Sourcing Report 2021 by Sourcing Journal

SOURCING REPORT

2021 1 / SOURCING STATE OF THE INDUSTRY REPORT

Contents 45

India on the Rebound

Supply Chain Diversity Is Everyone’s Responsibility

A New Chapter in Bangladesh

Footwear Production Slowly Steps Away From China

Wage Worries in Asia

Brazil Puts Best Foot Forward

Rebuilding Relationships: Manufacturing Trust in the Supply Chain

Canadian Cachet: Trade North of the Border

Size Matters

VF VP Talks Innovation and Sustainability

Raw Material Outlook Fragile Amid Economic Uncertainty

Running Lean and Mean

Ralph Lauren’s Alagöz on Speed-to-Market and Industry Collaboration

The Long and the Short of It

The ‘New Normal’ Brings Digital Sampling to the Fore

Tapestry Leaders on the Shift to Digital and Prioritizing Diversity

On the Ground in Central America

A&F’s Fran Horowitz Talks Supply Chain Changes

04 08 16 19

The Industry’s Complex Uyghur Cotton Problem

After Decades of China Dominance, Sourcing Seeks a New Way Forward

Trade Talk: The Ball’s in Biden’s Court

Small Batch and OnDemand, the Return of U.S. Manufacturing

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Editor’s Letter M

an plans, and God laughs. I joined Sourcing Journal as editor in chief in the second half of last year after two decades in media, and I thought I’d seen it all. I was wrong. No one could have been prepared for the pace and depth of change the pandemic inflicted on every aspect of our lives, and business was clearly not immune. 2020 brought the bankruptcies of stalwart nameplates from J.C. Penney to Brooks Brothers to Neiman Marcus and countless others. And while the tumult surrounding Covid-19 and the havoc it wreaked on each link of the supply chain weighed heavily, fashion was already an industry in dire need of reinvention. The past year highlighted every weakness in business models and forced all to be agile or perish. So where does that leave us? The change that has been necessary for survival has also been welcome in many ways, as fashion’s tried-and-true formula underwent long-overdue scrutiny. New methods and ideas from the ‘someday’ pile were forced into action at hyperspeed: digital sampling, in-season selling and contactless pickup, among

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them. What remains to be seen as we head into 2021 and beyond is if the lessons forged in the crucible of hardship will carry through to the next boon. These lessons include a renewed awareness of inventory levels as brands and retailers across the board adopted a lean stance in search of greater full-price sell-through and minimal markdowns. How they achieved these streamlined stocks has been a matter of great interest to the sourcing community this year, as mass order cancellations and anemic pricing terms strained buyer/supplier relationships past the breaking point. Rebuilding those partnerships is of paramount importance, as a greater emphasis on newness, smaller production runs and quicker turns cranks up the heat on an already simmering situation. Last year’s liquidity crunch also led many to question whether talk of a more sustainable industry was just that—talk. With survival on the line, many wondered if going green would still be feasible. The answer appears to be a resounding ‘yes.’ The new paradigm is here to stay as a generation of modern consumers is spending with their values, and where and how clothing is constructed

is just as crucial as its cut or color. Taken as a whole, sourcing has never been more mainstream. The headlines in our industry are the headlines everywhere. Sustainability, traceability, global trade, worker rights and abuse. A division once relegated to the back room is now fully on the front lines. In compiling this report, the SJ team took a comprehensive approach to examining all those issues and more— from the Uyghur crisis in China, to the rise of DTC and on-demand manufacturing, as well as candid talks with the name-brand leaders charting the course ahead. No one could have anticipated the upheaval the past year has wrought, and predicting what’s around the corner is likely a fool’s errand. We can, however, learn from what we’ve been through and use that understanding not only to prepare for whatever comes next, but also enact lasting change for the better. If there’s one takeaway from 2020, it’s the realization that we’re all in this together. Peter Sadera Editor in Chief Sourcing Journal

The Industry’s Complex Uyghur Cotton Problem COMING FROM THE GLOBAL SOURCE THAT IS CHINA AND TOUCHING A MASSIVE PERCENTAGE OF GOODS, UNTANGLING THE WEB OF PRODUCTION IS NOT A SIMPLE FIX. JASMIN MALIK CHUA

s China continues its brutal crackdown on the Muslim-majority Xinjiang Uyghur Autonomous Region, apparel sourcing in the country is becoming increasingly fraught. In early December, the Trump administration unveiled its tightest restrictions on the country’s cotton and textiles yet, citing a desire to prevent U.S. complicity in human-rights abuses in Xinjiang, where the Chinese government has detained as many as 1.8 million Uyghurs, Kazakhs and other Turkic Muslim minorities in internment camps and prisons as part of a broader campaign of coercion and assimilation. Though the program is variously touted in state media as a vehicle for poverty reduction or terrorism mitigation, stories of torture, forced labor, sexual assault, political indoctrination and forced renunciation of faith have emerged from former inmates. “Graduates” of these camps don’t always return home, either. In March, the Australian Strategic Policy Institute, a think tank, reported that more than 80,000 Uyghurs were

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transferred out of Xinjiang between 2017 and 2019 to work in factories across China, often against their will. “This kind of forced labor is antithetical to American values, negatively impacts both consumers and businesses, undermines legitimate trade and competition and threatens American workers,” Mark A. Morgan, acting commissioner of Customs and Border Protection, said at a press briefing. “No matter how you view it, this is a threat that impacts each and every aspect of our society. And we can’t afford to ignore it.” As a salvo, CBP issued a Withhold Release Order (WRO) that blocks all imports from the Xinjiang Production and Construction Corps (XPCC), a paramilitary organization that customs officials say operates detention facilities that employ Uyghur labor to farm and process cotton. Federal statutes already prohibit the importation of merchandise mined, manufactured or produced, wholly or in part, by forced labor, but the WRO is a way for the Trump administration to “double down” on using its legal powers “to their maximum effectiveness,” Morgan said.

PROTESTS REGARDING CHINA’S TREATMENT OF UYGHURS HAVE POPPED UP ACROSS THE GLOBE. CREDIT: SIPA VIA AP IMAGES

“We have found that only a few companies have a useable platform or system already in place to even begin to better understand their supply chains. It’s a real problem for the fashion industry at large.” —Tai Ford, Retraced

While the action stops short of a regional ban on all products from Xinjiang, its impact is no less severe: the XPCC produces onethird of cotton in China, the second-largest cotton grower after India and “by far the world’s leader in processing raw cotton fiber into textiles and apparel,” according to the U.S. Department of Agriculture. In 2018, the XPCC imported $43 million worth of goods into the United States. Companies might have seen the warning signs, however. In July, the Treasury Department placed the XPCC on its sanctions list, prohibiting all American companies and citizens—or non-American companies and citizens subject to U.S. jurisdiction—from engaging with the organization, whether directly or indirectly. “That already made companies start assessing what sort of transactional relationships they might be having with the XPCC,” said Shelly Han, chief of staff at the Fair Labor Association, which has asked its affiliates, including Adidas, Hanesbrands, Lululemon and Patagonia, to identify sourcing alternatives to Xinjiang in light of the situation. “So this is just an additional layer that companies are going to have to think about.” Most brands and retailers, even those implicated in reports about forced labor in Xinjiang, have vociferously denied relationships,

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however tangential, with the region. Others have been more decisive: In July, Patagonia announced it will no longer be sourcing materials from Xinjiang. Two months later, H&M Group said it was cutting ties with a mill associated with Huafu Fashion Co., a textile producer that has been linked to Uyghur abuses. In a joint statement, the American Apparel & Footwear Association, National Retail Federation, Retail Industry Leaders Association and the U.S. Fashion Industry Association said they looked forward to working with the CBP to build a “detailed and practical implementation strategy to make sure today’s actions are effective, enforceable and focused on the bad actors who insist upon exploiting slave labor and do not harm trusted traders or our supply-chain partners who are working tirelessly to stamp out forced labor.” Ferreting out precise relationships is easier said than done, however. When Sayari, a corporate intelligence platform, combed through Chinese public records, it uncovered more than 862,600 direct and indirect holdings, including minority, majority, control and non-control positions through different XPCC divisions, across 147 countries, including the United States, the United Kingdom, Germany and offshore jurisdictions such as the British Virgin Islands. In

some cases, the layers of ownership from the XPCC numbered in the dozens. “It will be hard to implement this ban practically, and it will leave fashion apparel companies searching for guidance,” said Tai Ford, chief marketing officer at Retraced, a supply-chain traceability firm. “We have found that only a few companies have a useable platform or system already in place to even begin to better understand their supply chains. It’s a real problem for the fashion industry at large.” More legislation may be coming down the pipeline, too, including the Uyghur Forced Labor Prevention Act, which passed overwhelmingly in the House of Representatives in September. It assumes that all goods manufactured in Xinjiang are made with forced labor and therefore verboten unless “clear and convincing evidence” demonstrates otherwise. If enacted into law, the act could have sweeping implications for garment and textile sourcing. Xinjiang produces 85 percent of China’s cotton, which in turn accounted for more than 22 percent of the world’s supply in fiscal year 2019. The End Uyghur Forced Labour coalition estimates that one in five cotton garments sold globally contains fiber or yarn sourced from Xinjiang, meaning that “virtually” the entire apparel industry is at least tangentially tainted by Uyghur abuses. Indeed, it’s the opacity of garment supply chains that make it difficult to peg what materials or products have been touched by forced labor. Brands and retailers have invested in traceability to promote environmental sustainability, yet visibility into labor beyond the first tier has lagged behind, Han said. In the case of Xinjiang, the persecution of Uyghurs and other Muslim minorities is not the action of a “few bad-apple suppliers,” but rather a government-mandated one, which adds to the scope and complexity of the issue. “It’s a policy. And it’s something the government is standing behind,” she said. The unprecedented situation has led to an unprecedented response. Over the summer, the Trump administration placed several apparel firms, including reported current or former suppliers to brands such as Ralph Lauren and Tommy Hilfiger, on a blacklist that bars them from buying U.S. products because of their alleged ties to

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forced-labor camps in Xinjiang. In July, the State Department led an interagency group to publish the “Xinjiang Supply Chain Business Advisory,” advising companies with potential supply-chain exposure to Xinjiang to consider the reputational, economic and legal risks of involvement with entities that may be directly or indirectly engaging in human rights abuses in the region. Because of its significant volumes, however, writing off Chinese cotton entirely is difficult, if not impossible. “[It’s] not so easily replaced,” said Nate Herman, senior vice president of policy at the AAFA. “We’re working to see if we can try and source U.S. cotton, Indian cotton, Brazilian cotton, West African cotton...there’s a lot of other sources out there, but it is hard to replace 20 percent.” Herman said the situation in China differs from that of Uzbekistan, where reports of state-sponsored cotton forced labor led hundreds of brands to unite in a boycott in 2012. The latter generates “very limited amounts of yarns and fabrics, and very small amounts of clothing,” he said. “Whereas China produces about 60 percent of the world’s textiles, and those textiles can end up anywhere in the world.” Already, brands and retailers, leery of President Trump’s tariffs and smarting from supply-chain bottlenecks at the start of the Covid-19 pandemic, when China went into extended lockdown, have been looking to diversify operations across Bangladesh, Cambodia, Vietnam and others. But though divesting from Chinese cotton may be an appealing option, Ford said it doesn’t address or put pressure on buyers to address the underlying problems. Neither does it prevent mills in these countries from buying Xinjiang or Chinese cotton. Solutions such as blockchain and DNA tagging are relatively niche and will need to be scaled up rapidly to be of value. Third-party audits, too, have limited utility under current circumstances. A number of supply-chain auditing firms, including Bureau Veritas and Worldwide Responsible Accredited Production, said they are no longer conducting inspections in Xinjiang because they’re unable to carve out the necessary amount of access to conduct a satisfactory review. For now, Retraced is building out a system where brands can connect with their

“No matter how you view it, this is a threat that impacts each and every aspect of our society. And we can’t afford to ignore it.” —Mark A. Morgan, Customs and Border Protection

CHINA PRODUCES 60 PERCENT OF THE WORLD’S TEXTILES. CREDIT: ELÉONORE/ADOBE

suppliers and use invoices to trace the chain of custody “as far down as they can go to the cotton crops,” Ford said. “We’re helping them better the documentation trail, and getting that onto one system. Because right now, people are trying to coordinate massive amounts of Excel [sheets] from different spots and then looking for that one email here and another email there.” Security officials say they are aware of the tight position fashion businesses find themselves in, but they’re placing the onus of policing supply chains on the corporations, which they say have “more robust” systems of monitoring suppliers than they do. “It is going to be a challenge I think for the industry to separate out goods that are made with forced labor versus goods that are not,” said Brenda B. Smith, executive assistant commissioner at the Office of Trade. “We strongly recommend to the industry that they do significant due diligence around their supply chain to try to tease out—as CBP has done—the specific entities that are related to or use cotton out of Xinjiang.” Modern slavery is not something that is unique to China, and it’s important for both regulators and brands to make sure they are not moving from “one forced labor hub to another,” said Tu Rinsche, vice president of strategic engagement and partnerships at Transparentem, a human-rights nonprofit. “Forced labor is a global problem.” For Rinsche, the only way out of the morass is through industry collaboration. “An important thing for companies to realize is that if they want to do this, they do indeed have the leverage and they should be willing to exercise that leverage,” she said. Beyond the “doom and gloom,” there’s one positive outcome from the sourcing debate, said Evonne Tan, director of data management and China strategy at sustainability nonprofit Textile Exchange. “The spotlight on human rights in Xinjiang has kick-started a deep dive into social risk in general—and that’s a good thing,” Tan said “How can we do greater due diligence? How do we do country-wide assessments? These are not [questions] specific to China itself.”

