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Shift in global apparel sourcing.

Byline: A.H.H.Saheed

The Clothing Sector has traditionally been a gateway to export diversification and industrial development for developing countries and especially for Low-Income Countries (LIC's) but recent developments may question this role.

In most middle and low income countries, the clothing sector was central in the industrialization process, given its low entry barriers (Low Fixed Costs and relatively simple technology) and its labour intensive nature, the Sector absorbed large number of unskilled, mostly female workers and provided upgrading opportunities into higher value added activities, within and across sectors. Recently, however the environment for global clothing trade has changed significantly, driven by the rise of organizational buyers and their global sourcing strategies, the phase-out of the Multi Fibre Agreement (MFA) at the end of 2004 and the global economic crisis in 2008-2009.

The year 2010 was a year of recovery for most of the countries in the world after the global financial crisis which began in mid-2008 and went up to latter part of 2009. The year 2010 is also a positive year for Production and Trade.

In 1990, Natural Fibers accounted for over 60% of global fiber consumption, while in 2000 that share declined to 45% and fell further to 40% in 2008. Cotton has been rapidly losing its market share. It is not surprising, therefore that the distribution of apparel production varies considerably from that of apparel consumption. It is estimated that global consumption of apparel is worth between US$ 550 bn. and US$ 570 bn. per annum. About a third consumed in Europe, a third in the USA and a third in Asia.

Global apparel production clearly continued to rise in the first-quarter-2011, according to recently released UNIDO data.

Apparel production was relatively stronger in the emerging countries. Global apparel production continued rising in the first -three months in 2011,gaining 5.98%, from a year earlier. Apparel output continued decreasing in the first-quarter in developed countries, losing 4.69% from the same period year earlier. In emerging countries apparel output was surging with 12.82% growth.

However, Asia accounts for an over-whelming 71% of world's apparel production, while only 14% is made in Europe, 11% in the Americas and 4% in Africa and Middle-East.

Developed countries continued to be the major consumers of cotton with per capita consumption at 9.5 kg in 2008. Just slightly higher than 9.2 Kg registered in 2004. The Per capita consumption of man-made fibers in developed countries on the contrary, experienced a slight decline between 2004 and 2008 from 12 Kg to 11.8 Kg.

At the world level, Synthetic Fiber consumption in 2009 amounted to 35 Mn. Tons substantially exceeding 23.3 Mn. Tons of cotton consumed in that year. The per capita consumption of synthetic fiber increased by 21% between 2004 and 2009 whereas per capita consumption of cotton increased by only 11% during that period. Forecast of worldwide fiber consumption in 2014 will be cotton-25.9 mn tons as against 46.7 mn tons of synthetic fiber.

In today's market place, it has become the norm to source clothing form countries with low costs. Furthermore, buyers are being forced to look for ever cheaper sources in order to satisfy consumers who are increasingly demanding while competition at the retail level continues to get tougher. Global consolidation has increased entry barriers at the country and firm level.

The MFA phase-out led to increasing entry barriers at the country level as quotas no longer secure market access for low-income countries. At the firm level global buyers supply chain rationalization strategies have resulted increased entry barriers as more capabilities and higher standards are expected from suppliers. Thus firms are able to enter supply chains of global buyers only if they can offer higher manufacturing capabilities, including low costs, high quality, short lead times, production flexibility and labour compliance.

In addition buyers increasingly demand non-manufacturing capabilities, including input souring, production development and design, inventory management, logistics and communications.

These capabilities require financial and human resources at the firm level as well as reliable and low cost infrastructure and backbone services, education and training facilities and access to finance at the country level. These new development are challenging, as low labour costs and preferential market access are not enough to be competitive in today's clothing sector.

Furthermore, buyers are looking increasingly to source from factories which adhere to Corporate Social Responsibility (CSR) programmes in general and fair labour practices in particular.

Over the last two decades, international sourcing have intensified as buyers have searched the world to find the best supply sources for their companies.

The way clothing is being sourced by EU and US buyers is rapidly changing in the post-quota and post crisis. World apparel producers will have to swiftly offer a large number of services. Being no more forced by the now expired quota system to source from a large number of countries, western buyers have drastically reduced the number of suppliers. Long-term relationship with a small number of core suppliers is being preferred by buyers and have become key in buyers sourcing strategies, although still relying on intermediaries for a large part of their orders.

In addition to the traditional low production costs. EU and US buyers are increasingly looking for lower lead times and production flexibility.

A wide array of services is also expected from the same suppliers, including textile sourcing, design and product development inventory management and stock holding, logistics and financing, communication and merchandising. They are also more insistent on labour and environmental compliance.

The end of quotas and the economic crisis have accelerated the long-term modification of the global apparel supply chain, says a recent World Bank Report. Asia based sourcing houses are increasingly having a greater role in the global process while more emerging countries try to shift from subcontracting to full package services.

