Plains Cotton Cooperative Association

Untold volumes have been written about changes in sourcing strategies for textiles and apparel over the last century. As transportation infrastructure improved, as technology advanced, and as societies progressed from agrarian to industrial, sourcing managers chased the cheap needle all over the globe. This search was focused like a laser beam on one single factor: price. In fact, it was even more narrowly defined than that.

Price Is not the Same Thing as Cost
Buyers didn’t really look at all the components of price or cost. They looked simply at one number, namely nominal first cost. How many cents per pound, or how many dollars per yard, or per garment.

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They ignored many of the other critical factors inherent in understanding total value, such as freight, duties, quality, response time and speed to market, the time value of money, the costs of obsolescence and stock-outs, and the performance records of their vendors. If they could say to their bosses, that they found it cheaper, it didn’t seem to matter if they even understood the terms of sale, the validity of delivery dates, or any of the other twists, turns, pitfalls, and costs in the supply chain.

A mindset settled in: “We’re going to Asia.” New generations of sourcing executives came on board with no knowledge whatsoever of their available regional options. Even today, there are organizations who are trying to create a database of regional capabilities so they can help educate these young buyers regarding their options close to home.

Several interdependent factors over the last three years have totally changed the outlook for efficient sourcing. First, the rise of the Asian consumer has put upward pressure on retail prices in China and India. Millions of people have migrated from a rural agrarian lifestyle to an urban, gainfully employed existence.

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People who used to grow their own food suddenly have jobs creating infrastructure or working in industry. Thus, they have more personal disposable income than ever before. The demand for consumer goods, fueled by their spending, has meant Asian textile and apparel producers could raise prices at home. This meant export prices went up as well.

Industrial and infrastructure expansion has created inflationary wage pressures in China, India, Pakistan, Bangladesh, Cambodia and elsewhere. For more than five years, many U.S. brands and retailers have been transitioning their sourcing from China to cheaper wage countries like Bangladesh or Vietnam, but wages are now going up in those countries as well. Consumer purchasing power grew steadily in China and India, where economies have happily chugged along with annual GDP growths of 8% to 12% while the rest of the world contracted. Some of the production of textiles and apparel in cheaper-wage Asian countries was routed back into China and India rather than being exported to the U.S. or Europe.

The volatility in cotton prices, which began as a short-term phenomenon in 2008 and became a systemic phenomenon in 2010, has caused massive disruptions in the textiles and apparel supply chain. Apparel buyers in the U.S. have been told by some of their Asian suppliers that they could not ship the garments because the weaver couldn’t get the yarn from the spinner, who couldn’t get the raw cotton from his supplier. Default became rampant and renegotiation became commonplace.

The more sinister effect, however, was the additional time these disruptions injected into the flow of garments to Western consumers.

Don’t Overlook Excess Inventory
A further complication of the volatility and the skyrocketing cotton prices was that participants throughout the supply chain became reluctant to purchase raw materials unless they could sell their products. No one wanted to be stuck with speculative inventory if cotton prices fell. As a result, the pipeline began to empty. Inventories were pared down by spinners, weavers, knitters, apparel makers, brands and retailers. Then, as economic conditions in the U.S. and Europe began to improve, the chase was on. Brands scrambled to find fabric and needle to fill the pipeline for the 2010 back-to-school season, and in some cases found they had waited too long to buy.

Yarn spinners were full, so pure knitters and weavers couldn’t make nearby shipments of fabrics. Since contractors couldn’t get fabric, they couldn’t offer nearby delivery of garments. With the pipeline largely empty, response time and speed to market came to the forefront of sourcing executives’ concerns. No longer was price the only factor. In fact, price made very little difference if no one could deliver the goods.

In this scenario, regional supply chains and vertically integrated supply chains proved their value. When virtually every day matters because inventories are lean, brands and retailers make time their most important determinant of sourcing strategy rather than simple price. This is where the vertical model has advantages over other sourcing strategies.

Time can be saved at every step in the supply chain in a vertically integrated operation. If a textile mill can spin its own cotton into yarn to weave or knit, then it doesn’t have to wait for deliveries from a spinner. If the mill’s owners produce their own cotton, they don’t have to wait for a merchant to deliver it.

The elimination of credit constraints and the need for duplicate testing can eliminate as much as two weeks in the conversion of cotton into fabric.

The same two factors usually create further delays in the next link in the chain, namely from textile mill to cut-and-sew operator. Credit constraints have been a huge problem throughout the world as cotton prices went from 60 cents to $2 per pound. Contractors were not able to triple their lines of credit, so shipments slowed down in the non-vertical model.

Duplicate testing is another hurdle that can be eliminated in the vertical model. Contractor and fabric suppliers, no matter how close they might be, have a natural (and perhaps healthy) level of mutual distrust.

If a contractor is buying goods based on specified quality parameters based on a unit price, they are going to want to verify both the quality and the exact quantity received, which can take a week or longer. In the vertical model, trust can be established and test results can be shared and confidently used downstream.

Then, of course, the merchandise has to be shipped back to wherever it is being sold. This is where the regional model contributes to saving time. It has been estimated that a vertical model, producing U.S. fabric from locally produced cotton and shipping the fabric to Central America to its own full package garment operation, can save over two months of delivery time compared to Asian, Middle Eastern or African garment producers.

There are several other factors that contribute to saving time. One is in design — working between the fabric producer, the garment producer and suppliers of the trim. Designers can leave their U.S. bases and be at work in Central America the same day, whereas they face at least one to two days of travel to arrive in Asia or the Middle East, where jet lag adds to the time needed to accomplish their goals. Contractors provide comfortable accommodations for designers.
 

A two-day trip can accomplish what would take a week or more in a different part of the world.

A Joint Selling Opportunity
Another example of the types of synergies that can be achieved in the vertical model is what happens when fabric sales forces and garment sales forces make joint calls on customers. Many brands still want to control fabric purchasing, yet they really only buy a full package garment. They may have a fabric price goal in mind because of a quote they received from a cheaply priced origin, but at the end of the day they are going to pay a certain garment price.

In one example, a fabric salesman and a garment salesman from a vertically integrated company met with the buyer of a large brand. He said he needed a very complex fabric, but it had to be below a certain price. No fabric producer would have accepted that price, and the conversation would have ended.

However, when he said what he would pay for the garment, the two salesmen were able to consider their joint costs and make the deal work. If they hadn’t been there together, a few more weeks might have elapsed as the brand searched in vain for a fabric at their price to go into a garment whose price they already knew.

Vertical integration also helps save time in design and construction. It is very hard to visualize how a fabric will actually look in garment form if someone is looking at just a small swatch of fabric or even a leg tube.

However, if that fabric is shown as a garment with various treatments and finishes, the designer can see firsthand the product differentiation that is possible from a single chassis. When different washes and finishes and embellishments are applied to the same fabric, a designer can create a whole collection with a wide range of looks from a single fabric. This differentiation in the laundry and finishing means that the fabric producer can have longer runs and fewer changes, thus making the fabric cheaper.

Cheaper, quicker, and less need for inventory are all concepts that brands and retailers love. As changing demographics and income growth patterns create greater consumer demand in Asia, regional sourcing will become more important for all countries.

In the regional model, vertical integration offers additional savings in time, logistics and money. More brands are embracing this kind of thinking every day. While globalism was the buzzword of the last decade, regionalism will come into its own now.

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