trends supply chains europe apparel 2014

7/24/2019 Trends Supply Chains Europe Apparel 2014

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Source: CBI Market Information Database URL:www.cbi.eu Contact:[email protected] www.cbi.eu/disclaimer

CBI Special Topic:Supply Chain Trends inthe Apparel SectorPractical Market Insights

This paper examines a key trend in apparel supply chains: thechanging map of apparel sourcing. China is Europes largest

apparel supplier. However, wage inflation in China and otherlow-cost sourcing nations is a posing significant challenge forapparel companies; social risk is also a growing concern.Seeking to optimize the cost/risk ratio, apparel companies areexploring new sourcing locations and sourcing strategies arebecoming more complex. While companies are evaluatingpotential new frontiers, they are also exploring sourcecountries closer to home. Proximity sourcing is favoured forthe fast fashion segments and some national governmentinitiatives are encouraging reshoring. Low-cost sourcing isfavoured by companies offering products that are less fashion-forward. Turkey is a key competitor for all countries in todaysEuropean sourcing landscape; DC exporters need to focus onspeed to market, just-in-time deliveries and preproductionservices in order to best compete in the changing sourcinglandscape.

China is Europes largest apparel supplier

China is the largest apparel supplier to Europe, due to the maturity of its supply

chain, the skill of its labour force, growth in its domestic consumption and

strong fabric base.

Figure 1: Top Developing Country Apparel Importers 2013

Source: Eurostat 2014

China

39%

Turkey18%

Bangladesh

17%

India

6%

Portugal4%

Cambodia4%

Sri Lanka

2%

Morocco2%

Pakistan

2%Tunisia

2%

Others

4%
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CBI Special Topic Supply Chain Trends in the Apparel Sector


China imported 11.3 billion of apparel into Europe in 2013. This accounted for27% of total apparel imports into the EU and 39% of apparel imports fromdeveloping countries. Overall, apparel imports from China only grew at a 2.2%CAGR over 2009-2013. The highest growth over the same period among thedeveloping countries was seen in imports from Cambodia (26.5%), Bangladesh(13.8), and Pakistan (13.4%).

CONSIDERATIONS FOR ACTION: Although China is currently the largestimporter of apparel, Turkey is the next largest competitor, and due to itsbeneficial location, should be monitored by all countries within the Europeansourcing landscape.

Wage inflation is the primary supply chain challenge

Labour costs are a significant component of FOB and they are a growing issue in

China and other low-cost manufacturing regions.

Figure 2: Labour Costs make up 40% of FOB

Source: Cowen and Company, 2014

Over the past several years, Chinas labour rates have been on the rise, andmany companies have moved their manufacturing to emerging markets to helpkeep costs down. China is no longer the low-cost leader; although wages forChinese factory workers are still lower than Japan, South Korea and Singapore,they are now significantly higher than for workers in Bangladesh, Vietnam andCambodia. Rates are still lowest in Bangladesh, although recent surveys havefound that many factories are failing to pay minimum wage to garment workers.

Figure 3: Monthly minimum wages in the garment industry in 2013, in EUR*

Source: ILO Regional Office for Asia and the Pacific

51 53 55 58 59 60 63 6494 103

185

230

402

598

0

100

200

300

400

500

600

700


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* for countries with different rates by region, enterprise size or grade, the lowest possible

rate was used

But wages are also rising in the lower-cost manufacturing regions in SoutheastAsia. In 2013, factory workers in several developing countries revolted, seekingbetter wages in relation to the cost of living. Recently, workers in Bangladeshand Cambodia went on strike in lobbying for fair wage increases. Manymanufacturing regions will see significant wage increases in 2014:

Figure 4: 2014 Wage increases by Country

Source: Credit Suisse, 2014

Bangladesh announced the most dramatic increase to minimum wage for 2014,up 77% Y/Y. Cambodia agreed to a 25% Y/Y increase from 60 per month to75, but this was significantly lower than the 120 per month that the workerswere asking for. Wages in China are expected to increase 10%-plus in 2014:

Shenzhen, a major apparel and footwear manufacturing province, hasannounced a 13% Y/Y increase for 2014; Yangzhou will increase wages 15.6%,Jiangsu 15.6%, Xi'an 11.3%, and Changsha 9.1%.

