Vertical Integration Offers a Range of Synergies
February 10, 2011 Cotton International’s theme for this year’s Annual edition, “A Whole New Game,” is a very apt description of the changes occurring in the global supply chain today.
The rapid emergence of new trade patterns is causing serious disruption in sourcing practices. Prices are extremely volatile and at record levels. Some economies are expanding, while others are contracting. Exchange rate policies are under extreme pressure from a variety of sources. The imposition of export bans also wreaks havoc throughout the world.
When such chaos reins, vertically integrated companies offer beneficial sourcing solutions for their customers around the world.
Perhaps the biggest change is the emergence of the Asian consumer. The United States and Europe have floundered in deep recessions since 2008, but Chinese and Indian economies are roaring forward. Many economists believed that the Asian “tigers” were totally dependent on exports to the West, but now it appears that they have become self-sustaining based on infrastructure growth. The jobs created by construction of roads, factories, housing, and commercial real estate have given birth to an new consumer class which suddenly has personal disposable income. Millions of people who formerly lived by subsistence agriculture now work in jobs where they take home money they never had in the past.
While they may not spend as much as Western consumers, the sheer numbers of Asian consumers make them a formidable source of demand. At a recent CCI meeting, one of the speakers noted that China expects to open 4,000 apartments per hour during 2011.
India, home to the world’s second largest population, is experiencing similar growth. Thus the emergence of the Asian consumer means that significant portions of the Asian textile capacity which previously sold their products into Western economies are now focused more on their own consumers.
Empty pipeline = danger
At the same time, the world’s cotton supply has shrunk so much relative to demand that the pipeline is dangerously empty. Prices have reached their highest levels in history. In this situation, textile mills in traditional textile and apparel exporting countries are reluctant to produce unsold “spec” inventory. They will only produce if they can book orders which will reflect the current high cost of cotton. This reduces the availability of yarn, cloth, and apparel.
This combination of increasing Asian consumer demand and the reluctance of Asian mills to produce unsold inventory has led to a situation in which U.S. and European apparel brands and retailers are suddenly faced with a scarcity of sourcing options. A hand-to-mouth buying pattern worked well for years when prices were declining, but many buyers now find that they waited too long and face potential gaps in supply.
Interestingly, many international brands and retailers suddenly want to secure supply and extend their coverage farther forward than they have in the past. When multiple large retailers who do not produce anything, but rather buy all their apparel “full package” from others, start calling cotton merchants and cooperatives about wanting to buy and store cotton, or calling textile mills to buy and store yarns and fabrics, it is clear that they are seriously concerned about supply disruptions. They have found that some apparel suppliers can’t deliver because they can’t get cloth, weavers and knitters can’t get yarn, and spinners can’t get cotton.
So it is indeed a whole new game. In this scenario, a vertically integrated supplier is the preferred source. Few companies around the world go all the way from field to fashion. But this strategy is experiencing a rebirth. Vertically integrated solutions offer a significant advantage to brands and retailers today. They can buy “full package” garments without worrying about whether the cotton will exist, the yarn will get spun, the cloth will be woven or knitted, or the apparel will get cut, sewn, and finished.
Vertical integration from raw material to finished products brings a whole range of synergies: credit constraints in the supply chain disappear; duplicate testing is eliminated; and the use of similar “chassies” fabrics offer product differentiation with unparalleled speed.
Speed to market means lower inventories and quicker turns, the retailers “dream.” In today’s market, with high and extremely volatile raw material prices, a high degree of economic uncertainty, and rapidly shifting trade patterns, brands and retailers around the world will look increasingly to vertically integrated suppliers for prompt and reliable service.
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