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After Decades of China Dominance, Sourcing Seeks a New Way Forward THE GLOBAL PANDEMIC HAS FORCED BRANDS TO PAUSE AND REEXAMINE THEIR SUPPLY CHAINS AS OBSTACLES TO WORKING WITH CHINA CONTINUE TO MOUNT. KAT E N I S H I M U RA

s the world continues to reel from myriad challenges, one wonders if the events of 2020 will read, in future history books, like a dystopian drama. A global pandemic managed to dismantle supply chains and deflate consumer confidence. And even though some stir-crazy shoppers might now be eager—after so many months at home—to part with a few dollars for a pick-me-up, the contagion’s unabated spread has made it impossible for the retail sector to return to business as usual. Stores and shopping centers, for the most part, remained far below normal levels during the holiday period. And though e-commerce has accelerated tremendously, the uptick in online orders has created others challenges, namely returns and fulfillment. Last year represented an inflection point

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for the industry, with the word “unprecedented” being thrown around liberally. But the problems that plagued apparel’s sourcing sector began long before the globe became familiar with the term, “coronavirus.” Over the past two years, tariffs on goods from China have forced the U.S. apparel businesses to reexamine their dependence on the country. Rising labor costs, currency devaluations and rumblings about human rights abuses have also presented unfavorable conditions for healthy trade, and brands have been slowly, through necessity, engaging partners elsewhere. What’s more, the ethos of the fashion industry is changing—and not in China’s favor. Its massive capacity and unending supply helped the country burgeon into a hub for fast fashion, but disposable clothes are quickly going out of style. While the re-

A SAMPLING CENTER IN SHENZHEN, CHINA

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gion has the ability to produce just about anything, from luxury goods to mass market wares, a Made in China tag still carries unfavorable implications. The stall and restart cadence of 2020 has shone a light on some harsh truths, according to Munir Mashooqullah, founder and chairman of global sourcing firm Synergies Worldwide. Even after normal trade resumes, sourcing is unlikely to return to the status quo, he told Sourcing Journal. “I don’t want to say never, but the possibility of that happening is very low,” he said. China has been dealt a handful of blows, he added, citing the continued trade war, currency issues, and of course, the Covid crisis that began to radiate outward from Wuhan in January, eventually infecting the globe. “Naturally, when a country is facing all these headwinds, your interest and investment is going to be diluted,” Mashooqullah added. Synergies has both factories and offices in China, and Mashooqullah said he’s seen an

uptick in interest from brands and fashion firms looking to stake out new relationships or further diversify away from the country. “Movement has accelerated,” he stated. Synergies is in a unique position to observe these trends as it also has factories in nine other countries, including key players like Bangladesh, India, Pakistan, Portugal, Turkey and Cambodia. Mashooqullah believes that China’s reign as a singular sourcing superpower is over. And contenders for the giant’s business aren’t just waiting in line for a piece of the pie—they’re actively digging in. Bangladesh and India are emerging as leaders in unstructured casual clothing, denim and children’s wear, while Pakistan has cornered the market in popular fleece styles. Vietnam’s technical skill is nearly unrivaled, with an ability to produce highly sophisticated synthetic performance products, Mashooqullah said. Still, the country imports more than half of its raw materials and inputs from outside markets, including China,

“Brands are becoming more interested in transparency and telling the story of how their clothing is made.” —Aseem Kumar, Fashion Images Overseas

making it tough to verticalize operations. Some suppliers based in China and Hong Kong heard the canary in the coal mine years ago, and have worked to set up factories in these other locales to circumvent tariffs and tap into different skill sets. And brands have since followed, Mashooqullah said. “I think the departure to other countries with Chinese expertise has already happened.” Hong Kong-based multicategory supplier Lever Style has employed such a tactic, seeking to diversify its own sourcing operations so that its clients don’t have to. According to executive chairman Stanley Szeto, the optimal supply chain is a network of strategic sourcing partners, each equipped with unique capabilities spanning a range of product categories. Lever Style, which once served retail stalwarts like J. Crew and Banana Republic, has evolved its strategy in recent years. It now focuses on direct-to-consumer brands, which Szeto believes to be the business model of the future. When the firm went public in fall of last year, one of his stated goals was to focus on the acquisition of smaller, more categorically diverse suppliers to better serve these specialty startups. “We’ve been trying to be as flexible as possible for our clients, and that’s why we have factories all over the place,” Szeto said, adding that Lever Style operates on an asset-light strategy with quick turns and low minimum order quantities—all key qualifiers for DTC clients like Stitch Fix, Bonobos and Everlane. “Before the trade war, China was by far our largest production base,” he added, but now Vietnam is larger, accounting for about half of Lever Style’s production. In July, the firm acquired Vista Apparels, a China-based knitwear supplier that specializes in sweaters, with the intent to bring those operations to a new factory in Vietnam. And in August, Lever Style bought Hong Kong’s Liwaco Overseas Marketing Limited, a technical outerwear company responsible for the high-performance gear sold by brands like Mammut and Helly Hansen. Operational diversification makes Lever Style a one-stop shop for its customers, who can work with the company on the creation

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of all types of garments without worrying about managing multiple downstream relationships. “Whenever they have to find a new supplier and onboard them, it’s actually very cumbersome,” Szeto said. “And that’s why the narrower the sourcing base that our clients have, the better off they are. They can more focus on the front end, and what they’re good at.” Szeto believes that having factories in multiple markets also reduces the risk for brands. “By working with us, they’re not putting all their eggs in one basket in terms of a single factory and a single country,” he said. Lever Style, he added, can shift manufacturing amongst its factories “as the winds blow.” Speed and versatility are paramount, especially set against the uncertain backdrop of a Covid-ridden world. As the fashion industry marches forward into the unknown, Szeto believes brands will increasingly rely on “test-and-react strategies” where trends are vetted swiftly and fast reorders are key. “Some manufacturers will adapt to the new quick-turn, high-mix-low-volume demands from brands,” he said. “Others may let companies like ours take over their businesses so we can do the hard work of transformation.” Large-scale denim manufacturer Saitex is in the midst of just such a metamorphosis, according to founding CEO Sanjeev Bahl. “People lose business quite frequently because of this nonsensical system we have,” Bahl said, referring to the longstanding reliance on high minimum order quantities, long lead times and strict seasonal calendars. “These are all antiquated.” “We thought, ‘Let’s try and create a speedto-market model that is totally integrated,’” he added. The Vietnam-based B Corp has recently verticalized its operations in the country by setting up its own denim mill, lending speed and agility to its processes, and providing traceability from a materials perspective. “Being a factory in Vietnam didn’t cut it,” Bahl said, as he felt constrained by mill partners’ limitations. “There’s no transparency, there are quality issues, and there are pricing constraints because there’s nothing you can do about the material cost.”

DENIM JEANS BEING WASHED AT SAITEX’S FACTORY IN VIETNAM.

“It’s about getting a good handle on a product before you commit to inventory and take risks, and you have the ability to chase so you don’t lose out on dollars.” —Sanjeev Bahl, Saitex

Owning its own mill allows Saitex to streamline production, testing fabrics for shrinkage, double-checking measurements, and creating optimal washes “in-house.” Saitex has also been laying the groundwork for its first Los Angeles factory, set to be up and running sometime in Q4. Closer to the company’s U.S. brand partners and their target market, Bahl sees the outpost as a “factory of the future,” containing all of the robotics, artificial intelligence and digitized technology he’s employed in his Vietnam operations. The factory’s initial output will be about 600,000 units per year, though he

hopes to see it churn out more than one million at peak capacity. The L.A. factory will enable American brands to re-up on successful styles during the selling season—a feat that’s nearly impossible within the confines of the traditional fashion supply chain, and one that Zara has employed with reported success. According to Bahl, if a brand wants more units of a denim style that’s flying off the shelves, they have to coordinate with their mills, trim suppliers and manufacturers to rush the order. It’s a costly process, and the goods often arrive too late. Saitex’s L.A. operations will help brands test styles with small quantities of product, and then re-order their top sellers in time

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to fulfill demand. “If you’re launching a new style, you could have a read on it super fast,” he said. “It’s about getting a good handle on a product before you commit to inventory and take risks, and you have the ability to chase so you don’t lose out on dollars.” Brands are also less apt to be left with excess inventory ripe for markdowns. While the California factory will initially rely on denim from Saitex’s Vietnam mill, Bahl is actively working to develop mills closer to the U.S. market, in Mexico for example, which would allow for a quicker response to brand needs. If the new factory pans out as he hopes, Bahl wants to expand the concept globally. “This whole plan—on-shoring and verticality—has been in place for the past 10 years now,” he said. “I’ve been insisting that this model is the only way for manufacturers to be successful in the future.” Saima Chowdhury, founder of Noi Solutions, has espoused a similar vision for her family’s business in Bangladesh, touting self-reliance as a key to success. The company’s fleet of factories, which manufacture yarn, denim, printed fabrics, knits and sweaters, has operated vertically since 1976. According to Chowdhury, whose company creates private-label garments for global brands that cater to teens and millennials, Bangladesh has seen heightened interest from U.S. companies looking to diversify sourcing away from China because of tariffs, rising labor costs and human rights abuses. But they’re not just fleeing those issues—they’re looking to be enticed by forward-looking solutions. Bangladesh has served up strong alternatives to China for a number of reasons, and chief among them is the country’s “dual supply chain,” Chowdhury said. “We have a large number of yarn-to-garment vertical factories,” she added, “but we are also able to work with imported inputs, which allows for more flexibility in raw material innovation.” While Noi Solutions spins its own yarns and knits its own fabrics, the company has a longstanding collaborative relationship with U.S. cotton suppliers, sourcing about 80 percent of its fibers from American farmers. That flexibility and global worldview

FASHION IMAGES OVERSEAS SPECIALIZES IN CLOTHING MADE FROM NATURAL MATERIALS.

provides a strong counterpoint to China’s nationalistic insularity. Well more than half of the country’s apparel exports in 2019 (62 percent) went to the E.U., because of its duty-free access, while just 18 percent of its clothing output reached U.S. shores, Chowdhury said, citing data from the Bangladesh Garment Manufacturers and Exporters Association. “Bangladesh was not a preferred sourcing destination for the U.S.,” she said, but she’s witnessed this reality slowly shifting due to continued tariff tensions with China. Bangladesh touts a balance between price and capabilities that allows it to compete with China, she added, with McKinsey calling it the “next-largest sourcing country” for apparel in 2019. In fact, clothing is Bangladesh’s largest export, and the four-million-strong industry is working to scale production for much shorter lead times. A focus on agility will help its factories appeal to DTC brands, Chowdhury said, which are pulling market share from mass-market competitors. And as U.S. shoppers engage in more conscious consumerism, Bangladesh is making “huge strides in social and environmental compliance,” she added. “The Bangladesh garment industry has committed to making sustainability a necessity for doing business,”

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with 90 LEED-certified (Leadership in Energy and Environmental Design) factories, according to Chowdhury. Noi Solutions has used United Nations guidelines to craft its own goals around waste reduction, energy efficiency, clean water and sanitation, health care, fair wages and safe working conditions. Chowdhury said the industry has also played a key role in creating employment opportunities for Bangladeshi women, who make up 85 percent of the country’s garment workers, according to data from London-based non-profit War on Want. “This industry is important to the country for economic and social stability,” Chowdhury said, “which has led to a significant amount of investment in the industry vertical operations, state of the art factories, and sustainability.” Consumers’ growing concerns about their clothing’s origins have been a major factor prompting brands to look outside of China for sourcing, Aseem Kumar, owner of Fashion Images Overseas, told Sourcing Journal. Kumar’s Rajasthan, India-based factory has seen an uptick in interest over the past few years, as “brands are becoming more interested in transparency and telling the story of how their clothing is made,” he said. Pre-Covid, much of his business’ growth came from “brands with a mission” to become

ARI JOGIEL’S LOS ANGELES OFFICE.

