Economic Integration

A report issued by a Seattle, Washington-based international consulting firm reveals that supply chain contributions added almost three-fourths to the value of a group of apparel categories imported by US retailers, which supports the case for expanding importation of finished goods.  

The study was commissioned by the TPP (Trans-Pacific Partnership) Apparel Coalition, which is made up of five organizations, representing US retailers, apparel brands, apparel manufacturers, and importers.

“American consumers and policymakers tend to look at clothes and finished products and put them into one of two categories, either imported or Made in America,” said Moongate Associates Managing Partner Susan Hester, Ph.D., the report’s lead author.

“This approach is outdated and inaccurate,” she contended. “The study we published indicates US workers are extremely valuable in delivering affordable clothes to American families.”

Data were gathered on five specific products: men’s and women’s cotton knit shirts, men’s and women’s woven cotton trousers (included denim and non-denim), and women’s man- made fiber outerwear (including water-resistant and non-water-resistant).  These products were then sub-divided into 20 company-product combinations.

Study participants included seven US-headquartered apparel and retail companies that employ more than 500,000 people globally and 350,000 in the United States. Combined retail sales in 2011 totaled more than $92 billion. US apparel retail sales totaled more than $270 billion in 2011.

Principal Findings:

-- Today’s global value chains utilized by US apparel brands, manufacturers, and retailers include a full range of activities that firms and workers contribute to bring a product from its conception to the consumer. The study found that the US value-added, as a percentage of the final retail price for a variety of product categories – from shirts to pants in a variety of price points– averaged 70.3 percent, meaning 70.3 percent of the retail value of a garment is directly related to business activities executed by US workers.

-- US value-added specifically is from both blue collar and white collar workers in product design, research and development, transportation, logistics, distribution, product safety compliance, customs compliance, quality assurance, social compliance, environmental monitoring, labor compliance, legal support, marketing, merchandising, and sales.

-- An analysis of publicly available data for the respondent companies revealed single digit profit margins for all companies and a group average of four percent in 2011. 

-- US-based activities related to selling products supported 2.6 million US workers in 2011 and total US apparel employment from the beginning of the value chain through sales to the consumer totaled 2.9 million US workers during the same year.

General Conclusions:

-- The positive ratio of US-value-added to foreign-value-added translates directly into US jobs. These jobs are primarily medium- to high-skilled positions, and many are professional and managerial. 

-- Removing tariffs under trade agreements would lower prices to consumers, increase demand, and create jobs and profits all along the apparel global value chain, especially in the United States.

-- Efforts to support these global strategies by American apparel companies will contribute to their success and growth, and these will in turn lead to a more competitive marketplace that will not only benefit the US labor force, but also create new high-quality jobs for workers throughout the global value chain.

The entire report may be found here.

Dramatic weather events, such as Hurricane Katrina hitting the south and the more-recent Hurricane Sandy striking the northeastern seaboard, coupled with volatile petroleum prices and other unforeseen events, have prompted supply chain managers across a wide range of industries to reexamine their strategies for ensuring a ready supply of production inputs, as well as the finished product.

Consequently, an old-line supply management technique, known as ‘just in case’, has begun to receive more attention.  Investopedia.com provides the following definition of just in case (JIC):

“An inventory strategy in which companies keep large inventories on hand. This type of inventory management strategy aims to minimize the probability that a product will sell out of stock. A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold out inventory.”

Investopedia says the JIC inventory strategy “is much different than the newer 'just in time' (JIT) strategy where companies try to minimize inventory costs by producing the goods after the orders have come in.  The older 'just in case' strategy is used by companies that have trouble forecasting demand. With this strategy, the companies have enough production material on hand to meet unexpected spikes in demand. Higher storage costs are the main disadvantage of this strategy.”

An inventory management blog post from Symbiant Technologies, a provider of enterprise resource planning and inventory management software and services to US distribution businesses, has noted that companies have begun to add additional distribution points to their supply chain strategy to afford themselves a better chance to handle distruptions.

The post points to a February New York Times article, which makes the point that although just in time inventory management is more cost efficient, it is vulnerable to supply chain disruptions.  Consequently, companies are trying to strike a balance between the two strategies in order to limit costs but still have enough inventory on hand to meet demand.

