of supply chain errors increased by 465% between 2009 and 2011. In the United States, over the same period, these errors cost $350 billion. And we also estimate that this year, 70% of companies will experience least once an error in the supply chain!
A variety of factors contribute to these errors: lack of production capacity, internationalisation, complex processes, consumer demand for social and environmental responsibility (although managers are still struggling to tackle this issue head on).
Our approach to this involves comparing, supplier by supplier, the fixed price level (high, middle, low) and corresponding risk levels. To create this tool, we break down risk into several sub-factors – eight relating to political, economic and management parameters: price stability, quality, logistics, stability of the company, management know-how, substitution risk, social standards and price. We then subdivide each of these criteria to establish measureable indicators of risk. These are drawn from interviews with company managers who we help to retrieve the relevant information. The advantage of this strategy lies in plotting the comparison of the different business areas’ perspectives (production, finance, design, general management) against the scores to assign to different risk factors.
Of course, discussions are fierce, since differences in perception and priorities can be significant. But it is essential do this if we want to gain a shared vision that is based on measurable evaluations. The method is empowering. Following these calculations, managers can no longer shrug and say that they did not know the risks associated with a particular portfolio supplier. The weighting then provides a roadmap for deciding what we can expect from a supplier in full knowledge of the facts, whether this is the price level, increasing its quality or responsibility standards and so on.
The fashion management cycle, just-in-time deliveries and e-sample production
Dhyana Van der Pols
CEO, Nash International
Here’s a scoop: open source software for the collaborative development of collections in the cloud will go live in November 2014. The website is www.onestageahead.com and is the result of three years’ work. You will understand its significance better once I’ve explained the existing situation regarding collaboration with suppliers and what could be gained at each stage of the chain by opting for truly collaborative approaches. My analysis is based on my experience of coaching businesses: I see more than 200 businesses each year.
I have found that since the Rana Plaza disaster in Bangladesh, companies are certainly proving more concerned about traceability, ethics and reputation in their choice of sourcing destination, but cost remains the driving factor. Discussions with manufacturing suppliers are still sketchy: at best, clients are ready to transfer production-related operations, such as logistics, but there is no question of talking about trends or products, which many suppliers lament. And not without reason, when we know that the policy of oversupply often misses its target and results in markdowns or wastage.
The phenomenon of oversampling is just one example of the anomalies we must avoid. To maintain their high turnover of new products, brands are forcing their manufacturers to provide and cover the cost of at least fifteen sampling stages. Let’s do a quick calculation: for a small business producing 100,000 items per month for five clients, this translates to 45 samples to be manufactured and delivered, multiplied by as many updates, i.e. at least 150 samples per month over four seasons. The cost? At least $60,000 per month. Needless to say, this is not tenable.
The software I told you about earlier aims instead to broaden the exchange of information with suppliers to the trend identification and product development stages. Interfaces allow style and colour options to be shared. Option segmentation per market (women, men, children) is available. Collaboration can stall at the colour ranges stage or extend to the topics of fashion, choosing patterns, and even to shape options, thanks to a directory of 8,000 styles, and even to selecting a retail price.
This tool offers cooperation modules in which each discussion can be more or less advanced. If used properly, it shortens sampling stages and reduces associated costs to zero (transport, materials, time, development etc.). Imagine the environmental savings too. Downstream, it also enables products and lead times to be much more in tune with upstream industry information.