“We have a large number of yarn-togarment vertical factories…but we are also able to work with imported inputs, which allows for more flexibility in raw material innovation.” —Saima Chowdhury, Noi Solutions

more sustainable. “India, and my company, specialize in natural fibers,” he said, noting it is “almost impossible to find polyester dyers” in Jaipur. Instead, manufacturers opt for locally sourced cotton, jute, silk and rayon. “As a community we have placed importance on using less toxic methods,” he added. Throughout the Covid crisis, Kumar said businesses like his have seen increased interest from those desperate to diversify their supply chains. “India has good international relations, and thanks to upgrades in infrastructure over the past decade, it is set to compete in a global market,” he said. A capacity for block-printing, machine printing, hand and schiffli embroidery and sequin work should also prove appealing to international brands. “Every state of India has unique designs which belong to their culture and are shown through their art,” he added, giving designers a large scope of skills to tap into. The country is also looking to augment its capabilities beyond natural materials to include the novelty and performance fabrics that have proven indispensable to the apparel market through shoppers’ obsession with athleisure and streetwear. Those consumer trends also stand to

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benefit the small but growing manufacturing sector in the U.S., centered chiefly in Los Angeles. On-demand manufacturer Ari Jogiel’s eponymous company serves American labels in markets across the country, specializing in contemporary apparel. The manufacturer— which produces and fulfills garment orders within days, only after a consumer has purchased online—has seen a blossoming desire for lounge and streetwear as the long days at home have worn on. Most of his clients are direct-to-consumer, Jogiel said, though some still dabble in the wholesale business. “At the beginning some of our bigger projects were canceled,” he said, but immediately following Los Angeles Mayor Eric Garcetti’s “Safer At Home” order early on in the pandemic, which required residents to remain in their residences and barred non-essential businesses from operating, Jogiel’s business picked up. He engaged with the City of Los Angeles in addressing the PPE shortage, working with the L.A. Protects program to create non-medical-grade masks. The effort kept operations humming, and shortly afterward, the company’s apparel business “picked right back up,” he said. “In the last two months we have signed seven new brands and have seen a spike in demand for ‘American Made.’” The sourcing landscape is “changing quickly,” he added, with many overseas-reliant clients “now having issues with importing and lead times.” In a sense, the pandemic illuminated an already existing need for a total makeover of the fashion supply chain. As the gravity of the situation began to settle in earlier this year, brands scrambled to cancel orders and liquidate inventory that was no longer relevant to homebound shoppers. Many were unable to pivot quickly enough to cash in on emerging trends, like comfortable, casual lounge sets and sweats, which have become the unofficial Covid uniform. In light of missing out on opportunities this spring, brands are looking for solutions that offer a quicker turnaround, like madeto-order products and domestic production. “I also believe that we are living in very

One of the top trends to come out of Covid-19 is conscious consumption. As part of this shift, shoppers are paying more attention to the raw materials within their products. Responding to the demand for lower impact textiles, wood-based fiber producer Lenzing expanded its sustainable offerings during the pandemic with the launch of carbon zero TENCEL™ fibers. Tricia Carey, director of global business development – apparel at Lenzing, sees a need for continued investment on innovation throughout the industry, particularly to reduce fashion’s carbon footprint. Carey is optimistic about the potential for sustainable momentum post-pandemic. “As we start to emerge from this time of pause and reflection, we will see a renaissance of new ideas and an opportunity to accelerate change,” she added. Sourcing Journal spoke with Carey about how the supply chain and shopping behavior is changing. Which key lessons should the fashion industry have learned from Covid? Some of the key lessons the fashion industry should have learned from Covid include the interconnected ecosystem of our industry. It is no longer a supply chain considering only the next company— there is a network of many companies working together. With this in mind, there needs to be integrity for people and the planet. Consumers are also seeking fairness and social justice from companies. How have consumers’ attitudes around sustainability shifted during the pandemic? How can downstream players adapt to meet their expectations? Consumers have a fresh sense of value and a back-to-basics mentality. This is a time of conscious consumerism as we try to make sense of a senseless world. Downstream players can dissect the shift in consumers as responsible citizens who are seeking products with purpose from companies with shared values. This can range from ethical sourcing, as well as low-impact products. Downstream this means we have more accountability to the consumer. As shoppers take a closer look at the fiber content in prospective clothing purchases, what is the benefit for brands of working with a known name like TENCEL™? To a brand, working with TENCEL™ fibers means a trusted and naturally positive ingredient. We collaborate with brands to communicate at the consumer level about the benefits of using TENCEL™ fibers. Additionally, we provide an array of support services for sourcing, technical development and sustainability.

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tough times,” Jogiel said. Across his home city, businesses have shuttered—some of them likely for good. “Some Americans are realizing the importance of supporting local businesses, and being patriotic in a way.” For decades, shoppers operated on a “don’t ask, don’t tell” policy when it came to the origins of their clothing. Few made a habit of vetting brands for sustainable and ethical practices, or even checking tags to see which far-flung locale their graphic T-shirt or trendy jeans came from. But as more conscious consumers age into their purchasing power, those considerations stand to become paramount to a brand’s success. The industry also appears to have realized that the only path forward is a new one. Trade tensions aside, the old model of near-complete dependence on China was riddled with flaws. New sourcing players are rising to prominence across the globe, testing business models that reduce waste, promote efficiency and showcase the talents of regional makers. Saitex’s Bahl warned that attempting to retrofit a fix on an already broken model for sourcing is likely a futile exercise. Instead, the industry must continue to evolve. “You can’t believe that the same course of problems and solutions we’re seeing today will be replicated in the future,” he said. “Two years from now, we could see something even crazier than what we have today. This is the world we live in now.”

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Trade Talk: The Ball’s in Biden’s Court EXPERTS ARE DIVIDED AS TO HOW SWIFTLY THE PRESIDENT-ELECT WILL TACKLE THE CONTENTIOUS TRADE LANDSCAPE HE HAS INHERITED. A RT H U R F R I E D M A N

ith a new administration comes a new perspective on trade. Since few issues are likely to affect the industry more directly, any inkling on potential policies is given great scrutiny. Political and trade experts expect President Biden to take a multilateral approach to global trade versus the Trump administration’s bilateral strategy, while focusing on domestic manufacturing in a more specific manner instead of merely as a slogan. Most also agree that Biden will need time to first focus on getting the coronavirus pandemic under control through mandates and vaccine distribution in conjunction with efforts to support the economy and job creation. This could put trade initiatives on the back burner for at least the near term. “The first year or two of the Biden administration could look a lot like the first couple of years of the Obama administration, which first had to deal with the economic crisis before trade issues like TPP (Trans Pacific Partnership) were taken up,” Nicole Bivens Collinson, president of international trade and government relations for Sandler, Travis & Rosenberg, said in a talk with members of

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the American Apparel Producers Network. “After that, Biden might just look for the U.S. to join what is now CPTPP.” Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA), sent a letter to Biden urging action on two key items for the nation’s footwear sector–removing 301 tariffs and reentering what is now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Obama had negotiated TPP in part to isolate China and build relationships with its Asian neighbors. Trump nixed the deal on his first day in office. “We were encouraged when Vice President-elect Harris highlighted the impact tariffs have on American consumers during the Vice Presidential debate,” Priest wrote to Biden. “In fact, for our industry, the highest tariff rates most often fall on lower-value shoes and children’s shoes, raising costs for working class individuals and families on a product they have to buy as a necessity.” Phil Levy, chief economist at Flexport, said Biden’s campaign stances–make “Buy America” real; tighten domestic content rules; support the Jones Act requiring all ves-

sels carrying goods between two U.S. points be American-built, owned, crewed and flagged; “Invest in America” and Bring Back Critical Supply Chains to America–“don’t actually look especially free trade.” However, Rod Hunter, partner at Baker McKenzie, begged to differ. “There’s a big difference between how people campaign and how they actually govern,” said Hunter, a former senior director for international economics at the National Security Council under President George W. Bush, said. “But the Biden campaign had to bring their conversation in a much more protectionist context during the campaign, so it’s not surprising that the Biden campaign did not take account of the Trans Pacific Partnership, for example, that the Obama administration had taken so much stock in,” he said. “I wouldn’t put too much weight on the fact that all the items look much more protectionist. The role of president tends to make presidents–the current one maybe an exception–increasingly interested in trade agreements. There’s no more engaging relationship than trading relationships. For presidents, it’s often an important vehicle for foreign policy.” Brian Pomper, partner at Akin Gump, said Biden’s trade record has been one of moderation, voting for some agreements and initiatives as a senator and against others. For example, then-Senator Biden voted in favor of the North American Free Trade Agreement and the Uruguay Round of the GATT talks in the 1990s and permanent normal trade relations (PNTR) with China in 2000, but opposed free trade agreements with Singaore, Chile, Oman and the Central American Free Trade Agreement (CAFTA). “While Joe Biden was not a leader on trade policy when he was in the Senate, he was certainly a leader on foreign policy,” said Pomper, who served as chief international trade counsel to former Senate Finance Committee chairman Max Baucus. “And he continued in that way when he was vice president. When I think about what a Biden presidency will be like, I agree that Joe Biden will look at trade policy almost as an adjunct of foreign policy.”

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With that said, Pomper noted the existing tariffs with China and the Europe Union imposed by the Trump administration will make it unavoidable for Biden to deal with trade expeditiously. “China is one of those issues that unites both parties,” he said. “I don’t really expect much difference in substance in China policy under Biden. I’m sure China will make a charm offensive early on and offer something in order to get rid of the 301 tariffs and otherwise normalize relations. I think the Biden administration is going to be too savvy to fall for something like that and will go slow.” A white paper from Greenberg Traurig’s Government Law & Policy practice offered the view that Biden’s trade agenda may be more focused on multilateral action to resolve trade conflicts, particularly with China. Biden is likely to a “aggressively enforce U.S. trade remedy laws to protect American businesses and workers from unfair import competition” and “prioritize reshoring of medical and other critical supply chains to protect U.S. economic and national security.” The white paper surmises that a Biden administration is seen delaying negotiating new trade deals because he has said he would not enter into new trade agreements “until we’ve made major investments here at

“While Joe Biden was not a leader on trade policy when he was in the Senate, he was certainly a leader on foreign policy.” —Brian Pomper, Akin Gump

PRESIDENT-ELECT BIDEN CREDIT: AP PHOTO/PATRICK SEMANSKY

home, in our workers and our communities.” When Biden does decide to negotiate new trade pacts, Greenberg Traurig feels he will use the U.S.-Mexico-Canada Agreement (USMCA) as a template for negotiating trade agreements, focusing on the priorities of labor and environmental enforcement. Biden is also likely to take a leadership role in developing a consensus on reforms to the World Trade Organization (WTO) and would be unlikely to continue the Trump administration’s strategy of blocking the appointment of replacement judges to the WTO Appellate Body. The white paper sees Biden working more closely with U.S. allies to put pressure on China to stop its unfair trade practices and reform its state-run economy, “though the substance of Biden’s China trade policy could be similar to that of President Trump” because Biden has vowed to stand up to Beijing, and he has close ties to organized labor, which has condemned “China’s denial of basic labor rights,” and China’s “massive subsidies to its domestic companies and the predatory practices of its state-owned enterprises, which have cost millions of U.S. jobs and gutted [the U.S.] manufacturing base.” For those reasons, Greenberg Traurig said a Biden administration “might not prioritize a major rollback of the Section 301 tariffs that President Trump imposed on Chinese

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products,” and could use them as leverage to negotiate deeper Chinese concessions on key structural economic issues, including Chinese theft of U.S. companies’ intellectual property, its forced technology transfer of U.S. businesses in China and subsidies to state-owned enterprises. The report noted that Congress and the President must enact legislation renewing Trade Promotion Authority (TPA), which expires on July 1. But that could be difficult due to differences between House Democrats and Senate Republicans over possible changes to the law, which allows for an up or down vote to approve a trade agreement in each chamber, without amendments, in exchange for Congressional involvement in the negotiation of trade agreements. Peter Quinter, chair of the Customs & International Trade Law Group at Florida-based law firm GrayRobinson, said a Biden presidency will likely mean less restrictions on trade and travel with Cuba and a re-engagement on the TPP discussions. Quinter thinks Biden will negotiate with China to reduce and then eliminate the Section 301 Trump extra tariffs against Chinese made products. The former counsel for the U.S. Customs & Border Protection’s Southeast Regional Headquarters, foresees free trade agreements with Taiwan, the European Union and the U.K.