“With just-in-case distribution, the major change is that distributors have more distribution points, as opposed to just a single location,” the Symbiant blog post said. “It’s not so much about holding excess inventory, although they have more inventory on hand because it’s spread across multiple warehouses. They’re more diversified with that inventory so that if there’s a chaotic situation — say, gas prices go astronomically up or there’s a major power loss in a specific city — they can at least potentially rely on other sites to get the product out. In the older model, when one site went down, the whole product went down with it. Businesses are applying these disaster recovery principles not just toward computers and software, but also distribution concepts.”

Questions:  Where along the cotton/textile supply chain could a combination of JIC and JIT be helpful?

What factors, if any, along the chain would preclude the incorporation of both techniques?

Are there areas of the chain where one or the other tools simply better than the other?

Following an almost nine-month delay, the Indian government has approved foreign direct investment (FDI) of as much as 51 percent for multi-brand retailers, such as Walmart, Tesco and Carrefour. New rules also will be implemented in the aviation sector, which will allow international airlines to invest in domestic carriers.

In an effort to counter the still strong opposition, which prompted New Delhi postpone implementation in December last year, state governments will be allowed to opt out of the FDI scheme in the retail sector.  Concern has been expressed that small local retailers will be overwhelmed by the large, multi-national corporations, a point that has been countered by supporters who maintain that local enterprises will far out number the multi-nationals and also offer more specialized services.

Indeed, in a statement to a textile-oriented website, Mr. S.V. Arumugam, Chairman of the Confederation of Indian Textile Industry expressed gratitude to Mr. Anand Sharma, Minister of Commerce, Industry and Textiles “for his tireless efforts to get this important economic reform through, in spite of uninformed opposition from several quarters.”  He said that” the decision would encourage organized retailing, which in turn would result in more centralized procurement operations, improved supply chain management and reduced involvement of middlemen between producers and retailers.”

Foreign retailers must meet certain conditions, however, in order to participate in the FDI program, among which are:

•  A minimum investment of US$100 million,
•  Half of the investment must be for infrastructure, such as cold storage and  warehouses, and
• At least 30 percent of goods sold must be sourced from local producers.

A 51 percent FDI for single-brand retailers already is in place, and the 30 percent local sourcing requirement also will be applicable.  However, the government will grant a waiver, so long as a manufacturing plant is built to ensure jobs will remain in the country.

Just-style.com this spring and summer has offered a pair of reports written by Euromonitor International detailing the current challenges of getting clothing and footwear to market.  Growth sectors are identified, and factors driving change along the supply chain also are identified.

The first report: Apparel Routes To Market: Part One - Global Distribution Overview is previewed as follows:

“Historically, apparel brands looked to retail specialists to distribute their products; however, the boundaries are now blurring, as many brands move across into retailing and retailers become known as fashion brands. In the middle are those brands which have tried to embrace both perspectives from the outset. It appears that retailers dependent on others’ apparel brands are losing ground, so as the retail landscape evolves, the battle to follow the right distribution strategy is intensifying.”

In Part Two - Brands Squeezed by Changing Retail Environment:

“The volatile economic environment and rising pricing pressures make apparel retail a difficult environment to operate in. With independent specialists struggling, the power is shifting from wholesale to own stores and online operations. Key distribution strategies are already being put in place by successful companies, and represent an outward-looking vision, while at the same time keeping on top of the detail of the business and keeping a balance while embracing different routes to market.”

The reports are designed as a global briefing to provide an insight into to the size and shape of the apparel market, highlight topics currently being discussed and emerging trends, as well as important industry issues. They identify leading companies and brands, offer strategic analysis of key factors influencing the clothing and footwear market, such as changes on the supply side, economic/ lifestyle /demographic influences and pricing issues. Forecasts illustrate how the market is set to change and criteria for success.

The reports provide data coverage on market sizes (historic and forecasts), company shares, brand shares and distribution data.  The also help to understand the competitive environment and the market’s major companies and leading brands.  

