Report on:

Global Sourcing Summit

Wednesday 4 April 2001, Brussels Exhibition Centre, Belgium
"Sourcing trends and ethical challenges"

The "Summit" was part of the "World Apparel Market" event (3-5 April) and was targeted at executives responsible for sourcing. "It will allow you to source in new markets with renewed confidence. From sourcing trends and ethical challenges to supply chain and risk management in new markets, the strategic issues affecting your business will be covered in depth." In my report below, I summarise the various presentations and make comments on relevant discussion.

David J. Tyler,
North West Advanced Clothing Web.

The impact of European Union legislation and international agreements on the sourcing process

Fernando Perreau de Pinninck is Head of the Textiles Negotiations Unit, Directorate General for Trade, European Commission. His presentation was to give us an update on the legislation on quotas and their effect on European companies. He explained that EU tariffs are low (5.3% for yarn and fibre, 6.3% for fabric and 11.9% for clothing). Some countries have no quota restrictions and zero duties: these are the least developed countries (such as Bangladesh). In 1999, 44% of the EU's imports of textiles and clothing were duty free. Apparently, those quotas that are in place are not fixed but are subject to annual increases. All quotas are to be eliminated by 31/12/2004.

Mention was made of a "reciprocal market opening strategy" desperate to obtain the "best possible candidates for EU industry to do business aboard." However, the lowest tariff for clothing mentioned was 17.5% (Sri-Lanka). Others listed are:

As this is not an impressive record of negotiation, and because the speaker seemed to think the negotiators had achieved something, I felt constrained to question why the "principle of reciprocity" seems only to be approved within the EU and not outside it. Perhaps because he is an experienced politician, he found a way to respond with confidence, but at least one other person noted he did not answer the question.

Overview of worldwide markets and sourcing trends

David Birnbaum heads Third Horizon Limited, a Consultancy Group working in the area of globalised supply chain management. As brand owners have forced prices down, products have suffered (in quality, in becoming simplified, in availability - with more complex logistics, and in being tainted with exploitation of workers). Further reductions in unit cost are not the answer, because even a 10% saving of direct labour is hardly significant to the total cost structure. A new sourcing model is needed based on a realistic view of costs.

It was pointed out that decisions on sourcing are typically based on the FOB cost, which shows up as 16% of the total costs of delivering a product into store.

In the global context, duty, quota costs and shipping costs are significant. The example was given of choosing to source in Mexico rather than China. A $20 non-manufacturing cost differential was found to exist - because Mexico is plant of the North American trade "Block."

Some product development is sometimes a home cost, but when it is not it is generally absorbed into the FOB (Freight on Board) cost and it is often unrecognised. Companies who provide good NPD services will often have a higher FOB cost - but current sourcing strategies (which look for the lowest price) prejudice buyers against the better factories.

Agents get their percentage commission, but they are rapidly becoming less relevant. Many suppliers can deal direct with the retailers. The power of sourcing is now back in the Buyer's hands, and suppliers need to learn how to talk the Buyer's language.

A written version of David Birnbaum's talk is on the World Apparel web site.
Part 1: http://cgi.worldapparel.plus.com/cgi-bin/serve-feature.php?article_id=40&Type_ID=2

Future Sourcing Trends and Requirements

Dr Andreas Stockert is a principal with KSA based in Germany. He suggested that the "supply chain" concept is in need of updating to reflect the complex web of relationship that are emerging in globalised delivery systems. He proposed the name "supply net" and referred to trends in "global supply net management". However, those he identified were not particularly novel and the only point not covered in my own lectures on Supply Chain Management is "Auction services". The main changes are in software products and e-business (he spoke about the failure of the EDIFACT communication protocol to deliver standardisation and of the way transfer of information has become much easier with XML). Electronic market places are emerging as a way of sourcing low cost commodity products. The speakers then used slides I've seen before describing the KSA perspective on supply chain issues, including the distinction between traditional sourcing, story sourcing, speed sourcing (QR) and replenishment sourcing (NOS= never out of shelf).

Lots of issues were touched on, with an emphasis on services rather than product. I was reminded on a point made by Naomi Klein in "No Logo" that modern retailing is in danger of losing sight of product performance in its strategy of creating lifestyle concepts in its approach to branding. These are the customers that KSA are aiming at.