“There’s a big difference between how people campaign and how they actually govern.” —Rod Hunter, Baker McKenzie

Small Batch and On-Demand, the Return of U.S. Manufacturing WITH THE ABILITY TO MAKE LIMITED QUANTITIES AND QUICKLY SHIP DOMESTICALLY, STATESIDE PRODUCTION IS SEEING A RESURGENCE. KAT E N I S H I M U RA

espite a deeply rooted history in textile and garment production, U.S. apparel manufacturers have barely registered as a blip on the worldwide sourcing map in recent decades. Global brands and American labels alike decamped for greener—or cheaper—pastures long ago, fueling China’s ascension as the dominant sourcing superpower. But amid the crises and complications of today, that country’s reign may be coming to an end. Trade tensions with the U.S. have cost brands dearly, and rising labor costs have prompted them to look elsewhere for more economical options. When a deadly contagion radiated outward from Wuhan during the winter months, supply chains ground to a standstill, leaving brands’ orders in limbo. The disruption highlighted the inefficiencies and vulnerabilities inherent to a reliance on overseas manufacturing. And, as shoppers become more conscious

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about their consumption habits, brands appear to be recognizing that the high-volume, fast fashion practices that propelled their success throughout the aughts and 2010s could be more of a liability than an asset going forward. This confluence of circumstances has left an opening for an entirely different model of manufacturing. While makers in the U.S. have struggled to stake a claim to a share of the world’s sourcing due to their comparatively limited capacity and the exponentially higher cost of labor, shoppers are becoming increasingly enamored with specialized products made more ethically and sustainably. U.S. manufacturers have also been quietly espousing a clear-eyed focus on the future, working to solve fashion’s waste-making ways through innovative small batch or on-demand models that increase efficiency and also margins. According to Will Duncan, executive director of SEAMS, an association for the

U.S. sewn products industry, those advancements could represent an inflection point for American-made goods. “The interest in domestic manufacturing started well before Covid,” he said, though movement to the states has undoubtedly been underscored by the pandemic’s challenges. In a survey of both apparel and textile manufacturers conducted by SEAMS in October, 43 percent of participating respondents said their domestic sales had increased throughout the pandemic—and 36 percent said offshore sales had also gone up. While about one-fifth of responding companies said their sales both at home and abroad had taken a hit since the coronavirus struck, the same number said their U.S. sales had been steady. “For the past several years there’s been far more demand for domestic manufacturing than capacity,” he said, adding that the “biggest bottleneck” is the limited number of cut-and-sew factories in the states. Larger

ARI JOEGIEL

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brands have been unable to source at scale from the often small operations in the U.S., but now, “you’re seeing smaller and mid-size brands recognizing the value of sourcing domestically,” and that movement could represent a significant shift. Duncan attributes the increased interest to manufacturers’ growing adoption of data-driven models that cut down on waste and inventory liability, as well as a desire from brands to manufacture products in their home market. Looking at the cost equation, “not from a landed duty versus domestically manufactured perspective,” but holistically, “from a perspective of what happens in the fashion industry with markdowns and stockouts,” often reveals that the cost of making things stateside isn’t the impediment many brands once thought it to be. The inefficiencies of sourcing overseas— with long lead times and high MOQs—can amount to real losses for brands, he added. Making product closer to the end market,

“When you look at how much inventory is left over and put all of that together, you really start to realize that one-off, on-demand, fast delivery makes sense.” —David Prentice, OnPoint Manufacturing

and doing so using a model that relies on consumer insights, not gut instincts, eliminates those problems. “I wholeheartedly believe in the on-demand model,” he said. “You’re even able to bypass the need for a distribution center, on top of being able to respond quickly and not have all the inventory and discounts.” Alabama’s OnPoint Manufacturing, a SEAMS member, has developed an advanced ecosystem for made-to-order manufacturing over the course of the past six years. Heavily reliant on advanced automation tools enhanced by a partnership with textile manufacturing group Gerber Technology, the operation churns out clothing only after it’s ordered by the end consumer, eliminating waste and relieving brands of the burden of carrying inventory. According to the company’s vice president of sales, David Prentice, OnPoint’s model has begun to resonate with fashion industry stalwarts and newcomers to the space. High minimum order quantities, along with transportation costs, have become the most commonly referenced factors in pursuing on-shore options, he said. “That’s probably their two best biggest concerns: having the inventory model, and challenges with delivery of the product.” Even if manufacturers in Asia were able to implement an on-demand model, producing just one garment instead of thousands or even millions, the time and cost of shipping would invalidate the model’s effectiveness, he said. By contrast, OnPoint can manufacture a paid-for piece in three to five business days and ship it directly from its Alabama facility to a customer using a brand’s custom packaging. “Cost is still the initial question, with almost everyone,” Prentice said, referencing brands’ apprehension when deviating from a well-worn, if inefficient, production model. “It’s a daily conversation, and our message really is that it’s not just about the cost of goods, but the cost of goods sold.” Brands often fixate on the price comparison between manufacturing individual units in a market like China versus OnPoint’s model, he explained, but they might not be tak-

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ing into account the cost of tariffs, freight, storage, shipping, and the financial liability that comes with purchasing and holding inventory that may not sell. “You may have been buying it in China for $15 and I’m selling for $25, but you probably visited China three times, there are shipping costs, there are delays,” he said. “And when you look at how much inventory is left over and put all of that together, you really start to realize that one-off, on-demand, fast delivery makes sense.” What’s more, the freedom to manufacture when, and only if, a consumer buys a product means that brands can give consumers more options. Retailers once shied away from buying into a wide range of sizes or colors because of the inventory risk. But if the product is theoretical until purchased, there’s no downside to offering inclusive sizing, for example, when plus-size shoppers are vying for more options. OnPoint’s model has lowered the barrier to entry for sustainably-minded startups that couldn’t afford China’s high MOQs, but larger labels and global fashion firms have also begun to see the light. “We really started with the smaller independent brands and labels that don’t have $20,000 to try to launch a full line and it’s been a great fit for them,” he said, “but now the size and the quality of the brands that are reaching out is just getting bigger and better every month.” The company has recently attracted a flurry of attention from global brands looking to reach American shoppers, too. “We have seen just a massive uptick of calls with India, South America and Canada, from people going ‘Hey, we’ve heard about you, and we want to try to manufacture in the U.S. and deliver product in the U.S.,’” Prentice said. If the Covid crisis has offered up any positive revelations, he added, it’s that the supply chain has been broken for years. “Now brands are saying, ‘Maybe we should further investigate manufacturing in the U.S.” Los Angeles-based Ari Jogiel said his eponymous small-batch manufacturing business has received similarly surprising requests in recent months. “We’re getting queries from all over the world,” he said. Man-

LEFTY WORKS WITH NICHE LABELS FOCUSED ON CONSCIOUSNESS OVER CONSUMPTION.

ufacturing overseas is only becoming more difficult, he added, and a “Made in America” tag comes with a certain degree of prestige. L.A.’s proximity to the U.S. consumer base is also a major driver for brands looking to tap into the market. But while Jogiel is proud that stateside manufacturing is finally garnering the attention he believes it deserves, his business won’t be going global. “Due to our slogan being ‘Made in Freaking Los Angeles,’ and being very proud of that, I feel it defeats the purpose to manufacture for a company that’s not in the States,” he said. Jogiel said that long lead times, quality issues and rising labor costs overseas have driven American brands to seek out his business. His team also aids brands in the design process, and has longstanding relationships with a few of the city’s fabric mills that specialize in U.S.-grown cotton, the business’ most popular material. “Most of the brands that we work with are very niche brands who are not looking to make hundreds of thousands of units,” he said, so personalized attention is an integral part of the process. The minimum wage in Los Angeles is exponentially higher than most overseas locales, though, and many small brands can’t foot the bill. “That’s an obvious obstacle” for some, Jogiel said. Manufacturers just hours

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away in Mexico pay far less for labor, and enjoy the same proximity benefits to the American market. But Jogiel is betting on L.A.’s cachet. With just 50 full and part-time workers, the factory serves about 100 brand partners across the nation, and he expects to expand his operations in 2021. “We’re two and a half years old, and thankfully things have been growing from year to year,” he said. “So I anticipate more growth keeping the momentum going that we have right now.” Fellow Los Angeles factory Lefty Production Co. is now cresting a high peak after weathering devastating lows this spring. While retail panic left the business in a lurch as the pandemic surged in March, Lefty was able to bridge the gap with PPE orders from the City of Los Angeles and private healthcare companies that needed both masks and gowns. “We really had to pivot through Covid a lot—the first few weeks, everybody was canceling their orders left and right, and it got to the point where I was thinking I was going to close the company,” co-founder and owner Marta Miller said. Within weeks, though, she was receiving hundreds of thousands in medical orders. “We had to reopen and figure out how to meet the demands of the hospitals,” she said. Months later, the small-batch manufacturer that nearly shuttered is fielding new inquiries every day, Miller said. That’s because the “fall of retail as we knew it” began long before the coronavirus entered the world’s lexicon, and Lefty was already making moves to support a new, connectivity-driven reality. With the emergence of social shopping and direct-to-consumer, she said, brands and designers are no longer beholden to retail to dictate the size or scope of their lines. Sprawling collections of complementary garments and extensive buy-ins from department stores are no longer necessary to launch a successful brand. In fact, Lefty, which works with niche labels focused on consciousness over consumption, is banking on a totally opposing scenario. “You don’t need to have a big fash-

UNSPUN RELIES ON INNOVATIVE TECHNOLOGY TO CREATE WASTE-FREE PERSONALIZED JEANS.

ion show, you don’t need to have sales reps all around the country—you can literally have an audience on Instagram and talk directly to the people that are buying, and really influence them,” she said. Lefty has branched out in recent seasons from serving brands like Free People, Splendid and Ella Moss to working directly with a diverse cadre of influencers across the country. With unique perspectives and sometimes massive audiences, Miller insisted that mommy bloggers and fitness gurus stand to have all the sway of traditional brands—and are already better leveraging tools to ensure success. “One of our clients wants to do a cute tie-dye jogger and hoodie, for example,” she said. “She can go on Instagram and be like,

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‘Do you all like this color way?’” Followers are eager to provide influencers-turned-designers with real-time feedback on products, and they’re also willing to vote with their wallets. “I find that we’re pre-selling more stuff,” Miller said. “It’s kind of a phenomenon.” Like Jogiel, Miller said her business is willing to work with clients to bring their visions to life, making fashion side-hustles possible for working mothers or college students, for example, whose relatability resonates with everyday shoppers. “One of the really unique things about Lefty is that we help people that aren’t really industry experts,” she said. “We really guide them through the process and teach them.” With low minimum order quantities, creating a line or a one-off product is no longer cost-prohibitive, Miller said. And with the tides changing to favor pre-sales and on-demand production, brands and influencers are more likely to recoup their investments. Lefty’s Downtown L.A. operations, which include a large development arm responsible for pattern-making and prototyping, apparel production, and account managers to help shepherd relationships with partners, totals about 50 people. And while Miller said the factory is intent on fostering new relationships with creators and like-minded brands, she’s wary of becoming a port in the storm for larger corporations looking to diversify away from China and other sourcing locales in the developing world. “We’ve had big companies come to us, and from my experience, they’re sharks who are used to operating overseas,” she said. U.S. manufacturers like Lefty can’t meet the unit expectations and prices that these brands are looking for and still operate ethically. “I am personally wary of that business, and often times we have more success with an influencer than a large brand because the influencer is direct-to-consumer and has the margin to afford U.S.-made.” In the Bay Area, on-demand denim brand and producer Unspun is attempting to reform the industry from the inside out. True to its Silicon Valley roots, the company relies on innovative fashion technology to create its waste-free, personalized jeans—and it’s looking to create a scalable solution that re-