For more than 40 years, Euromonitor International has published market research reports, business reference books and online information systems. It has offices in London, Chicago, Singapore, Shanghai, Vilnius, Dubai, Cape Town, Santiago, Sydney, Tokyo and Bangalore.  With more than 800 analysts worldwide, Euromonitor International maintains it “has a unique capability to develop reliable information resources to help drive informed strategic planning.”

Information about purchasing the two reports may be found here and here.

In it’s latest issue, TextileWorld.com’s Associate Editor Sarah Thomasson reports on a survey of corporate executives throughout the apparel supply chain, which covered a variety of issues contributing to success or failure.

Among those, officials acknowledged that technology has become a critical aid in consumer purchasing, with goods available at any time via the internet.  The use of technology also has contributed to the following:

• Product research on-line by the consumer,
• Price comparison in retail stores with the use of smart phones,
• Immediate product feedback (positive and negative) by consumers, and
• The use of video-sharing and social networking websites that can be advantageous or disadvantageous.

Meantime, unlimited selection of products vying for the consumer dollar means brands and retailers must understand buyers and their desires.  Additionally, American consumer selectivity and attention to value have grown in recent years, as well as emphasis on sustainability across the supply chain and the desire to purchase products made in the United States.

Ms. Thomasson reports that attention to strict inventory control has become critical in the retail community, which has affected the entire supply chain.  Consequently, this has produced a greater need for flexibility and focus on consumer trends.  Speed of supply has become paramount.

Partnering along the textile and apparel supply chain has become a relatively new innovation as brand manufacturers and retailers recognize the improvement in cost/benefit ratios.  

With respect to product sourcing, rising labor and transportation costs in Asian countries, which for years have enjoyed the position of No. 1 supplier to the US and Europe, have prompted companies on the two continents to look closer to home.  Moreover, ‘local’ sourcing aids in the monitoring of sustainability at the manufacturing level.

Finally, the article notes that those along the supply chain who embrace change are better positioned to succeed over the long term.  Although there are those who choose to react to events as they occur along the supply chain, who will not realize the greatest returns, the broader outlook is positive, and enthusiasm continues to grow.

The entire articles can be read here.

Questions:  In addition to the internet, what other technological or other innovations are on the horizon that will help improve efficiencies along the supply chain?

Considering the high cost of labor was one reason textile and apparel manufactures in the US moved sourcing to Asia and Indian Sub-continent, what are the chances latest efforts to source locally will succeed?

The validity of warnings regarding China’s stumbling economy by economists and other market analysts bears merit in light of recent comments by the country’s premier.  

Mr. Wen Jiabao has toured several provinces this month encouraging workers, researchers and industrial leaders to be more innovative in their research and development of new techologies, as a means to reverse a falling economic growth rate, thus improving the country’s social and economic infrastructure.

Reports from China’s Xinhua News Agency suggests Premier Wen has taken a lead role in exhorting the nation to perservere through the difficult times, calling for “greater efforts to strengthen the vitality and dynamism of economic growth,” according to Xinhua.

Mr. Wen acknowledged that the economy is progressing at a slower, though more stable pace, but insisted the growth rate “is still within the government target range set early this year, and stabilization policies are working." 

Beijing has lowered its target for gross domestic product (GDP) growth this year to 7.5 percent, compared with 9.2 percent in 2011, because of ongoing economic difficulties in the United States and an expanding debt crisis in the Euro Zone countries.

Hampered by poor external demand and government efforts to reign in a previously runaway property sector, GDP growth slowed to a three-year low of 7.6 percent in the second quarter.  

China has imposed a strict ban on real estate speculation in order to hold prices at affordable levels.  Residential construction, however, has slowed sharply and there are varying reports of how low real estate prices have fallen across the country.  

The Central Bank has cut regulated bank lending and deposit rates twice since last month, and a small rise in activity has been witnessed.  Meantime, a number of China’s largest cities are reported to have loosened the prohibition on real estate speculation, which has drawn the attention of the central government and brought warnings of punishment, if the national policy is not reinstated.

