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Most apparel companies have prioritized a shift away from Chinese manufacturing over the last decade. Unfortunately for many, hard work remains ahead.
Departures from China have accelerated over the last five years due to COVID lockdowns, increased labor rates, and Section 301 tariffs that remain in place. The result of this shift is a drastically more complex and fragmented apparel supply chain that requires an overhaul in how sourcing operations are structured and function.
Previously, China served as a one-stop shop for the apparel industry to run manufacturing operations. But variability in country-level labor capabilities, capacity restraints, raw material availability, supply chain effectiveness, duty agreements, country-specific category expertise, infrastructure challenges, ESG concerns, and geopolitical risks have combined to fragment China’s historical dominance across the world.
And the shift from China isn’t done; in fact, by 2025 we expect China’s share of U.S. apparel imports to decrease by a further $14-17B from 2022 levels. As development centers, material supply chains, sophisticated manufacturing methods, and machinery are still China-dependent, retailers will need to shift country of origin while also shifting these other components.
As such, a single Asia-based sourcing office managing a few dozen factories in 1-2 countries is no longer economically viable or operationally effective. Retailers must now manage those same factories in 4-6 countries spread over a greater distance, alongside raw material suppliers in additional countries.
The resulting challenges are not easy to alleviate. However, there are measures you can take today to understand the implications this landscape has on your business and inform your strategy adjustments to maximize efficiency and mitigate risk.
Structure your organization to manage a fragmented, global supply base
Develop your organization with flexibility and agility in mind. As your country mix expands, think through how to implement resources on the ground to ensure operations run smoothly and linkages between stakeholders are strong and efficient. By linking merchandise planning to capacity planning to sales planning, you can cross-functionally match demand requirements with supply capabilities. Supply chains are now too complex for siloed teams to coordinate over email—develop your integrated business planning muscle.
Leverage your in-region supplier partners to enhance capabilities within your existing infrastructure. This is especially important given you’ll no longer have an office in each sourcing country or sub-region to manage operations.
As an example, consider the challenges in raw material management brought on by this global shift. Raw materials are not yet established in many new sourcing countries—cotton, for instance, is still predominantly farmed in China. Planning must now be more accurate and dynamic, to ensure your organization reflects your new sourcing base. Your raw materials team must be capable of executing pre-positioning to ensure efficiency. Product development calendars must shift to account for this as well.
What will ease the pain?
To start, you must change the way you manage sourcing, working towards a “sourcing model of the future.”
This entails smaller, more agile in-region sourcing offices that focus on planning and coordination. Each office should communicate supply chain statuses and data with you in real-time, so all teams are up to date on operations.
Your intellectual property for apparel creation (such as specs, patterns, lasts, and molds) needs to be centrally controlled for easy dual-sourcing or shifting due to geopolitical disruptions. Batch sizes will be smaller and more frequent, and inventory risk takes on greater importance given inflation and the increased cost of capital in today’s environment.
A key solution is to give your suppliers more responsibility and autonomy in exchange for real-time data access. By providing them with the decision rights and authority to lead product development in-region, you free up in-house bandwidth. Critically assess where and in what capacity your own in-region presence is needed, and where you can rely on third parties.
Focus on the data that matters
Start by understanding your import strategy. Do you have countries where you are too concentrated or overexposed? Any that are too fragmented to manage, leading to excess costs or poor performance? Do you have backups at a category level that can provide business continuity in case of disruptions?
To make informed sourcing decisions, work to understand cost drivers across the full apparel manufacturing process. Analyzing the interplay between where raw materials are sourced, local labor and overhead prices, transport costs from factories to distribution centers, and duties and tariffs will allow you to optimize overall unit costs.
Adjust your supplier scorecards with the right metrics to match the new reality. Incorporate on-time metrics and leading indicators to home in on the root cause of delays. Work alongside your suppliers to solve issues that arise, and apply the same focus to managing second and third-tier suppliers; often raw materials are responsible for delays of finished goods.
Strategically recalibrate your shipping capacity by lane with your ocean carriers to get the most bang for the buck when transporting your apparel from its origin. Transpacific ocean freight rates are down nearly 80% compared to one year ago—utilize the current climate to lock in low rates today.
With customer expectations for newness on the rise and loyalty on the decline, organizations must build agile supply chain networks to adapt quickly. If you don’t, the risks are massive—you’ll be left with off-trend stock (or no stock at all), margin pressures will squeeze profits, and your competitors will capture capacity in new regions by moving first.
If you haven’t started changing, you’re behind as it’s a 12-to-18-month journey to see results. Start with an accurate picture of your current supply chain (not just finished goods but raw materials and commodities) and begin the journey today to ensure you aren’t stuck during the next supply chain crunch.