ALABAMA’S ONPOINT MANUFACTURING IS HEAVILY RELIANT ON ADVANCED AUTOMATION TOOLS.

duces overproduction and encourages localized manufacturing. According to Beth Esponnette, the company’s co-founder, Unspun is a blend of a fashion tech company and a denim brand. “Anytime we’ve completed some sort of technology that we’ve developed, we put it on the market by testing and perfecting it with our own brand,” she said. The company’s claim to fame is a proprietary algorithm that uses precise measurements taken straight from a shopper’s mobile device and converts them into a pattern for a customized pair of jeans. Consumers need only snap a couple of quick photos using a 3D fit app or visit the company’s store for a body scan to start the process. Unspun has also developed a 3D weaving process using an automated machine that can produce a pair of custom-fitted denim in just 25 minutes. While the company’s focus has been on bolstering its own label, Esponnette said Unspun ultimately aims to revolutionize

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the denim industry by building out production hubs for 3D-weaving machines across the globe, and to share that technology with brands interested in localizing. The first hub will be near the company’s home base of San Francisco. There’s an interest from brands, Esponnette said, in both the algorithmic technology that informs fit, and in the concept of 3D weaving, which eliminates cutting room scraps and improves efficiency. The startup recently partnered with global fast fashion juggernaut H&M on a line for its in-house denim brand, Weekday. The effort softlaunched in Sweden last month, with about 20 customers per week encouraged to visit H&M stores for a body scan that would inform the creation of a pair of their favorite Weekday jeans. Those orders were manufactured by H&M’s existing suppliers in Bangladesh, but Esponnette envisions a future where one of the company’s fleets of 3D weaving ma-

Today’s consumers are putting their prospective purchases under a microscope. A recent study1 shows the extent of this trend, finding that seven in 10 shoppers value traceability enough to pay a premium for it. Serving this demand for transparency, material-level tracking can communicate verified details about garments’ origins. “Accountability from source to shelf enables transparency and trust in what brands are saying and what they are doing,” said MeiLin Wan, vice president, textile sales at Applied DNA Sciences, a molecular technology firm. “Consumers can better understand the real work, time, costs and people behind the products they buy.” Here, Wan discusses how material traceability can reassure consumers. Which key lessons should the fashion industry have learned from Covid? Be authentic to your brand. Be able to stand behind your marketing claims. Tell a great story. What is the most important investment or innovation needed for supply chains to successfully navigate the next year? Supply chain traceability solutions that can work with multiple materials. Transitioning from mass balance to physical traceability using molecular solutions like our CertainT® platform can help to address supply chain, sustainability and brand assurance in a multi-layered, systematic manner that applies for cotton, recycled materials, trims like zippers, shoelaces and more. It’s a proven, complete, end-to-end system. How can solutions like CertainT help apparel businesses grapple with situations like Xinjiang forced labor and its trade implications? CertainT is a multi-layered solution that enables businesses to verify their cotton in their supply chain for their brands. This translates to being able to have scientific data using multiple analytical tools— genotyping, isotope analysis, PCR testing—to verify the what, who, where, when and how your cotton is processed at any point in the supply chain. CertainT can prove supply chain integrity for multiple materials. This includes showing what solutions are being used in a company’s supply chain to avoid Xinjiang cotton. The platform can also indicate how a company meets its sustainability goals and proves that it’s using sustainable, traceable raw materials. For brand assurance, it substantiates the authenticity of a product while also minimizing diversion. Even in the midst of uncertainty, what makes you most optimistic about 2021? Applied DNA has over a decade of experience in supply chain integrity because of our scientific heritage, and we offer a proven, competitive advantage to our customers under CertainT. We continue to provide faster, smarter and better solutions that are scalable and trusted. IBM, January 2020

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chines with proximity to the European market would produce the orders. She believes that automation represents the future of sourcing and manufacturing, and that the technology can unlock nearshoring an onshoring opportunities that would have been impossible in the past. Building out a hub of just 50 machines in the Bay Area would allow Unspun to meet 1 percent of the demand for premium denim in the U.S., she opined. “You would just need 100 of those facilities around the states and suddenly that whole market is taken care of.” Esponnette believes that such a shift could happen within the decade, and would prove to be more cost-effective for denim production than foreign manufacturing or even nearshoring in a country like Mexico. “From that perspective, within 10 years, it feels like absolutely things are going to move back to the U.S.,” she said. “Globalization moves so fast,” she said. “I wouldn’t be surprised if things move really quickly.”

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Size Matters THE ABILITY TO DO SMALL BATCH PRODUCTION HAS BECOME A NECESSITY FOR MANY FACTORIES. S A RA H J O N E S

one size fits all mentality won’t get you very far these days. Factories have traditionally chased big orders from big brands, but as fashion faces up to its excess inventory problem, an increasing number are on the hunt for the option of lower minimum order quantities. Since larger retailers have pulled back on their orders during the pandemic, factories cannot afford to miss any opportunities. And the numerous direct-to-consumer and niche labels cropping up demand more streamlined order quantities than traditional legacy brick-and-mortar brands.

BIG OPPORTUNITIES FOR LOW MOQ

“Millennial and Gen Z customers are turning towards more purpose-driven niche brands that align with their personal values,” said Kunal Amalean, co-founder of manufacturer Runway Kit. “Forming an emotional bond with a brand, going beyond mere consumption of a product has become the norm. The dynamics of trends and styles are changing over faster and seasons have become rapid. This has all pushed manufacturers to understand how to cater to lower production quantities.” It’s not just the smaller labels that are

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courting smaller production runs. E-commerce has changed the game for product testing. Whereas national retailers like Target and Walmart used to require tens of thousands of units to test product across the country, they can now buy 600 or 1,200 units and gauge consumers’ response online before committing to a bigger run. “Because of the movement of the big people in smaller test orders before they commit to their giant numbers, it means that the factories that are serving them have to accommodate that or not get any business,” said Chris Bryer, president of Selective World Sourcing. “So the whole market is getting more willing for low MOQ. They have to— no choice—whether it’s big or small.” Fashion’s persistent pursuit of large volumes comes down to numbers. The process that happens pre-production—from sample making to invoicing—comes with a set cost regardless of th number of units. Rodrigo Lines, commercial director at apparel trading firm World Textile Sourcing (WTS), estimates that these pre-production activities are about 15 to 20 percent of the total cost of manufacturing an order. In larger orders, this cost can be spread out over more items, but a smaller order means this amount is not as easily absorbed and pre-production accounts for a more significant portion of the total cost to make each unit.

Another reason that smaller orders haven’t traditionally been as appealing is tied to efficiency. When garments are mass produced, each person on a production line can have a set task that they become particularly skilled at. In contrast, to complete smaller orders, factories need to take the time to cross train employees in different skills. “As team members have the skill and capability to do both [small and large orders], an important factor to consider is how they can be incentivized accordingly to switch between, when needed,” said Amalean. While factories can make money on high-volume orders by streamlining costs through extreme production efficiency, this also means that low costs become a competitive advantage, to factories’ detriment. “With the big brands, because so many factories want to get those big orders, prices get bid down all the time,” said Stanley Szeto, executive chairman of manufacturer Lever Style. Smaller orders offer an alternative approach to profitability, since buyers can be charged a premium per unit. The higher costs for small runs raise margins, making it financially viable. However, manufacturers have to court clients with retail prices that can support the added costs that come with small batches. Bryer has seen sample-making firms struggle to align with customers that are a financial fit. “It’s a challenge because they consistently go after the wrong customers, and people that really could never afford them, and they don’t make a lot of progress,” he said. “But when they do go after the right customers, they can find a way to make a profit on every order they sell.”

WHY SMALL CAN BE BETTER THAN BIG

About five years ago, Lever Style was working with large brands like Banana Republic, American Eagle and J. Crew. But after seeing that direct-to-consumer players like Everlane and Stitch Fix were underserved, the manufacturer decided to make a switch to specialize in smaller orders with shorter lead times. As a result, Szeto notes the company now has healthier margins and financial results. The firm is also adding dozens of new

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customers per year, compared to gaining at most one new client when it was geared toward larger retailers. While Lever Style went full throttle into small batch, chasing low MOQ opportunities doesn’t need to mean giving up lucrative large customers. One option for large factories to add the flexibility to produce smaller minimum order quantities is to use their sample room as a small-scale production facility. These studios tend to be set up in a way that is more conducive to creating smaller batches since workers already take on multiple tasks. “Some of our factories are building modular lines,” said Luis Antonio Aspillaga, founder and CEO of WTS. “So you’re going to have the regular lines to make the big cuts and you’re going to have one section of your factory doing smaller test orders…And if those orders come back with bigger requests for reorders, you can then move them to the regular lines.” While he sees an opening for large factories to temporarily offer smaller minimums to clients in this moment to avoid discounting, Aspillaga is skeptical that a factory set up for tens of thousands of units can survive by switching solely to lower volumes on a more permanent basis. Factories can also dip into the small order game through partnerships, acquisitions or the creation of services catering to smaller customers. For instance, MAS Holdings, a

SMALLER RUNS OF TEST ORDERS WILL PLAY A BIGGER ROLE GOING FORWARD. CREDIT: MARHARYTA DEMYDOVA/ADOBE

Sri Lanka-based large intimate apparel manufacturer, entered the low MOQ market by creating the subsidiary Runway Kit. This online platform enables new and established small brands to design, sample and manufacture swimwear and activewear. Runway Kit’s approach points to the importance of technology in making small batch production possible. Innovations including 3D design and virtual samples can take some of the cost and time out of product development, as can communication and data sharing via product lifecycle management systems. Digital tools also have sales implications, enabling representatives to show virtual garments to multiple prospective clients in one day via video chat in the same time that it would take to physically visit just one or two. “With all the 3D technology that’s coming to the forefront right now, this won’t happen immediately, but over a little period of time I think they’ll bring efficiencies to the process that may help to mitigate some of [these] small order pain points,” said Elayne Masterson, vice president of sales and business development at WTS. “So that’s something I think everybody is looking at seriously to ramp up as quickly as possible over the course of the next six months, a year.” Beyond design, smaller order sizes call for reduced overhead, such as trimming steps in invoice creation. “If the overhead is small, then you can amortize it over 100 units and it’s not going to be prohibitive,” Szeto said.

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THE MATERIALS CHALLENGE

Even if a factory sets up its own production line to be able to handle smaller orders, there is still an issue surrounding materials. The minimum amounts offered by mills may be larger than the fabric needed for a small batch production run. And these minimums are set because of the constraints of the machines to prevent damage or quality issues in the material. “At the end, this is not a will issue, it’s a technical issue,” said Aspillaga. One solution would be to have multiple non-competitive clients share the same fabric, allowing factories to meet the mill’s minimums without leftovers. Another option that WTS has deployed is repurposing material for the same client. For instance, one customer had a test run that didn’t sell through, so the rest of the yardage was turned into basics or merchandise for off-price channels. While both parties lost some margin, neither was left with extra stock to store. Even if a factory recognizes the business opportunity in offering lower minimums, making the transition to cater to small batch production is a long-term transformation. “The first thing that the factory needs to do is to have a mindset change: ‘Hey, we think that’s the future. And we’ve got to maybe not give up all of the large volume orders, but at least reconfigure some of the production lines to cater to the smaller volume orders, and then learn from there,’” said Szeto. “It’s a learning process. You’re not going to get there in one day.”

“Because of the movement of the big people in smaller test orders before they commit to their giant numbers, it means that the factories that are serving them have to accommodate that or not get any business.” —Chris Bryer, Selective World Sourcing

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Running Lean and Mean BRANDS AND RETAILERS DRAMATICALLY REDUCED INVENTORY DURING THE PANDEMIC, LEADING TO LOWER MARKDOWNS AND STRONGER PROFITS. V I C K I M.YO U N G

actory shutdowns and order cancellations due to the coronavirus pandemic forced fashion brands and retailers to manage lower inventory levels, and they in turn learned that they can do more with less and still be profitable. In the most recent round of retail earnings reports late last year, the majority of retailers posted strong quarterly profits, owing mostly to higher margins due to leaner inventories and a reduction in markdowns.