The premier also addressed tax reform during his series of meetings.  He said the central government will continue to introduce “proactive fiscal policies” centered on structural tax reductions to lighten the burden on small and micro-sized firms.  Structural obstacles between supply credit and demand also will receive attention.

In meetings with 30 corporate officials and industry association chiefs, Mr. Wen again emphisized the need for increased innovation, in the face of falling foreign demand for traditional Chinese export products, coupled with increasing production costs.

However, when a textile manufacturing chief executive from Jiangsu Province offered the idea of tax relief to make prices more competitive to counter the drop in demand, the premier appeared to offer only soft support, saying the government will pursue aggressive fiscal policies to support companies, but structural tax reductions should be aimed at boosting innovation.

Data for the first four months of 2012 show a sharp drop in Chinese exports of textiles and apparel, according to the China National Textile and Apparel Council.  

Valued at US$71 billion, January-April exports were only 1.07 percent greater than at the same time a year earlier, and there is a growing fear that manufacturers are losing market share abroad.  Textiles shipments were only 0.15 percent higher at US$30.73 billion than at the same time in 2011, while apparel exports were placed at US$40.27 billion, which reflected a rise of 1.77 percent.

Questions:  If China has indeed lost export market share for its textile and apparel products, have other countries have stepped in to fill the gap, or is this more a reflection of current worldwide economic malaise? 

What are the implications of a Chinese economic recession?

A slowing general economy, coupled with downturns in manufacturing and retail sales, has prompted China’s central government to lower interest rates and introduce a somewhat greater degree of flexibility for the nation’s bankers.

In it’s latest edition of Cotton Outlook, Liverpool-based Cotlook, Ltd. reports the benchmark, one-year lending rate has been reduced to 6.31 percent from 6.56 percent, and the one-year deposit rate from 3.5 to 3.25 percent. In addition, banks have been given the freedom to set the rates they pay on deposits and charge for loans.

Latest reports indicate economic growth (measured by Gross Domestic Product) in the January-March period fell to 8.1 percent and had declined further to 7.7 percent by the end of the first five months.  Some private financial estimates place 2012 GDP growth in a range of 7.7 percent to 7.9 percent, compared with 9.2 percent last year.

In the cotton sector, Cotlook paints a discouraging picture, in which spinners are unable to replace their raw cotton needs at manageable prices, and the government has been forced to import significantly more cotton than desired yet still support producers at the farm level.  China’s imports this season have already reached almost to 4.5 million tons, suggesting the season’s total may reach 5.2 million (more than twice normal), given the size of the outstanding commitment from the United States, together with that from Australia, said Cotlook.

Weak prices during the past month for raw materials (domestic and imported cotton, polyester and viscose staple fibers) have been accompanied by falling prices for yarn and fabric, which has contributed to a pessimistic view of the market outlook by most spinners, according to a report from Beijing Cotton Outlook, an eight-year-old joint venture between Cotlook, Ltd., the China National Cotton Exchange and the China Cotton Association.

In its report, Cotlook said “that since early June, cotton yarn prices have been on a downward trend in Henan, Shandong and Zhejiang; a number of small cotton spinning, weaving and garment factories have advanced their summer vacations, and small to medium-sized textile enterprises have recorded a substantial decline in the amount of cotton consumed, and some 60 percent of that used is said to have been imported. Other references have been directed toward a decline in the quality of output. Enterprises are struggling to maintain meagre profit levels.”

Meantime, Cotlook reported that Madame Zhu Beina, president of the China Cotton Textile Association, said at a May cotton trade summit in Chengdu that yarn output in 2011 was well below official figures, at around 20,500,000 tons, and noted that the association’s data showed a three percent decline in output during the first four months of 2012. Moreover, without a strong recovery during the final six months, this year’s annual total likely will fall to less than 20 million tons.

Other factors contributing to the industry’s pessimism include:

• A significant decline in the competitiveness of Chinese-spun lower count yarns,
• A below-normal fabric trade prompting some companies to reduce capacity on fear of further losses, and
• Orders at dyeing factories placed at no more than a couple of weeks out.

 Questions:  What signs suggest that China’s economic downturn may be nearing a bottom?

