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Deciding sourcing country mix: Stability and flexibility drive decisions
Perceptions of country advantages and risks received new nuance, however, given supply disruptions and the need for more demand-focused, flexible sourcing models. Alongside traditional sourcing decision drivers, country stability has become a very important factor, especially for Asian sourcing markets. The need for flexibility and a changing cost-margin equation also encourages companies to look at options closer to home. Companies are turning their attention to nearshoring, or even reshoring, to secure the supply chain. This allows them to order closer to launch dates, or to employ dual-sourcing strategies for greater in-season reactivity and options for replenishment.
The sourcing footprint diversifies
In McKinsey CPO apparel 2021 survey participants to rank countries according to their sourcing potential over the next few years. The results highlight the current search for balance between sourcing cost and stability on the one hand, and speed and flexibility on the other. Of the top five most promising locations, only the two leaders— Bangladesh and Vietnam— Myanmar, Ethiopia, and India have been relegated to lower places, while for the first time in the last decade a near-shore country, Turkey, has reached the top five. Despite the relocation of sourcing volumes out of China in recent years, the relative stability of its apparel industry assures the country a spot in the top five sourcing hot spots. As we know from past predictions, being seen as the “most interesting” future sourcing destination does not necessarily convert into volumes. If we look at companies’ concrete plans for the future, a more accurate picture emerges. Overall, the focus on resilience and agility will lead to a more diversified country strategy, with a third of companies planning to increase their number of sourcing countries. At the same time, dual and multicountry sourcing to increase in-season reactivity will become more common, though it will be reserved for a limited range of the assortment.
Doubling down on nearshoring and reshoring—more work required for years, sourcing executives have been contemplating nearshoring as an option.This discussion has intensified due to challenges such as factory shutdowns in East Asia, logistical logjams, and price hikes; the shift to online sales; and the need for higher in-season reactivity.
Among European companies, this renewed interest in nearshoring is illustrated by a strong shift toward Turkey. This also highlights cheaper production costs due to a declining lira. The growth of Turkey will not be driven by European players alone: US companies also plan to take advantage of the country’s capacity for design and speed. For US companies, Central America is highest on the list for future nearshore activities. Reshoring, too, is gaining traction in the minds of sourcing executives. They expect to offset some of the cost disadvantages by semi-automation; but equally important is the consideration of increased full-price sell-through, and decreased markdown.Some of sourcing executives plan to increase reshoring in their sourcing strategy 71% of surveyed CPOs plan to increase their nearshoring share larger brands, too, are committing to reshoring parts of their assortment: this is no longer the sole domain of niche or fast-fashion players. However, production capacity for nearshoring and reshoring remains an issue, due to lack of capacity, industry fragmentation, and lack of labor supply. And, as certain cases over the last year have made clear, social compliance and human rights must remain high on the agenda for all countries; near- and reshoring markets are no exception. The raw-material availability gap is also still prevalent, with capacity developing only slowly, and materials priced at times at a noncompetitive premium. While some manufacturers have launched digitization and automation transformation initiatives and industry wide moves being under way in some nearshore markets such as Turkey, these elements must still increase to meet the demands of efficiency and cost competitiveness.
Increased diversity necessitates for more sophisticated sourcing-country decision making. Alongside the more traditional parameters, it also requires the implementation of intelligent, analytical decision-making tools that take sell-through and product margin into account. Analytic capabilities, therefore, are becoming more important for sourcing departments
A strong shift towards Turkey
Turkey might be the sixth-largest supplier of apparel worldwide, but the global apparel market is still largely flooded by garments from China, Bangladesh, Vietnam and European Union countries like Germany and Italy. Although this makes Turkey a lesser-known entity than the larger textile markets, apparel brands would benefit from giving its manufacturing ecosystem a closer look when considering new countries to source from. The Istanbul Apparel Exporters’ Association (IHKIB), argues that one of the best values brands can gain from working with a Turkish apparel manufacturer is the collaboration that takes place in garment design and development.
In some cases, Turkish apparel companies already do the design for European buyers and brands, who then simply choose the design from among the ones offered by the manufacturer, which then makes the collection. However, the buyers may also contribute their own design ideas to the apparel manufacturer, creating new collections based on the cooperative approach.
IHKIB points out that although only 1 percent of apparel imports in the U.S. comes from Turkey, more American brands are coming to Turkey for an alternative production base in recent years, particularly as they aim to nearshore within their European operations. Global apparel brands based in the U.S. such as Ralph Lauren, Banana Republic and PVH’s Tommy Hilfiger and Calvin Klein, have shifted some of their European production from markets like Portugal over to Turkey.
The Turkish apparel industry can supply these companies’ distribution centers in Europe faster than their larger Southeast Asian counterparts, making the country a good candidate for nearshoring at least some of their manufacturing capabilities. For example, supplying to a Ralph Lauren distribution center in Milan only takes three days by truck shipments, compared to deliveries from East Asia taking more than a week, according to IHKIB. Given the differentiation offered within the market, particularly when it comes to the collaborative aspect of design and product development, Turkey’s apparel industry may be able to offer the alternative necessary to effectively diversify the supply chain.
And in a time when more apparel brands are considering vertical operations within the supply chain, Turkey would be a viable option to either supplement already existing chains or start fresh. Turkey’s apparel manufacturing industry has largely been built on a vertical model, enabling companies operating in the sector to gather raw materials, produce yarn and develop garments all under their own facilities. With that in mind, product diversification is also a benefit that Turkey can deliver to brands in the U.S. and elsewhere. In working with its own materials, Turkish factories produce an incredibly wide range of products, including knitted wear, denim, socks, T-shirts and outerwear.
According to IHKIB, Turkey is one of the biggest knitted goods exporters in the world, with the country being the second-biggest supplier in hosiery and a leader in denim products. Such a broad array of garments could prove to be an incentive for brands that might be looking to move some of their sourcing capabilities away from their traditional suppliers and expand into new product categories.
While Turkey is lauded for its flexibility in the type of apparel it can produce, IHKIB also praised the market’s elasticity in production capabilities, noting that manufacturers are willing to produce small quantities and large quantities at the same time. Since the Turkish apparel industry by large doesn’t ask customers for long-term production times and to make long-term stock production, this could serve as yet another benefit for COVID-strapped apparel companies that are apprehensive about having to order an excess amount of stock that could end up floundering in their stores and distribution centers.
McKinsey Apparel CPO Survey 2021