It is important to note that although wages in China and other low-costmanufacturing regions continue to increase, overall levels have deceleratedfrom recent years. However, labor uncertainty in lowest-cost regions isdisrupting production and causing uncertainty with respect to costing. Wageinflation in lowest-cost manufacturing regions is placing pressure on supplychains. Price inflation for value offerings is expected to increase up to 5-6% Y/Ytowards the end of 2014.

CONSIDERATIONS FOR ACTION: Sourcing managers are getting more

concerned with sourcing from nations in which actual wage is moving towards a

living wage. DC Exporters are encouraged to not only pay fair wages, but to also

communicate wage policies to reassure buyers that you are complying withpolicies.

The challenge of increasing wages could squeeze margins for retailers andbrands with significant low-end product exposure in the value marketplace.However, at the higher end of the apparel value chain, pricing pressures arelikely to be more moderate. Companies that can pass pricing increases on tocustomers are best positioned in this sourcing environment: Brands with strong pricing power Making high-quality products and targeting the mid-to-high range Categories less exposed to selling price pressure (e.g. sportswear,

accessories, jewellery, footwear)

Compliance is another growing area of concern

Assessing social risks is becoming increasingly important for apparel companies.Sourcing in low-cost countries exposes retailers and brands to reputational risksfrom low wages and inadequate safety standards at suppliers. Although the

1.2% 2.3% 3.9%9.0% 10.0% 11.0%

15.0%

25.0%

77.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


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Rana Plaza collapse in Bangladesh raised unprecedented awareness on garmentworker safety and stimulated important initiatives, the overall workingconditions for workers in the garment industry in many Asian countries still posesignificant challenges. Supplier incidents and subsequent labour unrest is risingin countries such as Bangladesh and Cambodia.

As companies seek to lower production costs and consider moving production tocountries with lower wages, they are also looking at social risks and the types ofsocial issues that are most likely get widespread media attention and poseoperational and reputational risks. NGOs are the most active and outspokenstakeholder group, and their campaigns stemming from supplier controversieshave strong reputational impact on consumers, often placing the blame onretailers and pushing companies to take action. Other stakeholders are alsocontributing to pressure on apparel brands and retailers to minimize social risks;increasingly, US and European Union representative bodies and politician arealso speaking out.

Figure 5: Top social issues with Suppliers 2010-2013

Source: Societe Generale Cross Asset Research, 2014

Companies are actively exploring social risks in their supply chains. Social riskscan stem from a wide range of issues, including industrialisation levels, internalmigrations, social inequalities and overall economic situations. Companies canassess their sourcing locations by examining:

Minimum wage vs. Living wage Corruption index Freedom of Association Social unrest risk

Child labour risk

CONSIDERATIONS FOR ACTION: Companies with low exposure to supplychain country risk and low exposure to stakeholder scrutiny have lower socialsupply chain risk.

Monitor how key stakeholder groups are influencing larger brands and retailerspresent in your country. Be aware of the NGOs most active in recent apparelindustry controversies:

o The Clean Clothes Campaign (CCC)o War on Wanto Labour behind the Label (LBL)o SOMO (Center for Research on Multinational Corporations)&ICN (Indian

Committee of the Netherlands)o

IGLHR (The Institute for Global Labour and Human Rights)o International Labour Rights Forumo Fair Wear