The afternoon session were built around two panel discussions.

1. Ethical challenges in sourcing
2. Traditional sourcing or quick response?

Each session had short presentation by the panelists prior to open discussion. The format was effective, but they could have picked their panelists to represent a wider range of views.

(1) Ethical challenges in sourcing

I particularly appreciated the presentation by Philip Chamberlain, Head of Sourcing, C&A, and Europe. The speaker referred to a Mori poll (2000) carried out in 12 European countries: 70% of consumers say that ethical issues are important and about 50% are willing to pay a bit more for "clean" products. C&A has been developing its ethical thinking over 30 years and was one of the first to introduce a code of conduct. The Company has fully funded an organisation, SOCAM, to audit compliance.

In 1999, SOCAM visited nearly 1500 production units and identified 49 serious infringements. These led to correction plans to deal with the issues. C&A has a commitment to working with suppliers on a step by step basis to gain incremental improvements. The Company also has an environmental policy statement. Through these developing relationships, C&A is giving charitable support to over 30 projects. (in discussion afterwards, Philip Chamberlain told me about an unacceptable case of child labour. The infringement is being addressed, and has led to the provision of educational programmes for the children concerned. This is a refreshing contrast from other publicised cases where the brand owner has pulled out and taken its business elsewhere.)

Willie Beuth is the MD of the ECO-Tex Institute for Apparel Ecology in Cologne. The institute has developed CSM 2000, a compliance and supply chain management system. This brings together various other standards relating to environmental and ethical issues. Requirements are defined in the areas of: quality, environment, health and safety, social accountability and trade regulations. Auditing is done by TUV, German organisation working internationally.

John Henderson is Vice President of the SGS Group, an international agency for testing, inspection and verification. From a retailer's point of view, auditing can easily become complex, but from a supplier's perspective, the situation is worse: there many be a separate audit for each retailer served, with different codes of practice applying. SGS are involved in this auditing process and are seeking to develop a certification body that operates with a globally accepted standard.

Felicitas Agoncillo-Reyes is Executive Director of the Department of Trade and Industry, Garment and Textile Exports Board, in the Philippines. She spoke about the work being done to establish a certification scheme for "clean clothes". Since 1999, accreditation of a garment factory is needed before granting an export licence. She felt that the Philippines has made a lot of progress and no longer has major ethical problems to tackle. However, she did say that the Department of Trade and Industry has a lot of handholding to do in supporting local companies. "We don't want to leave firms behind."

The discussion did not lead to many additions to my notes of the session. However, I will mention my own comments and questions. A very similar presentation to that of C&A was made about a month ago by Littlewoods and this has triggered these thoughts.

1. Both companies have a small group of shareholders (privately owned)
2. Both companies have a strategic commitment to their supply base.
3. Both companies have funded their own auditing procedures.

I commented that these distinctives are not of minor relevance. Without wishing to minimise what C&A and Littlewoods are doing, what expectations can we have that other retailers (not privately owned) can do similar things?

Phil Chamberlain decided to limit has to comments to C&A approach. John Henderson (SGS) said that it was fair to say that some companies just want a "snapshot" of compliance, and they will unhesitatingly drop suppliers for non-compliance. However, he feels that there are others who will work their suppliers as they recognise this to be the only sustainable way forward.

Since I restrain myself to one question per session, I did not pick up the issues of subcontracting. This issue is developed in an article at just-style, where there are also specific comments on the Philippines.
http://www.just-style.com/features_detail.asp?art=362

(2) Traditional sourcing or quick response?

Peter Cheung is Director and General Manager of Concept Creator Fashion Ltd of Hong Kong, a manufacturer of silk products. The speaker's main comment was that agents are becoming less and less important as companies learn to communicate directly with customers. Agents take commission and add time - they are dispensable.

Gary Ross is Vice President of world-wide operations for Liz Clairborne. He spoke of their 50,000 styles per year and the challenge this is for sourcing. He contrasted their present sourcing strategy with the one in place over 5 years ago. Then, LC went to where there was quota at a good price. This led to them working in 40 countries and 500 suppliers. Now they have cut back: they work in 30 countries and have 260 suppliers. Yet production has increased by over 50%. The strategy now is continuous improvement. "We buy packages, not components." Their suppliers are expected to deliver packages of products and services. The basic principles identified 5 years ago are: configuration, consolidation, certification, concern, collaboration, coalition and cost control. Each of these was discussed. Quick response was not discussed (!), although it was said that progressive apparel companies would be fast, flexible and versatile.

