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Posted Date: 7/26/2010



contributed by Jessica Roberti, Manager, Retail and Consumer Products Group, Kurt Salmon Associates, jessica.roberti@kurtsalmon.com

It's another blow to the bottom line. A somewhat unexpected increase in sourcing costs is pinching already thin margins for soft goods manufacturers and retailers. The increased cost of raw materials, such as cotton, and diminished capacity in China's mills are driving up costs of goods sold and sending some sourcing groups scrambling.

At a time when cash-strapped consumers are looking to start spending again, but at much lower price points, this could be yet another setback for some soft goods businesses still trying to recover from the "Great Recession."

For companies at the mercy of agents and vendors, this could spell serious trouble and only reiterates the importance of having both strong collaborative relationships with vendors and the ability to proactively manage fabric and construction details.

Retailers without either are struggling to secure orders and may find themselves with inventory and quality issues, while leaders who have implemented them are taking advantage and locking in the best available materials and capacity.

The One-Two Punch

The trouble started last year when raw material prices started to rise again. Specifically, cotton prices, which had come off their highs in 2008 started skyrocketing and are currently at levels not seen in 15 years, with limited quantities available due in part to a poor Chinese crop. With little certainty that the order volumes will increase, mills have taken smaller positions in cotton as to not be over-inventoried at high prices.

|With fabric driving approximately 50 percent of garment costs, the rise in underlying commodities alone is forcing companies to make hard decisions with their limited inventory dollars.

Complicating the situation is a manpower shortage in China's textile mills. Having forecasted dramatic decreases in demand, many mills released large numbers of workers who migrated back inland. In addition, the labor climate in China is putting pressure on mill owners for higher wages and better working conditions.

Companies reliant -- or, worse, solely dependent -- on Chinese mills are finding it difficult to secure capacity for upcoming orders. Where the fabric is available, prices are significantly higher than even what has been negotiated for the year.

Fighting Back

In today's epic battle to restore profits and secure market share, consumer companies are dusting off their long-overlooked sourcing strategies to thwart this newest performance threat.

Over the longer term, many companies will better diversify their sourcing options to prevent a repeat of this episode.

In the near-term, sourcing strategies for the upcoming season are already set, so just keeping costs stable will be a heroic effort. To do so, executive teams are managing costs primarily through engineering and trade regulations. For example, the African Growth Opportunity Act provides the legislative platform for duty-free export to the United States. In the past, many sourcing executives overlooked some of the smaller trade pacts to take advantage of the longer term benefits of working in China; today these other pacts are becoming critical.

While it is expected that some of the recent pressures will ease in the future, retailers must recognize that sourcing is undergoing a seismic shift. Hedging, through diversification, and a more hands-on approach (in terms of managing the risks related to political, currency, commodity and macro-economic change) are both necessary.

Some of this is part of the natural evolution of low cost manufacturing. Retailers are looking to Southeast Asia, the Indian sub-continent, Africa and Central America to source production for the short- and long-term to complement their Chinese operations. This will continue as infrastructure and skills are built. More importantly, retailers are taking back control of key elements of the process, most notably the identification and sourcing of fabric. By proactively managing their fabric early in the development season through negotiations and positioning with mills, these leaders have further insulated themselves from the next unexpected chink in the supply chain.

Jessica is a Manager in the Retail and Consumer Products Group at Kurt Salmon Associates. While at KSA, she has worked on a number of product development and sourcing projects in North America and Europe. Prior to joining KSA, Jessica worked in the retail industry for 12 years with a focus on production, sourcing and product development for well known specialty retailers. She has managed teams in the US and Asia and has traveled extensively throughout Asia, Southeast Asia and Central America


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