General workconditions andlabour rights

44%

Safety25%

Low wages21%

Freedom ofassociation

4%

Child and/orforced labour

3%

Other3%
http://www.cbi.eu/http://www.cbi.eu/http://www.cbi.eu/mailto:[email protected]:[email protected]:[email protected]://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cleanclothes.org/http://www.cleanclothes.org/http://www.waronwant.org/http://www.waronwant.org/http://www.labourbehindthelabel.org/http://www.labourbehindthelabel.org/http://www.somo.nl/http://www.somo.nl/http://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://www.globallabourrights.org/http://www.globallabourrights.org/http://www.laborrights.org/http://www.laborrights.org/http://www.fairwear.org/http://www.fairwear.org/http://www.fairwear.org/http://www.laborrights.org/http://www.globallabourrights.org/http://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://somo.nl/organisations-en/india-committee-of-the-netherlandshttp://www.somo.nl/http://www.labourbehindthelabel.org/http://www.waronwant.org/http://www.cleanclothes.org/http://www.cbi.eu/disclaimermailto:[email protected]://www.cbi.eu/


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Seeking to optimize the cost/risk ratio, apparel companies are

exploring new sourcing locations

Apparel companies are employing various strategies to minimize costs. Supplychain efficiency is increasingly an area focus for retailers for savings. Mainly,efficiencies are achieved through higher volumes; these savings can bereinvested into prices, services, websites, technology, online services, storeenvironment and/or advertising. Technology investment also helps the largerretailers. For example, through the aggregation and analysis of sales data, theycan find sales patterns and generate demand projection estimates, therebyreducing mark-downs and wastage.

Many companies are considering their sourcing location as a key area forsavings. Wages are a primary consideration for manufacturers, but they are notthe sole sourcing decision driver; the decision-making process takes intoaccount many other factors:

Raw materials costs, especially local cotton prices

Energy costs

Currency appreciation

Infrastructure quality

Political risk

Government support of the textile industry

The changing map of apparel sourcing

CBI conducted an informal survey of European apparel experts to determine

which countries are perceived to have the highest potential as new sourcing

nations for the European apparel industry.

Figure 6: New Sourcing Countries of Interest to European buyers


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Figure 7: New Supply Nations Perceived Capabilities

Nation Capabilities Pros Cons

Ethiopia CM Jersey, work wear, uniforms

mass, nonwoven, light shirts

Good work ethic , productivity;

existing infrastructure

Have to import everything

fabric, components etc.

Ukraine CMT Woven, jackets, shirts Labour is cheap, well-known

producers, nearby, good

transport and infrastructure

Fabric has to be imported,

Danish presence already

Serbia CMT Jersey, lingierie, woven Special techniques, goodindustry knowledge, cheap

labour

Myanmar CMP Sportswear, jackets, woven

items

Has capacity Korean/Japanese have

invested heavily; productivity

needs improvement; no BSCI

yet

Vietnam CMPT Good workmanship, nice cotton.

Good potential when FTA is in

place

More expensive

Thailand Sustainable program in fabric

and production

North Korea CMT Jackets Chinese connection needed,

no direct business

Madagascar FOB Knitwear, heavy sweaters,

cashmere

Zero duty easy entry into EU Dominated by French

Pakistan FOB Leather, jeans, motorcycle

suits, sweatshirts

GSP in effect

Mongolia FOB Lemmy coats, cashmere More complete textile chain Small industry

Croatia Good quality comparable to

Macedonia but better

Romania Fully-tailored products Industry knowledge

Sourcing strategies are becoming more complex

Some retailers are placing caps on the percentage they are willing to sourcethrough very high risk countries and developing more complex supply chains.Many companies are developing supply chains that source according to theirsegment positioning and business model.