David Birnbaum (who had spoken in the morning session) added very little. The onus is on the suppliers to do what the customer wants. The problem is really one of trust. The future belongs to strategic relationships.

Again, the discussion was not particularly controversial or noteworthy. I asked Gary Ross whether Liz Claibourne achieves story sourcing, speed sourcing and replenishment souring (as described by the KSA speaker) and whether different delivery procedures were needed to achieve this. The response was not clear to me: "We do what needs to be done (paraphrased!) taking into account total cost, not just manufacturing cost."

The "Global Sourcing Summit" certainly had interest, but there are continuing questions about whether people are asking the right questions or articulating the problem. For example, David Birnbaum said that past practices have adversely impacted on products in term of their design and need for simplification but this was never developed (or contradicted). The implication for new product development appears substantial to me. Andreas Stockert put more emphasis on services than on product – this may be an admission that Birnbaum is correct. Perhaps this is a pointer to where UK companies can be competitive via innovation in their product ranges.

World Apparel Market

3-5 April 2001
Brussels Exhibition Centre

From the web site:
http://www.worldapparelmarket.com/

World Apparel Market is a new exhibition designed to enable the world's leading clothing and textile producers to meet the major buyers of volume private label clothing.

It satisfies the growing demand for an easy way to network with the major players in the sourcing world of menswear, womenswear, children's wear and lingerie.

World Apparel Market is:

• The only event where large-scale buyers, selectors, distributors and branded manufacturers can source under one roof in the heart of Europe.

• Initiated by Europe's most important buyers and is a vital trade summit for buyers and clothing manufacturers. Trade boards have organised National Pavilions providing vital information about their markets for sourcing professionals.

Countries attending include Sri Lanka, China, India, Indonesia, Tunisia, Ghana, Taiwan, Romania, Mexico, Peru, Philippines, Bangladesh & Hong Kong.

General comments on the event:

1. There were very few buyers visiting the stands. Several people told me that there was not enough evidence of business to justify their involvement.
2. Talk of partnership (at the Sourcing Summit) does not reflect what is happening at company level. The downward pressure on price is pervasive and there is little appreciation in buyers that services have to be paid for. Services are regarded as a necessary part of the package, with costs carried by the manufacturer.
3. The role of agents is diminishing rapidly. The agent has become a block to communication. The factory will feed back to the agent regarding problems, but the agent does not pass on the communication to the customer. The agent expects the manufacturer to sort things out. Then, the customer is surprised by a shortfall (or a delay in delivery) and accuses the manufacturer of non-communication. This has happened so often that the demise of the agent will not be mourned. Companies wanting to deal direct are setting themselves up to do this. They have people in place that are able to communicate and who make it their business to understand customer needs. Nevertheless, some positive words were reserved for the larger agents, because they do set out to provide the customer with a comprehensive service and they do deliver (Li & Fung was one name mentioned in this context).
4. Strategic relationships (partnerships, collaboration) are not prominent. There is pressure on price, almost to the exclusion of everything else. Furthermore, European buyers are not bringing volume orders and the focus of effort is in getting US business. This situation ought to raise a few questions for European retailers: unless they place large contracts, they will not be able to get the service levels enjoyed by their US counterparts. But larger orders bring higher risks – and this is the rationale for the smaller contracts.
5. Evidence that Europe is out-sourcing more than manufacturing. All the Sri Lankan companies visited could handle products in whatever form the buyer presents them. Fo example, Readywear has a design facility and creates products to show customers. They are very well equipped with Lectra CAD, 10 pattern cutters, 50 sample machinists. I asked: "Is Readywear unusual in having this design facility?" The response was "No", other companies are doing this – it is all part of the service to customers. There is an expectation that design can be sourced in lower labour cost countries (to reduce costs).

Overall, it was an interesting event for non-exhibitors. The future of World Apparel Market must depend on whether the organisers can attract buyers in sufficient numbers to justify exhibiting.

David J. Tyler
30 April 2001

North West Advanced Clothing Web