Since China no longer appears to be immune to the cyclical nature of global economic health, are there implications for the country’s intermediate and long term prospects for cotton and textiles along the supply chain?

Amazon.com, Inc., the largest internet retailer in the world, seems constantly to be adding to its list of goods and services offered on-line, and it has now focused on high fashion merchandizing.  An article in the New York Times detailed the latest effort in the company’s quest to broaden its product line.  

Amazon introduced clothing to its websites in the mid-2000s and has now turned its attention to higher-end fashions because of more attractive profit margins.  Starting with its own website as a base, Amazon has purchased fashion websites and started others.  The most recent is MyHabit, developed in 2011 using the latest in internet-based video technology, to allow consumers get a more realistic idea of what the item will look like before the purchase.

Moreover, the company is taking advantage of its capacity to collect and evaluate a wide range of consumer buying characteristics and shopping habits, in order to offer fashion items that are more likely to appeal to the individual shopper.

Meantime, the very advantage Amazon holds in the realm of internet merchandizing is viewed as cause for concern among manufacturers of some high-end fashion brands.  Foremost among those concerns is that with its huge customer base and turnover volume, there is the threat that Amazon will dictate prices, which will result in lower returns for the producer.

The company has acknowledged that it has taken that route in other industries, but insists it intends to abide by a historical schedule of price markdowns established by the fashion industry.

The entire article can be read here.

Questions:  Are consumers of ‘high-end’ fashion likely to be viable on-line purchasers of typically expensive products?

Can this latest effort by Amazon be viewed as simply the next step in the evolution of an internet merchandizer, or does its massive size pose a threat to competition?

Does the advantage of a large customer base engaging in fast and easy shopping, offset the potential for high fashion producers accustomed wide profit margins to see those margins squeezed?

The first sector-specific initiative under the auspices of the United Nations Global Compact has been announced with the UN and the Nordic Initiative Clean and Ethical (NICE) joining in an effort to focus on environmental, social and ethical challenges worldwide.

In a report from the World Textile Information Network, technical textiles and nonwoven analyst Ms. Tara Hounslea, suggests that it is “no surprise that the fashion industry is the first sector under the spotlight, with issues such as low wages, migrant workers, corporate accountability and working conditions making the headlines on a daily basis. The textile and fashion industry’s impact on the environment no longer goes unnoticed either, as organizations such as Greenpeace raise awareness of big name brands and their more shadowy supply chains.” 

Ms. Hounslea said the solution is a supply chain that works harmony. She cautioned, however, that such a solution is not straightforward since the textile and fashion industry is characterized by a complex production network which spans countless businesses and crosses numerous international boundaries.

The following is taken from the WTiN report:

While speaking at the inaugural World Textile Summit held in Barcelona last year, Mr. (Kofi) Annan (former secretary general of the UN) urged textile and fashion companies to work with their local communities to help bring about a better quality of life for workers and ultimately help the industry.

To facilitate this, the new initiative will develop a platform to unite the small and medium-sized fashion companies across borders to help tackle the global challenges the industry faces. It will comprise a set of guidelines, based on those of the UN Global Compact, but with a specific focus for the textile and fashion industry, such as waste, water, chemicals and welfare.

The launchpad for this new code will be the Copenhagen Fashion Summit on May 3, described as the largest and most important conference on sustainability and CSR in the fashion industry.

“Fashion has historically had the capacity to affect the society as a whole, and therefore fashion is a great place to start building a new creative future aligned with the ecosystem we are all part of,” said Eva Kruse, chairman of the Nordic Fashion Association and CEO of the Danish Fashion Institute. “We look forward to engaging experts and leaders of international fashion companies in the work of creating a meaningful and ambitious tool for the global fashion industry.”

Launched by former UN secretary general Kofi Annan some ten years ago, the Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally-accepted principles in the areas of human rights, labour, environment and anti-corruption.

Mr Annan asserted last summer that: “sustainable, healthy communities and good environmental stewardship lead to a healthy environment that is beneficial to all the companies involved.” Those who concur, or at least those who have already signed up to the UN Global Compact include Nike, Puma, H&M, the Pentland Group, Mango, Gap, Inditex, Levi Strauss and Timberland.