Proximity sourcing is favoured for the fast fashion segments

Fast fashion is about how quickly a design can move from catwalk to store inresponse to current fashion trends; it demands short supplier lead times andincreased consumer choice through continuous product replenishment. Growingconsumer demand for fast fashion has vastly increased the number of fashionretailers in the market and the emergence of online and multichannel shoppinghas increased customers' options. These factors have forced many retailers toadapt their supply chain in order to lower lead times and increase speed to

market. Although China remains the dominant sourcing location for mostretailers, European retailers that are more fashion-focused are shifting towardsproximity sourcing locations like Turkey. Sourcing in lower-cost countries


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exposes retailers to reputational risks from wage and safety issues, but it alsoreduces their visibility on rapidly changing consumer preferences. This canpotentially result in a mismatch in offer and demand that leads to larger mark-downs. With a more local approach, apparel companies can deliver shorter leadtimes and more effectively adapt to volatile consumer demand; in fast fashion,adapting toconsumer demand and the latest fashions efficiently and quickly hasbecome a crucial aspect in supply chain management. There has also been anincrease in the proportion of Open to Buy buying plans; these allow retailers tohave the right amount of inventory and react quickly to fast-selling items andreplenish supply levels within a season.

Proximity sourcing may involve a cost trade-off, in that sourcing more locally

increases speed and efficiency, but often means higher wage costs. However,

working with a local supplier means a small business is not tied to ordering from

China in large volumes or waiting six weeks for a delivery. In addition, orders

from smaller European suppliers may lose out as China increasingly prioritizes

production for domestic consumption.

Government initiatives encouraging reshoring

Reshoringis also a growing movement within certain countries. In the US,

there has been marked growth in the number of companies bringing

manufacturing back to the US; the EU has also seen modest growth. The

reshoring trend in Europe has been noted in Spain, Portugal, and Greece. In

2014, the UK launched a reshoring initiative to stimulate the economy by

encouraging companies to provide jobs in the UK rather than the Far East. The

skills shortage has is also being addressed; for example, online retailer ASOS

launched a Stitching Academy in the UK for stitching and production methods

training.

Figure 8: Reshoring considerations for European companies

Benefits Challenges

Lower transportation costs

Easier production management

Better flexibility (e.g. minimum

quantities) and just-in-time

properties

Better preproduction services and

sampling speed

Better creative contributions

(eg. proposals, problem-solving,

decision-making, intuition) Less CSR risk, environmental

issues

Marketing opportunities in patriotic

purchasing (e.g. Made in Britain

equated with quality)

Possibilities for re-export

Lack of expertise and fabric

intelligence retraining needed

People prefer to work in retail over

manufacturing

It is unknown how wages will

develop in the EEC

Still need to source components

and fabric from Asia

Producing in EU23 is more

expensive

CONSIDERATIONS FOR ACTION: In order to better understand the changingmap of apparel sourcing, DC exporters are encouraged to investigate companiesthat could see benefit from moving sourcing closer to home. Inditex (Zara,Massimo Duty)andASOSare two large European apparel manufacturers/brandsknown to be using proximity sourcing to meet consumer demand for fastfashion. Other prominent European fast fashion retailers include: Top Shop,

Mango,andNext.

Better quality products also being increasingly sourced closer to home as they
http://www.cbi.eu/http://www.cbi.eu/http://www.cbi.eu/mailto:[email protected]:[email protected]:[email protected]://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.zara.com/http://www.zara.com/http://www.zara.com/http://www.massimodutti.com/inditex-sel/?redirect=truehttp://www.massimodutti.com/inditex-sel/?redirect=truehttp://www.asos.com/women/http://www.asos.com/women/http://www.asos.com/women/http://www.topshop.com/?geoip=homehttp://www.topshop.com/?geoip=homehttp://shop.mango.com/preHome.faceshttp://shop.mango.com/preHome.faceshttp://www.next.co.uk/http://www.next.co.uk/http://www.next.co.uk/http://www.next.co.uk/http://shop.mango.com/preHome.faceshttp://www.topshop.com/?geoip=homehttp://www.asos.com/women/http://www.massimodutti.com/inditex-sel/?redirect=truehttp://www.zara.com/http://www.cbi.eu/disclaimermailto:[email protected]://www.cbi.eu/