Countries, particularly the BRIC states - Brazil, Russia, India and China have become economically and politically more powerful in the last years.

Prices of products made in China are rising. This is a bad news for organizations that rely on China for manufacturing. Today many sourcing organizations are asking "Where's the next China?" Unfortunately there isn't a "next China."

There have been three keys to China's manufacturing dominance. Pro-trade government policy, solid infrastructure and a huge under employed labour pool. It is the last ingredient - China's huge labour pool - that has kept manufacturing costs so low for so long.

However in the recent past, we have seen the wide changes very quickly in The Clothing Sector has traditionally been a gateway to export diversification and industrial development for developing countries and especially for Low-Income Countries (LIC's) but recent developments may question this role.

In most middle and low income countries, the clothing sector was central in the industrialization process, given its low entry barriers (Low Fixed Costs and relatively simple technology) and its labour intensive nature, the Sector absorbed large number of unskilled, mostly female workers and provided upgrading opportunities into higher value added activities, within and across sectors. Recently, however the environment for global clothing trade has changed significantly, driven by the rise of organizational buyers and their global sourcing strategies, the phase-out of the Multi Fibre Agreement (MFA) at the end of 2004 and the global economic crisis in 2008-2009.

The year 2010 was a year of recovery for most of the countries in the world after the global financial crisis which began in mid-2008 and went up to latter part of 2009. The year 2010 is also a positive year for Production and Trade.

In 1990, Natural Fibers accounted for over 60% of global fiber consumption, while in 2000 that share declined to 45% and fell further to 40% in 2008. Cotton has been rapidly losing its market share. It is not surprising, therefore that the distribution of apparel production varies considerably from that of apparel consumption. It is estimated that global consumption of apparel is worth between US$ 550 bn. and US$ 570 bn. per annum. About a third consumed in Europe, a third in the USA and a third in Asia.

Global apparel production clearly continued to rise in the first-quarter-2011, according to recently released UNIDO data.

Apparel production was relatively stronger in the emerging countries. Global apparel production continued rising in the first -three months in 2011,gaining 5.98%, from a year earlier. Apparel output continued decreasing in the first-quarter in developed countries, losing 4.69% from the same period year earlier. In emerging countries apparel output was surging with 12.82% growth.

However, Asia accounts for an over-whelming 71% of world's apparel production, while only 14% is made in Europe, 11% in the Americas and 4% in Africa and Middle-East.

Developed countries continued to be the major consumers of cotton with per capita consumption at 9.5 kg in 2008. Just slightly higher than 9.2 Kg registered in 2004. The Per capita consumption of man-made fibers in developed countries on the contrary, experienced a slight decline between 2004 and 2008 from 12 Kg to 11.8 Kg.

At the world level, Synthetic Fiber consumption in 2009 amounted to 35 Mn. Tons substantially exceeding 23.3 Mn. Tons of cotton consumed in that year. The per capita consumption of synthetic fiber increased by 21% between 2004 and 2009 whereas per capita consumption of cotton increased by only 11% during that period. Forecast of worldwide fiber consumption in 2014 will be cotton-25.9 mn tons as against 46.7 mn tons of synthetic fiber.

In today's market place, it has become the norm to source clothing form countries with low costs. Furthermore, buyers are being forced to look for ever cheaper sources in order to satisfy consumers who are increasingly demanding while competition at the retail level continues to get tougher.

Global consolidation has increased entry barriers at the country and firm level. The MFA phase-out led to increasing entry barriers at the country level as quotas no longer secure market access for low-income countries. At the firm level global buyers supply chain rationalization strategies have resulted increased entry barriers as more capabilities and higher standards are expected from suppliers. Thus firms are able to enter supply chains of global buyers only if they can offer higher manufacturing capabilities, including low costs, high quality, short lead times, production flexibility and labour compliance.

In addition buyers increasingly demand non-manufacturing capabilities, including input souring, production development and design, inventory management, logistics and communications. These capabilities require financial and human resources at the firm level as well as reliable and low cost infrastructure and backbone services, education and training facilities and access to finance at the country level. These new development are challenging, as low labour costs and preferential market access are not enough to be competitive in today's clothing sector.

Furthermore, buyers are looking increasingly to source from factories which adhere to Corporate Social Responsibility (CSR) programmes in general and fair labour practices in particular. Over the last two decades, international sourcing have intensified as buyers have searched the world to find the best supply sources for their companies.

The way clothing is being sourced by EU and US buyers is rapidly changing in the post-quota and post crisis. World apparel producers will have to swiftly offer a large number of services. Being no more forced by the now expired quota system to source from a large number of countries, western buyers have drastically reduced the number of suppliers. Long-term relationship with a small number of core suppliers is being preferred by buyers and have become key in buyers sourcing strategies, although still relying on intermediaries for a large part of their orders.