WHAT RETAILERS ARE DOING

Fran Horowitz, Abercrombie & Fitch Co. Inc. CEO, during a company conference call in August, said that “over the past several months, we proactively bought inventory conservatively.” “Our inventory is very balanced,” Horowitz said, noting that the company’s “agile” sourcing team has been able to “chase into what we need.” The leaner inventory has resulted in lower promotions and clearance and improved average unit retail, she said, referencing the metric used for pricing and sales comparison that gauges an item’s average cost over time. The company plans to

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remain conservative with inventory levels going forward. “In retail, chasing is a good way to go,” Horowitz said. Staying laser focused on that strategy gave the specialty retailer its best third quarter operating income since 2012. The company reported third-quarter results in November. “As we’ve done since the start of the pandemic, we are focused on controlling what we can control and stopped responding to what we cannot. We have remained conservative with our inventory commitments and that key move to maximize digital throughput while increasing omni capabilities, including curbside, ship from store, and pop-in capacity.... I firmly believe that our company is better positioned today than it was coming into this pandemic,” Horowitz said during a third-quarter conference call with Wall Street analysts. More specifically, Abercrombie’s chief financial officer Scott Lipesky noted that the company’s gross profit rate was 64 percent, up 390 basis points from the year-ago quarter. “Results benefited from higher AUR, with promotions and clearance below last year and lower AUC (average unit costs),” adding that the company ended the quar-

ter with inventories down 8 percent from last year. American Eagle Outfitters Inc., which reported third-quarter earnings on Nov. 24, saw its intimates brand Aerie post its 24th consecutive quarter of double-digit sales growth. Chief operating officer Mike Rempell told investors on a conference call: “Our go-forward thinking on inventory continues to be that we want sales to outpace inventory.” That strategy gives the company its “best margin results and opens up inventory for us to chase,” Rempell explained. The reduction in inventory levels also helped Macy’s post third-quarter results that were better than Wall Street’s consensus estimates, although in its case the improvement was not about profits but losses that were narrower than expectations. CEO Jeff Gennette said during an earnings call that the company managed the “channel shift” and was able to draw shoppers to its digital operations. He added that the retailer was also able to “flex categories and price points as customers’ needs change.”

SLIM IS IN

Inventory levels were down 29 percent from the year-ago quarter. A continued focus on cleaner inventory levels allowed the chain to garner gross margins of 35.6 percent for the third quarter, lower than the yearago gross margin rate of 40 percent, but up sequentially from the 23.6 percent in the second quarter. Apparel firms are learning, too It wasn’t just the retailers that benefited from the reduction in inventory levels. Apparel firms were also benefiting. “From what I’m hearing in apparel, inventory is in better shape. They did a pretty good job during the pandemic in cutting back. Many companies have said they’d rather be out of stock than have more [than they need],” Mike Zuccaro, apparel credit analyst at Moody’s Investors Service, said. Zuccaro said fashion companies have restructured operations post-Covid-19 by cutting costs. In addition to pulling back where they can on operational costs, many also reduced inventory levels through a cutting of their stock-keeping unit (SKU) counts.

Leaner inventories across the board led to improved full-price selling.

100

Ralph Lauren Corp.

13%

12%

Urban Outfitters Inc.

Capri Holdings Ltd.

13.4%

Abercrombie & Fitch Co. Inc.

American Eagle Outfitters Inc.

14%

20.3%

Tapestry Inc.

Deckers Inc.

22%

Burlington Stores Inc.

22%

TJX Cos. Inc.

26%

Wolverine World Wide

27%

Dillards Inc.

29%

Kohl’s Corp.

Nordstrom Inc.

60 Macy’s Inc.

Inventory Reduction (%)

BASED ON THE LATEST QUARTERLY EARNINGS REPORTS FROM OCTOBER AND NOVEMBER.

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“Holding less is the way to go. Companies learned from the pandemic that this has become critically important because too much inventory can make you sick. It’s far easier to maneuver when you are cleaner and have less to deal with,” the apparel analyst said. Cutting SKUs allowed companies to focus on a particular group of merchandise options, resulting in a curated offering with better quality items. “It’s really about having good product. Companies pull back on some items to save on costs, they then take their savings to put elsewhere, such as marketing or digital,” he explained. Zuccaro added that investing in digital is another move companies are making to help with speed-to-market. Digital via technology in design allows companies to do swatches online instead of sending physical pieces of fabric shipped around the world. They’re also using digital processes to link inventory levels with those of their customers to create a whole ecosystem that can “talk” better with each other.

DOING THE MATH

Companies have also been taking a good, hard look at margins and targeting where they want to be and how to get there, with the help of lower inventory levels. One example is Capri Holdings Ltd. When the company reported second-quarter results on Nov. 5, Capri said net inventory at the end of the quarter was $930 million, representing a 13 percent decline from the same year-ago period. Executives on the company conference call also said they’ve raised prices, and found that consumers have shown “no resistence” to the increases. While that’s one way to make up for fewer sales, it’s a strategy that also gives companies

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what they call better quality sales that translate to higher margins and greater profits. BMO Capital Markets retail analyst Simeon Siegel has been advocating for a price paradigm reset since May to help fashion firms improve their margins, and he believes the key is inventory management. “We saw that Victoria’s Secret sold less, but their profits went up.... And [recent] third-quarter reports show retailers have had their best gross margins despite revenue declines,” the retail analyst said. He noted that it’s never been easy to tell companies they need to shrink in order to grow, pointing out that even if executives hear what’s said, how well they can execute a pullback can be another issue to contend with. “This year, the factory shutdowns saved companies from themselves. They didn’t have sales and there was no [new] inventory available. So, companies had to build back up from their roots and regrow their businesses,” he said. Siegel has what he calls a simplistic math calculation based on the economics of supply and demand to drive healthier profits. “We know that if retailers are willing to give up 40 percent of their units, there will be 60 percent of people willing to spend more,” Siegel said. Taking that a step further, companies that keep lean inventories—meaning that they’ve already strategically figured out how many unit sales they’re willing to lose— are in the best position possible to hold the line on promotions, even if they also up the price points because fewer units create scarcity for those items. “Their power lies in inventory and access. It’s about their ability to see the bottom line [and] figuring out what the right balance is,” Siegel said.

“Their power lies in inventory and access. It’s about their ability to see the bottom line [and] figuring out what the right balance is.” —Simeon Siegel, BMO Capital Markets

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34 / SOURCING STATE OF THE INDUSTRY REPORT

The ‘New Normal’ Brings Digital Sampling to the Fore THE NECESSITY OF WORKING FROM HOME HAS FAST FORWARDED THE ADOPTION OF THE TIME AND COST SAVING METHOD FOR DESIGNING PRODUCT. G L E N N TAY LO R

“Now that things are slowly moving back into the flow, they’re confirmed that there is definitive ROI in scaling the software, all within a few months, not years.” —Ryan Teng, CLO

hile the pandemic has hastened the pace of change across many industries, few have been more directly associated with saving costs and trimming lead times as the digital sampling technologies that have been on the on uptick since March. While virtual design tools geared at giving product developers a real-life garment simulation had popped up well before the pandemic as a way to prevent overproduction of fabric, the work-from-home dynamic Covid created has made digital sampling an almost mandatory tool for design and development teams. Tommy Hilfiger announced in November 2019 that it planned to shift its design to a 100 percent digital process by 2022 with the implementation of 3D design technology throughout its global apparel design teams in Amsterdam. While that move seemed like a bold ambition at the time, the pandemic has made it clairvoyant. Levi’s followed suit in April when it un-

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veiled it had rolled out photo-realistic 3D renderings of denim garments and samples, with CEO Chip Bergh highlighting that the digital samples were a massive hit for the denim brand’s first virtual assortment meeting, which included 100 merchants from around the world. In fact, the samples helped take weeks out of the company’s go-to-market cycle, Bergh said in an earnings call: “The feedback was that this may have been the best assortment meeting ever, and we may never go back to live meetings.” Upon expanding its partnership with digital product testing platform First Insight in working with 2D and 3D computer-aided design (CAD) software Optitex, Marks & Spencer revealed in November that its transition to 3D imagery samples resulted in increased product test completion rates and boosted respondents’ comments by 50 percent, providing richer product feedback to the company’s product development and merchant teams. The U.K.-based department store even

THE PANDEMIC MADE IT IMPERATIVE FOR MANY TO UTILIZE DIGITAL SAMPLING.

noted that the use of 3D CAD technology reduced cost and lead time in Marks & Spencer’s product development process. With so much uncertainty related to the resurgence of the pandemic over the holiday season and the expected continuance of virtual events in lieu of in-person trade shows into 2021, digital sampling appears here to stay, especially if money-hampered apparel and footwear businesses are looking to conserve resources. At the R/Evolution Sourcing Journal Summit in October, experts estimated that physical samples could end up costing anywhere from $1,000 to $2,000 per sample, which should plenty of incentive to brands to experiment with the technology. “I think on the development side, it’s really important to educate the rest of your organization about some of these costs that are not really calculated out right away until you look at the sampling and the cost of changing and all those things,” Erik Olson, vice president of product development and sourcing at Crocs, said during the panel. “It’s not well understood. So, we do need to do a better job of explaining to our organizations how these margins get attacked.”

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DIGITAL SAMPLING TECH ADVANCES BODE WELL FOR 2021

Companies such as Gerber Technology, CLO, Optitex and Browzwear are among many that have seen uptick in apparel users throughout the pandemic and have since continued to upgrade their platforms and form new partnerships. This is an extremely positive sign for 2021 given the scope of visual assets now available for sharing across platforms. “I think the realization really is there, where before, it was really a question of ‘Yeah, we understand virtual simulation and these types of things are important, buy we’re so busy that we can’t get to it right now’ to now, where it’s ‘We’ve got to figure out a way to get there,’” Karsten Newbury, chief strategy and digital officer at Gerber Technology, told Sourcing Journal. Gerber integrated its AccuMark 2D and 3D design technologies with its YuniquePLM platform so that users can access digital samples and mass manage sample requests for all garments in a line, while enabling multiple users to comment and report on the product to ultimately improve collaboration. CLO recently partnered with SwatchOn to convert 200,000 of the South Korean B2B platform’s fabric SKUs into digital samples. Next year, SwatchOn will launch its full digital fabric library making all of its offerings accessible to its 12,000 brand members. CLO was busy onboarding new apparel users prior to the pandemic, according to Ryan Teng, the company’s vice president of business development. But he said it was “unavoidable” to mention the effect Covid budget freezes had on its enterprise clients. “They found the silver lining in the moment and used that time for us to teach them the software and roll it out to a wider scope of their employees,” Teng told Sourcing Journal. “Now that things are slowly moving back into the flow, they’re confirmed that there is definitive ROI in scaling the software, all within a few months, not years.” In a more outside-of-the-box collaboration, Optitex partnered with Daz3D, a software that enables users to create high-reso-

Covid has highlighted the digital divide that exists in fashion. As collaboration went remote, companies that were still relying on siloed software to handle data management and communications were at a disadvantage. “The pandemic and people working from home has shed a lot of light where silos exist in an organization,” said Courtney Velasco, industry marketing lead at cloud ERP solution Oracle NetSuite. “Since people are no longer working in an office, you can’t walk down the hall to get the info you need, so it’s more evident that brands need a technology platform to share data.” Here, Velasco explains how centralized platforms can help firms keep products flowing amid disruption. What are the top concerns you’re hearing from your customers about 2021? It seems as if our customers are at two forks in the road about 2021. Some are seeing wild growth due to people staying home and spending on certain categories. Loungewear, athleisure and personal care categories are skyrocketing right now, so these brands are concerned with being able to keep up and fulfill these orders. Other brands are struggling to keep their customers engaged and purchasing. These two scenarios are very different, but the commonality is that both require a quick pivot to stay viable. NetSuite’s software removes location as a factor for sourcing decisions. Why is that particularly important now? NetSuite allows a business to organize all of their vendor orders and inventory locations under one solution, which eliminates barriers like location as a factor to source inventory. For example, if a business has a large order and their main warehouse can only fulfill half of it, NetSuite allows them to see what orders are present in, or en route to, their other locations that may complete the order. Companies should focus on creating redundancies throughout their supply chain, especially knowing that future disruption may still be on the horizon for 2021. The pandemic highlighted how many companies have limited inventory visibility. What’s one thing brands and retailers can do right now to improve this? Find technology that gives all of your stakeholders full visibility into where all of your inventory stands. If you don’t have the right technology to do this, take the time to invest in finding options and getting set up now. We know brands that have used the slowdown caused by the pandemic to completely re-tool their systems for the better.