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can withstand the pricing pressures of increased wages. Jaeger,Fat Face,RiverIslandandM&Sare mid-to high level UK brands that have all brought backsome manufacturing to the UK. Other mid-range European brands include:Esprit,COS,andBenetton.Turkey is emerging as the key source nation competitor and it is targeting

strong growth in exports of textiles and clothing to Europe to capitalise on a

growing number of brands and retailers seeking to diversify their supply chains

away from Asia. Turkey has mastry of all apparel product groups and has been

a strong supplier in fast fashion to Europe, and it took over a lot of business

from North Africa during the Arab Spring. Garment manufacturing in Eastern

Europe is similar, has similar remuneration; in addition to Turkey, Eastern

European countries such as Romania, Macedonia, Bulgaria, Slovenia and

Lithuania are increasingly competitive for garment production and should be

monitored as well.

DC exporters need to focus on speed to market, and just in time deliveries inorder to remain competitive. Those that excel in preproduction services, speed

in sampling, and collection proposals will have an advantage. Survivors in the

market are the ones that can offer services related to stockkeeping units and

warehousing. Vertical integration is another option; manufacturers that expand

into brands and retailers are also doing well. Offering buyers flexibility towards

their Open to buystrategies is also advisable; having good control of inventory

is important to retailers as chronically inadequate stock levels can significantly

affect their bottom line.

Low-cost sourcing favoured by companies offering products

that are less fashion-forward

Retailers with a higher proportion of basic/less fashion forward products are

shifting more towards lower-cost countries such as Bangladesh. With low pricingpower, discount retailers at the mid-low end are most likely to source fromemerging markets in Africa and Southeast Asia. High-risk countries have moredifficulty investing in suppliers social risk monitoring; however, multi-nationalmanufacturers that transfer their infrastructure and expertise, especially infactory engineering and automation are benefitting from this low-cost sourcingstrategy. Favourable trade policies are also helping to drive this trend. Inaddition, infrastructure improvements may help offset rising wage costs.Supplychain and transportation infrastructures have improved dramatically acrossemerging markets and this is increasing manufacturing mobility. For example,deep water shipping capacity is being added across Southeast Asia andtransport infrastructure within second-tier manufacturing regions has improvedconsiderably; these improvements allow manufacturers to shift capacity tooutlying regions where there is less significant pressure from wage increases.This will ultimately benefit buyers by helping to offset some of the pressures of

wage inflation in many first-tier manufacturing cities. Companies are also tryingto offset rising labor costs with innovation in manufacturing processes toincrease productivity and keep costs down.

CONSIDERATIONS FOR ACTION: Many companies are prioritizing lower cost

sourcing over speed to market, includingH&M,Tesco,andNew Look.Keeping

costs low will be a priority for buyers sourcing from lowest-cost countries.

Specialization is becoming more important. Some companies will switch

suppliers if it specialises in particular product categories; for instance, some

suppliers in the former Soviet Union focus on making quality, technical

products, such as sportswear.

Key risks for buyers that affect sourcing decisions include lost efficienciesthrough production problems and delays and supplier uncertainty. Clearcommunication between companies and suppliers is vital for an effective supply

chain. For example, incorrectly assuming what is common practice can disrupt aproduction schedule. Software that puts suppliers and buyers on the same