The fashion industry clearly stands to benefit from a universal set of guidelines for environmental, social and ethical practices, but what remains to be seen is whether the extended and complex supply chain will recognize what Mr Annan claims, that “doing good is good for business.”

Comprehensive information about the UN’s Global Compact may be found here.

Questions:  Is the fashion industry a satisfactory starting point for the UN’s Global Compact implementation of fair practices throughout the supply chain?

What other issues might be logical areas upon which to focus in the effort to establish economically sound, yet fair, business practices?

The second of three scheduled research projects by the University of Arkansas has revealed benefits for apparel suppliers using radio frequency identification (RFID), according to study sponsors the American Apparel & Footwear Association (AAFA) and GS1 US.

A mid-month news release from AAFA reported that the year-long project found the potential for suppliers to realize both top- and bottom-line improvements via increased inventory accuracy, cycle count reductions and minimized chargebacks. 

“The University of Arkansas report ... offers a greater understanding of the many uses of RFID technology for the apparel industry particularly in the area of inventory accuracy,” said AAFA Special Advisor Mary Howell.  “By exploring these use cases, apparel and footwear brands can begin to see the full range of benefits RFID can provide when working to remain competitive in the global market by streamlining the supply chain and continuing to deliver quality, safe, and affordable clothes and shoes to American consumers.”

The research – titled “Supplier Return on Investment Use Case Data Collection and Analysis” – is the second phase in a three-phase study commonly referred to as the “Many-to-Many study.” It focused on three supplier use cases.

AAFA said researchers measured the benefits that apparel suppliers can achieve by adopting RFID based on GS1 Electronic Product Code (EPC) standards.  The effects of EPC-based tracking on improving the suppliers' inventory accuracy were quantified, along with the effects on their productivity, costs, and revenues.

In one use case, increased inventory accuracy, researchers discovered that suppliers’ estimates for their outbound shipments were much higher than the actual shipment count accuracy, in part because the companies were auditing very small percentages of those shipments, said the trade organization. The costs of incorrect shipments, including chargebacks, are very high, it noted. With EPC-based RFID enabling audits on 100 percent of shipments, the frequency of incorrect shipments can drop to zero, creating savings equal to the cost of implementing the RFID system.

“The research captures the first efforts of retail suppliers to shift their focus from just playing ‘catch up’ to retailer source tagging requirements, to truly leveraging the full value of item level tags by discovering the benefit and the value in their own supplier operations,” said Justin Patton, Managing Director, ITRI/RFID Research Center, University of Arkansas.

“The simple concept behind the study is to answer the question, What happens when suppliers move beyond EPC tagging just for their retail partner’s sake, and begin to internally capture and use EPC data from their tagged items?” said Patrick Javick, vice president, industry engagement, GS1 US. “Retailers use standardized RFID technology to improve inventory accuracy, and now with EPC, suppliers can also feel confident of the high level of accuracy in their shipments.”

In addition to the key findings, the research highlights the critical relationship between apparel suppliers and retailers and encourages continued collaboration in the widespread adoption of RFID.  

The American Apparel & Footwear Association (AAFA) is the national trade association representing apparel, footwear and other sewn products companies, and their suppliers, which compete in the global market. 

GS1 US, a member of GS1, is a not-for-profit organization that brings industry communities together to solve supply-chain problems through the adoption and implementation of GS1 standards. More than 200,000 businesses in 25 industries rely on GS1 US for trading-partner collaboration and for maximizing the cost effectiveness, speed, visibility, security and sustainability of their business processes. They achieve these benefits through solutions based on GS1 global unique numbering and identification systems, bar codes, Electronic Product Code-based RFID, data synchronization, and electronic information exchange. GS1 US also manages the United Nations Standard Products and Services Code® (UNSPSC®).

Questions:  What other areas of the supply chain lend themselves greater use of RFID technology?

Considering the incorporation of RFID is less than 10 years old, which sectors across the cotton supply chain, from field to consumer, have been quickest to implement the new technology?

Which sector stands to benefit the greatest from the use of RFID for long-term planning purposes?