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lution 3D images and animations, to offer its users a suite of 3D avatars, including avatars and characters created from real-life scans. Optitex users now have access to 5 million smart-content assets to design virtual collections for buyers, vendors and marketers that they can place on these characters can be customized, morphed, accessorized and visualized in garments in a variety of sizes and poses. And in another expanded partnership, Browzwear and fellow 3D design technology provider Metail are assimilating the latter’s EcoShot 3D garment-on-model technology into the former’s VStitcher design visualization tool, which is designed to serve as a virtual photo studio. The images generated with EcoShot are designed to providing more natural looking and inspirational designs compared with the garments shown on avatars alone. From there, users can then request EcoShot Finished Images, which can be used for line review meetings and for presenting to buyers. Although the use of digital sampling is vital for the future of apparel from a cost, time to market and overall sustainability standpoint, it doesn’t mean there is no room left for physical samples in today’s apparel ecosystem. Teng compared the changes in the habits of developers to those learning how to make sourdough bread from scratch, in that they want to produce their 3D designs with the platform and then sew the product at home. Where he said sentiment is changed the most is “the realization that 3D isn’t just a pretty shiny new toy, but an actual solution to most of their problems. It’s no longer a luxury to adopt 3D, it’s become imperative.”

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On the Ground in Central America RECOVERING FROM A MASSIVE DROP IN EXPORTS IN 2020 AND FACING ANXIETY OVER TPP, THE ISTHMUS LOOKS FORWARD. I VA N CA S TA N O

“Everything depends on the coronavirus and how many outbreaks it has. If we don’t have big closures again, our near-sourcing advantage [from geographical proximity] should create opportunities.” —Juan Sanchez, Texsun

entral America was poised for strong growth early last year before closures and order cancellations rocked its nations along with the rest of the world. Things got even more painful as twin storms Eta and Iota blasted the region in the fall. Observers, however, are forecasting a strong rebound in 2021, despite lingering trade and economic concerns, as U.S. apparel demand comes back faster than expected. “If the U.S. economy grows 4 percent, we could see our exports gain 5 percent,” predicted Juan Sanchez, owner of Guatemalan textiles firm Texsun. “Everything depends on the coronavirus and how many outbreaks it has. If we don’t have big closures again, our near-sourcing advantage [from geographical proximity] should create opportunities.” Industry consultant and sourcing veteran Carlos Arias agreed, noting that the region linking Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Dominican Republic into a free-trade corridor with the U.S. (under the DR-CAFTA treaty) stands to benefit from America’s economic recovery,

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which many expect will strengthen under President-elect Biden’s administration. Some executives, however, have expressed concern a Biden presidency could revive the Trans-Pacific Partnership (TPP), crippling its U.S. exports as archrival Vietnam gains a bigger market share. The U.S.’s economic recovery from Covid-19 has been faster than expected, at least when viewed by the third-quarter’s growth rebound, which prompted economists to upwardly revise year-end and 2021 figures. That has helped Central American sewers breathe a sigh of relief after orders plummeted when lockdowns were instituted in April, forcing retailers to scrap apparel imports and delay or even cancel payment to the region’s suppliers.

BETTER-THAN-EXPECTED LOSSES

Indeed, Central America’s 2020 industry exports are expected to show a decrease of 20 to 30 percent – much less than the 50 to 70 percent predicted during the virus’ peak – but nevertheless down significantly, Arias forecast.

HURRICANE ETA CAUSED SEVERE FLOODING ACROSS HONDURAS. CREDIT: HENRRY/ADOBE

“You can’t deny the negative impact the pandemic had on our industry,” he said. “We had to pay salaries without sales and pay bills and maintain companies operating while the market shuttered. The impact on costs was huge. And while the decline was less than expected and that is good news, it won’t make the balance positive.” Guatemala will see exports fall 10 percent, much less than originally envisaged, as its industry did not shut down as long as rivals in Honduras and El Salvador, according to Arias. “We have been less impacted than Honduras, which is the biggest supplier in the region, and El Salvador, which follows [in scale] with Nicaragua.” Despite this, Guatemala faced big challenges controlling Covid-19, so much so that some of its factories were forced to close after its workers became ill. One thing that will more evenly impact the industry is the combination of unsold merchandise made pre-pandemic and brands choosing to carry leaner inventory

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going forward that will inevitably dent next year’s sourcing demand, potentially by a huge degree. “There were many goods that could not be delivered to stores and have been put in storage,” said Arias. “A lot of summer and back-to-school stuff was not used. As a sourcing chain, we don’t know how much inventory is in storage so this will impact us next year.” Added Arias: “2021 won’t be a normal year. We have the risk of partial closings and economic uncertainty and this will weigh until the pandemic is controlled.”

FOCUS ON AGILITY

To stay competitive in toughening markets, producers will have to improve their quick response and near-sourcing abilities to woo orders away from nimbler Asian rivals such as Vietnam or even South American competitors such as Colombia. “There is an opportunity to improve our near-sourcing advantage,” said Arias. Cen-

“Apparel workers are [were] wanted in other industries because they are well trained and understand quality concepts. If you lose them in a market where others are seeking them, you may not get them back.” —Carlos Arias

tral America’s regional proximity to U.S. markets has become particularly crucial in the pandemic as cash-strapped brands and manufacturers can’t afford to place longterm orders, he added. “There isn’t enough money to buy goods for long-term delivery. I can’t pay today for something I will receive next year,” Arias explained. “Finance guys and CEOs are refusing to open 180- or 220-day letters of credit because they don’t know if what they order will actually arrive.” Producers must become faster at delivering a greater variety of garments in short runs to increasingly demanding U.S. customers, Arias said. To do this, collaboration between textile and clothing makers must deepen, among other things, he noted. Suppliers must also hasten their shift to digitalization and streamline product development. “We lose a lot of time by sending samples around the world. This is a huge expense that must be lowered by digitizing products and development processes,” Arias continued. Investment in software and hardware to enable digitalization must also increase significantly, others pointed out, in addition to digital printing to transition into smaller orders with more sophisticated finishes such as sublimation. Nike is already making uniforms using this technique, notably in Guatemala and Honduras, where Tegra and Grupo Kattan are also working to build a new $75 million, 63,000 square-meter facility in San Pedro Sula to supply the sportswear label. Nike makes National Football League (NFL) jerseys and other fan ware like hoodies and polos in these countries, according to Arias. Experts agree, the isthmus must also move out of its comfort zone to make – and suggest – more valuable products for clients. “We must increase our ability to offer products that can substitute Asia,” Sanchez said. “It can’t just be T-shirts. Our near sourcing must include more sophisticated and innovative fabrics such as nylon or polyester filaments or more sophisticated washings and finishes including taping.” Yogawear has become a star product for Central America in recent years with Guatemalan and Salvadoran makers churning out

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different varieties for the likes of Lululemon or Under Armour. But even in this category there is room for improvement, especially in the fabrics department. “Yoga pants are still strong in the region but we cannot do them with warp knit to produce them in great volume,” noted Sanchez, adding that sales of the comfortable attire have become buoyant in the pandemic’s stay-at-home new normal and Central America wants its piece of the pie. The region’s scarce warp knit means rivals in Asia have built a sourcing edge, he added. Additional wovens capacity is also crucial to boost economies of scale. While the pandemic has cut demand for dress shirts or suits, the region could gain an advantage in the post-Covid future if it bolsters this capacity, according to analysts.

TRADE UNDER BIDEN

The Biden election win has reignited fears about the TPP and its potentially negative impact on Central America’s sourcing franchise. The president elect has signaled he would renegotiate the high-stakes deal, which was retailored as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) after Trump pulled from the deal in 2017, when he steps into the White House. Under the original charter, Vietnam was expected to garner up to $6 billion in shipments from Central America if it gained yarn-forward manufacturing status and enjoyed lower duties to access the U.S. in negotiations to seal the 11-country freetrade block. While Biden has yet to provide further confirmation and/or details about how he would modify the TPP’s U.S. entry, executives are anxiously awaiting details. “Vietnam is currently part of the CPTTP but this could be recalibrated in the Biden presidency; there is fear that if they give more benefits [to access the U.S. market] to Vietnam it could be terrible for us,” said Sanchez. He echoed views that the region was hoping for a continuation of the Trump administration to avoid tougher competition from what many see as the next Asian tiger and to continue luring aid from the Alliance of

Prosperity in the Northern Triangle program, which Sanchez claimed Trump had bolstered recently to halt Central American migration to the U.S. “Trump’s plan to stop migration from the three Northern Triangle countries (Guatemala, El Salvador and Honduras) is fostering investment in the industry,” said Sanchez. “It has been used to generate new manufacturing projects, mainly in textiles and apparel [because of its high GDP contribution].” This is something the past democratic [Obama] government had no intention of doing.”

SETTING THE GROUND RULES

INDUSTRY EXPORTS FROM CENTRAL AMERICA WERE FORECAST TO FALL 20 TO 30 PERCENT IN 2020. CREDIT: AP PHOTO/ESTEBAN FELIX

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One key challenge is providing a more reliable operating environment for foreign multinationals including clearer and more predictable tax and Free Trades Zones regulations to ensure laws are respected and investors can recover potential losses. “Some of our governments see the export industry as being privileged by not paying VAT (value added tax). They question this and make life impossible for many exporters if they make the smallest tax reporting error,” Sanchez explained. His comments came after some foreign multinationals were said to scrap future investments in El Salvador following a brouhaha involving textiles maker Intratex in September. The government said it had 43 companies on its watch for potential tax violations, prompting some firms to cancel future investments, according to sources. Sanchez added similar issues have sprung up in Guatemala, scaring away crucial investments to develop the industry. To provide more regulatory and investment certainty, Central America would benefit from a cohesive and regional regulatory framework that all countries follow regardless of political leadership changes.. “Anyone interprets the law however they want,” said Sanchez. “And the laws are very difficult to follow.” The Northern Triangle members should also work to operate as a larger cluster so that goods move more freely and quickly between borders, something that isn’t always the case, despite long-running efforts to merge customs operations as part of a fleeting, EU-like

integration project by the Central American Economic Integration Board SIECA. SIECA reportedly has a plan to bolster the region’s integration through a new infrastructure, financial and regulatory development agenda set to be unveiled soon. The scheme should help the region expand and streamline airport, railway, highway and border-crossings infrastructure to help slash logistics costs which are much higher than in Asia and other competing sourcing hubs. Export routes can often be plagued with transit bottlenecks, meaning crossings can last up to 48 hours compared with much quicker passings elsewhere, analysts said. “We need clear and stable rules for product mobility,” added Sanchez. “The industry in Honduras can suddenly say they don’t want fabric from Guatemala and introduce obstacles and close the border because the politician in charge decided to arbitrarily do so.”

ECOMOMIC, LABOR CHALLENGES

Other challenges loom, including from fragile economies battered by the virus and the specter of a trained labor shortage. “Our countries’ shock absorption capacity is much lower than in the U.S. or other nations so each country will have different abilities to combat Covid,” said Arias, noting that he doesn’t see political volatility emerging in the conflict-prone region while Central America works to stem the virus. As the industry fought to tackle the health crisis, many jobs were lost to other industries, Arias noted, adding that some of these jobs may not be recaptured so firms may need to invest to train new workers. “We could have a labor shortage,” he predicted. “Apparel workers are [were] wanted in other industries because they are well trained and understand quality concepts. If you lose them in a market where others are seeking them, you may not get them back.” Central America faces other challenges on the employment front, as well. Labor unions are increasingly demanding that international trademarks employing low-cost labor operators in the impoverished region compensate about 200,000 factory operators who lost their jobs amid the lockdowns.