platform, sharing real-time information on costs and performance is becoming
http://www.cbi.eu/http://www.cbi.eu/http://www.cbi.eu/mailto:[email protected]:[email protected]:[email protected]://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.jaeger.co.uk/http://www.jaeger.co.uk/http://www.fatface.com/http://www.fatface.com/http://www.fatface.com/http://www.riverisland.com/http://www.riverisland.com/http://www.riverisland.com/http://www.riverisland.com/http://www.marksandspencer.com/http://www.marksandspencer.com/http://www.marksandspencer.com/http://www.esprit.com/stories?mc=stories&wt_cc2=storieshttp://www.esprit.com/stories?mc=stories&wt_cc2=storieshttp://www.cosstores.com/gb/http://www.cosstores.com/gb/http://www.cosstores.com/gb/http://www.benetton.com/http://www.benetton.com/http://www.benetton.com/http://www.hm.com/http://www.hm.com/http://www.hm.com/http://www.clothingattesco.com/http://www.clothingattesco.com/http://www.clothingattesco.com/http://www.newlook.com/http://www.newlook.com/http://www.newlook.com/http://www.newlook.com/http://www.clothingattesco.com/http://www.hm.com/http://www.benetton.com/http://www.cosstores.com/gb/http://www.esprit.com/stories?mc=stories&wt_cc2=storieshttp://www.marksandspencer.com/http://www.riverisland.com/http://www.riverisland.com/http://www.fatface.com/http://www.jaeger.co.uk/http://www.cbi.eu/disclaimermailto:[email protected]://www.cbi.eu/


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increasingly common. DC exporters can also reassure the buyer that yourpolicies and practices are compliant with local regulations and the policies andpractices of the company. You can also offer to do a trial order. Ultimately,manufacturers and buyers should work together on forging a much closer andmore integrated supply chain, and invest in long-term partnerships in order togain the most from process efficiencies and collaboration.

Useful sources

Just Style

Drapers

Social Risk in the Apparel Supply Chain, Societe Generale Cross Asset

Equity Research, 2014

European Food and General Retail Report, Barclays Equity Research, 2014

Sourcing Survey Vol. 2: Thoughts On 2014 Apparel Unit Costs And Bangladesh, Cowan and Company, 2014

2014 Sourcing Outlook, Credit Suisse, 2014

Tradeshows and events

Ethical Fashion ForumsSource Summit(London)

Fashion SVP(London)

Fatex(Paris)

More information

CBI market information: Promising EU export markets.

EU Expanding Exports Helpdesk -http://exporthelp.europa.eu- go to trade statistics.

Eurostat -http://epp.eurostat.ec.europa.eu/newxtweb- statistical database of the EU.

Several queries are possible. For trade, choose EU27 Trade Since 1995 By CN8. Use the

guide Understanding Eurostat: Quick guide to easy comext(http://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_2009051

3.pdf)for instructions.

International Trade Statistics -http://www.trademap.orgyou have to register

This survey was compiled for CBI by Global Intelligence Alliance

in collaboration with CBI sector expert Dhyana van der Pols

Disclaimer CBI market information tools:http://www.cbi.eu/disclaimer
http://www.cbi.eu/http://www.cbi.eu/http://www.cbi.eu/mailto:[email protected]:[email protected]:[email protected]://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://source.ethicalfashionforum.com/article/source-summit-2013-in-reviewhttp://source.ethicalfashionforum.com/article/source-summit-2013-in-reviewhttp://source.ethicalfashionforum.com/article/source-summit-2013-in-reviewhttp://www.fashionsvp.com/http://www.fashionsvp.com/http://www.fatex.fr/enhttp://www.fatex.fr/enhttp://exporthelp.europa.eu/http://exporthelp.europa.eu/http://exporthelp.europa.eu/http://epp.eurostat.ec.europa.eu/newxtwebhttp://epp.eurostat.ec.europa.eu/newxtwebhttp://epp.eurostat.ec.europa.eu/newxtwebhttp://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://www.trademap.org/http://www.trademap.org/http://www.trademap.org/http://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.cbi.eu/disclaimerhttp://www.trademap.org/http://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://epp.eurostat.ec.europa.eu/newxtweb/assets/User_guide_Easy_Comext_20090513.pdfhttp://epp.eurostat.ec.europa.eu/newxtwebhttp://exporthelp.europa.eu/http://www.fatex.fr/enhttp://www.fashionsvp.com/http://source.ethicalfashionforum.com/article/source-summit-2013-in-reviewhttp://www.cbi.eu/disclaimermailto:[email protected]://www.cbi.eu/

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