In addition to the traditional low production costs. EU and US buyers are increasingly looking for lower lead times and production flexibility.

A wide array of services is also expected from the same suppliers, including textile sourcing, design and product development inventory management and stock holding, logistics and financing, communication and merchandising. They are also more insistent on labour and environmental compliance.

The end of quotas and the economic crisis have accelerated the long-term modification of the global apparel supply chain, says a recent World Bank Report. Asia based sourcing houses are increasingly having a greater role in the global process while more emerging countries try to shift from subcontracting to full package services.

Countries, particularly the BRIC states - Brazil, Russia, India and China have become economically and politically more powerful in the last years.

Prices of products made in China are rising. This is a bad news for organizations that rely on China for manufacturing. Today many sourcing organizations are asking "Where's the next China?" Unfortunately there isn't a "next China."

There have been three keys to China's manufacturing dominance. Pro-trade government policy, solid infrastructure and a huge under employed labour pool. It is the last ingredient - China's huge labour pool - that has kept manufacturing costs so low for so long.

However in the recent past, we have seen the wide changes very quickly in China - Increase wages dramatically in response to multiple strikes, particularly in coastal China, leading many Companies to move inland. However the Great Recession forced many suppliers into survival mode and enabled buyers to get low prices, but this was a temporary situation.

As the global economy begins to recover wages are again increasing. There is now little doubt of what the future holds. Prices of products will rise and so the Companies will again ask "where's the next China.?" Unfortunately, there is no other country where it is possible to find the three keys - pro-trade government policy, solid infrastructure and a huge under employed labour pool. Only India comes close on the size of under employed labour pool, but India lacks pro-trade government policy and solid infrastructure.

Yes - there are low-cost alternatives to China. Many Companies have found success by sourcing from countries like - Vietnam, Bangladesh, Indonesia, Thailand etc. However, none of these countries has a large enough underemployed population to keep wages low, if Companies pour in for long and in such numbers, as they did in China. Therefore, any gains from moving to new geographies are likely to be short-lived.

Long-Term Shift

The end of quotas and the economic crisis have accelerated a long-term shift in apparel sourcing strategies. Retailers increasingly are focusing on private labels, including at higher prices than in the past. Clothing importers increasingly want to buy fully packaged apparel rather than investing in the details of a complex textile and apparel chain.

For suppliers in emerging countries, this is accelerating the long-term move from CMT (Cut, Make and Trim) where materials are provided by the apparel buyer to OEM (Original Equipment Manufacturer also called FOB), where the Contractor is able to independently source textile inputs, and even to the Full Package Model or ODM (Original Design Manufacture), where the whole production process including design is controlled by suppliers.

Focusing on Reliable Suppliers

The rising role of social and environmental standards is another merging trend in the global apparel market.

Sourcers increasingly focus on a small number of suppliers while developing with them a long-term relationship.

At the same time, they reduce their dependence on single factories, looking for back-up suppliers.

The reliance on China could also be reduced in the coming years. Japan for instance began sourcing from other Asian countries like Vietnam or Bangladesh.

Few Views expressed at Euratex AGM on 9 th June,2011.

The future relations between Textile and Clothing Industry and the Retail will depend on how we corporate to understand and service the growingly elusive and intangible consumers' needs.

"In future, winning companies will be the ones able to connect with consumers and optimize their in-store experience thanks to an integrated and business and product planning. The latter should speed-up design and development while integrating sourcing, supply and logistic partners with the aim of improving companies service strategies and create unique flow paths."

"Experience has shown that, when suppliers and retailers cooperate, exchange information on stock levels and sales and, more generally, create solid and longlasting relationships as business partners, both parties can achieve much better results than if they deal with each other merely as suppliers and buyers".

Sources: Euratex, UNIDO, World Bank study reports, ITMF Annual conference report 2009 Walmart, Apparel magazine.

Wal-Mart-Expectation from suppliers

1. We will require all our suppliers to clearly demonstrate their compliance with local environmental laws and regulations.

2. Suppliers shall become more energy efficient and reduce their use of natural resources. We will partner with our suppliers to achieve this.

3. When it comes to the products we sell, we will expect even higher standards for safely and quality.

4. We will require greater transparency and ownership from our supplier partners.

2009 Commitment

90% of top 200 apparel suppliers to be sourced form factories that receive Green or Yellow ratings (Apparel).

90% of direct import production to be sourced from factories that receive Green or Yellow ratings (corporate) 2012 Commitment

95% of direct import production to be sourced from factories that receive Green or Yellow ratings. (Source: ITMF Annual Conference Report-2009)
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Author:A.H.H.Saheed
Publication:Pakistan Textile Journal
Article Type:Industry overview
Geographic Code:90ASI
Date:Jan 31, 2012
Words:2847
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