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Specifically, they are demanding top manufacturers such as Gildan, Fruit of the Loom or Tegra contribute to a roughly $20 million to a ‘shared responsibility’ fund that is currently under negotiation. “We have sent proposals to the brands but are still waiting for answers,” said Miguel Ruiz, president of the Coordinadora Regional de Sindicatos de Maquila spearheading the local unions’ effort alongside its U.S. counterpart AFL-CIO and several other labor and human rights’ advocates. In Nicaragua, Ruiz said the country has recovered 3,500 workers of the 9,500 axed amid the pandemic. That largely stems from the fact that the country did not halt production as much as its neighbors – due to firm demand from sourcing clients such as Amazon and Wal-Mart, which saw brisk online sales as people were forced to stay home. Nicaragua is also seen as a safer and stabler sourcing hub than neighboring Honduras, at least in terms of its labor agreements. “We have a tripartite accord since 2019 which has given stability to workers in the maquila trades zones,” said Ruiz. “Next year, we have a fixed salary increase of 8.25 percent so companies that plan to come here know how much wages will cost them.” Ruiz claimed Honduras has failed to pursue similar strategies. “In terms of labor and investment, we see Honduras as most affected,” added Ruiz. Kattan countered that Honduras’ situation is improving. “The pandemic affected our market but we have been able to re-establish most production. The investment plans that were there [before Covid-19 hit] have also not been canceled,” he said. That includes $400 million in new investments that were expected to arrive in 2020 though critics say they are delayed and that the actual sum expected seems far lower. To be fair, some firms, such as Elcatex, have attracted significant investments, despite a failed Honduras 2020 plan that called for apparel exports to triple to $7.4 billion as the country pivoted into a major producer of synthetic sportswear garments. Kattan hopes manufacturing FDI will rise

As a trade event organizer, Informa Markets Fashion has a bird’s-eye view of emerging trends in apparel and footwear sourcing. Data from the fall edition of Informa’s SOURCING at MAGIC Online shows a growing interest in topics including low MOQ and on-demand production, indicating a potential shift away from traditional long-lead sourcing models. Kelly Helfman, commercial president at Informa Markets Fashion, sees this as a reaction to and preparation for unpredictability. “Adopting a more fluid approach, and breaking the rigidity of previous models, will open up more opportunities, while allowing businesses to remain ready to react to market changes more dynamically in the future,” she said. Here, Helfman discusses the path forward for fashion sourcing. What is the most important investment or innovation needed for supply chains to successfully navigate the next year? As seen from market insights from our events, there are two major trends emerging. First is the rethinking and re-configuration of small, on-demand production, which will continue to be crucial for business in order to respond to changing and unpredictable market needs. Additionally, investment in sustainable and traceable production is another key factor for business to consider. Marked by the importance that brands and consumers are placing on sustainable goods, the pandemic has accelerated the critique and introspection of how we do business, challenging us to reflect on doing more with less and reducing our carbon footprint. Market trends are all pointing toward both of these continuing to be of importance in 2021. Which key underutilized sourcing countries should be on U.S. brands’ radar this year? Any country or region south of the U.S. border. With nearshoring being an important element to support the sustainable movement, brands should explore sourcing in countries like Brazil, Colombia, Peru and Mexico. They are very equipped in handling large production and many product categories, as well as shorter and faster transport lead times. What is the most unexpected trend for 2021 that you saw at SOURCING at MAGIC Online this past fall? Prior to the pandemic, digital solutions for connecting and driving commerce between apparel sourcing and supply chain buyers and sellers were not widely used within the sourcing and supply chain industries. As a result of the pandemic, however, this is now changing. Specifically, we are seeing this through the increased use of digital B2B connection and commerce platforms like SOURCING at MAGIC Online, where both brands and manufacturers are looking for digital solutions to help their businesses innovate and become more efficient. With a still largely unpredictable future and changing market demands, online solutions allow businesses to remain more agile, while also keeping them connected no matter where they are located.

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in 2021 as the U.S recovery bolsters orders and near-sourcing demand gains steam for the Americas’ supply chain. Kattan is currently seeking partners to build a wovens’ factory in Honduras to help plug the DR-CAFTA region’s supply deficit for the fabric and move into new fashion products. “The Central America region should be primed to receive new investment,” Kattan enthused. “Regional proximity is going to be more valuable than ever in this new world.” That might be true. Regardless its seen as crucial that Central America works to improve its response times, build a more competitive product suite, speed up deliveries and overhaul its regulations to become a more viable alternative against Asian rivals and a potentially stronger Vietnam.

India on the Rebound AFTER A BRUTAL YEAR BATTLING WIDESPREAD CASES OF COVID-19 AND AN ESCALATION OF POLITICAL TENSIONS WITH NEIGHBORING CHINA, THE COUNTRY LOOKS TO RETURN TO GROWTH. M AY U S A I N I

t’s a balance between hope and stark reality for India’s apparel and textile sector. On the one hand, there’s hope of wooing business away from China due to trade tensions with the U.S, the labor wage advantage and a potent farm-to-factory ability. On the other, there’s the reality that all of the above has yet to translate into more business. Much of the overflow has been moving toward Vietnam, Bangladesh and Cambodia, and while manufacturers are hopeful of diverting some business toward India, industry analysts say that the Indian economy is expected to slide an approximate 8 percent in 2021, following a 30 percent decline in Indian garment exports in 2020. India has been forced to weather the impact of one of the most severe Covid-19 spreads–with the second highest number of Covid-19 cases in the world, after the U.S. By comparison, countries, such as Vietnam and Cambodia had an extremely low number of cases. While others, like Bangladesh, Pakistan and Sri Lanka, were able to get past the period of lockdown and resume production with efficacy.

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It is increasingly becoming a global competition as brands and retailers pick and choose the most economical means of production. “The garment scenario in India for 2021 is looking like a mixed bag,” noted Rahul Mehta, chief mentor, Clothing Manufacturers Association of India (CMAI) “The export sector was beginning to look quite promising, with September and October actually showing growth over the corresponding period of 2019. However, the uncertainty created by another wave of Covid-19 in November, new lockdowns, and the implications on the general consumer sentiment upset all calculations and estimates,” he said. Mehta observed that more than 60 percent of manufacturers in the apparel sector had gotten back online by September, with more in certain areas, such as Tirupur in Southern India, a knitwear hub which accounts for more than a third of all apparel exports from India.

INDIA’S PLACE AMONG THE LEADERS

India has long held the promise of growth as both a sourcing and consumer market. Listed among the top 10 countries export-

“The industry is still facing a lot of defaults due to bankruptcy filings by big brands and buyers, delayed export realizations, and an inability to restore manufacturing to pre-Covid 19 levels.” —A. Shaktivel, Apparel Export Promotion Council

ing apparel, textile, footwear and cotton, it also boasts one of the fastest growing retail segments in the world, with its population of more than 1.3 billion and a rapidly increasing acquisitive middle class of more than 400 million. The numbers in some of the sectors are indicative: Apparel: India is among the top five garment exporting countries in the world, with exports of $15.4 billion in the 2019-20 financial year (ending March 31, 2020). Textiles: India is also among the top textile and cotton exporters in the world, with textile exports of $18.4 billion as of March 31, 2020, the second largest textile exporter in the world, following China which had exports of $120 billion. Footwear: India was second only to China in terms of exports of footwear in 2019, with more than 2.6 billion pairs of shoes exported. Cotton: India is the largest cotton producer in the world, harvesting 6,423 metric tons in 2019-20, and the third largest cotton exporter globally in 2019, with 11.8 percent of global exports of $6.3 billion.

WHAT HAPPENED IN 2020

India’s apparel exports for the quarter from April to June 2020 plummeted 47.1 percent from the same period the previous year, while India’s GDP declined 23.9 percent in that quarter, after years of growing at between 5 and 8 percent. The hard lockdown in India from March 24 through June was part of the reason for the decline, exacerbated by huge cancellations of orders from global brands and retailers. As the industry limped back through November, there was another major issue: political tensions with China regarding borders that lead to delays in receiving material inputs as containers were blocked and business with China put closely under the microscope.

MIGRANT WORKER ISSUES

With factories shutting down amid the pandemic, tens of thousands of workers headed home toward their villages, often walking enormous distances as buses, trains and other forms of transport were totally shut down. Some migrant workers who were asked if

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NEW LABOR LAWS RUFFLE FEATHERS India’s labor codes have been streamlined in a bid to boost manufacturing, but garment worker advocates see the move as a blow to rights. Mayu Saini Three new labor codes were pushed through parliament in India near the end of last year, leaving the industry to decipher the implications for factories and production units across the country. The labor codes have both invigorated and disturbed the garment and textile industry, being received with a mix of anger at the speed with which they were rushed through parliament, gratitude by manufacturers that there is some simplification to the complex web of laws, and flat-out protest by some trade unions that they don’t do enough to support labor. This is the latest wrinkle set upon an industry beleaguered by the pandemic-related flurry of cancellations of more than 80 percent of orders in April and May. Big picture, Rahul Mehta, chief mentor and past president of the Clothing Manufacturers Association of India (CMAI), noted that, “the revised codes have benefits for all the stakeholders, the biggest positives being in the simplification and clarification of various terms, acts and definitions.” “These simplify several aspects– the biggest being the reduction of the plethora of Acts into four codes. Complexity of regulations has always been highlighted as one of the greatest banes of industry all these years,” he said. However, voices from the worker’s perspective are concerned at seeing

their rights diminish even further. The new labor codes highlight some important issues. Units employing less than 300 workers no longer need prior permission of the government for layoffs, retrenchment and closure. What’s more, unions will be recognized by management for collective bargaining only if they have 75 percent of the workforce as members. In order to organize a strike, participants must give 14-day notice and the definition of “right to strike” has been broadened to include “mass casual leave.” The new codes also introduced contracts with fixed end dates, meaning factories no longer have to lay off workers when the time come to part ways. Safety standards are not defined in the OSH code, but have been left to notifications that need to be issued by the government, potentially putting the safety of workers at risk. “Garment workers will now face these regulations, among other several other issues. And since most of the workforce in garment factories are women, and usually non-unionized, the effects will be exacerbated,” said Apoorva Kaiwar, regional secretary - South Asia, IndustriALL global Union, referring to the implications of the labor law reforms. “NGOs are saying the new labor code is bad for labor, and unfair, and pushed through too hastily,” added Anjani Singhania, director, J.J. Expo-Impo, a mid-sized garment

they could walk a distance of 400 kilometers to their home villages, for example, answered “If I walk 400 kilometers I may die or I may not, but If I stayed back I would surely die of hunger. I have no money to pay rent or buy.” In June, when factories reopened, this led to a huge shortage of workers. While the labor started returning, often with special transport organized by factories, and buses began to function slowly, the production capacities at manufacturing plants was substantially lower. Only an approximate 60 percent of the labor was back to work by September.

THE GLOBAL FALLOUT

“Our major markets for textiles–North America and West Europe–are both are under Covid pressure right now…that accounts for more than 60 percent of our exports,” observed industry analyst and textile expert D.K Nair. “The problem with the disease is no one is able to say when the markets will come back, and the society normalizes. In this time, a lot of importers and retailers will have collapsed. It will take time for them to reinstate their channels of production even though there is a huge effort to produce new business like PPE kits, masks, etc., even if it is a small portion of the garment business,” Nair reflected. “Most of the areas which have been badly hit by Covid-19 in India are all big textile and apparel sectors–the Delhi National Capital Region (which includes the surrounding areas of Gurugram and Noida), Chennai, Ahmedabad, as well as Mumbai which is nerve center for trade. In India, the fiber, yarn, textile and garmenting happens in different states, so the supply chain is a long and convoluted one–it is a zig zag in which the supply chain has to travel through different places. This disruption will have to be undone at every level. I don’t see that happening before December 2021,” he concluded.

manufacturer in Noida, in the New Delhi region. “On a humanitarian ground, I completely understand what they are saying. It is not good for the labor. But honestly, even when we sit on an aircraft, the first announcement is that in case of trouble first put on your own face mask, then try and help someone else out. “So the survival of the industry is the most important thing, and it is going to help the labor. If we don’t help and the industry itself perishes, then we will be in a very bad situation,” he said. As India’s gross domestic product crashed to negative 23.9 percent in the first quarter of the new financial year (April to June), from growth of 5 percent to 8 percent for the last decade, the government has been

INDIA’S DOMESTIC MARKET CANNOT BE DISCOUNTED

With its population of more than 1.3 billion and middle class of more than 400 million, India has been a key target for the global

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INDIA’S NEW LABOR CODES RECEIVED MIXED REVIEWS. CREDIT: MAYU SAINI

looking at ways to support business and rev up markets. “Right now, the future for the industry is not very bright. But one should be practical and understand we need to get the GDP back on the growth track and that is only possible if we get the industry rolling and get the confidence back. Right now, the confidence is just not there,” Singhania added. Singhania also noted it is hard to say how much the new labor code would even help because of the lack of clarity in terms of actual implementation, as well as the confusion that often happens between the central and state governments. “On paper they do sound positive. But one can only comment on them after they get implemented,” he said. “They are a glimmer of hope, for sure.”

market, both in terms of production as well as for consumers who have been growing increasingly open to higher spends and experimentation with new trends and products. The domestic textiles and apparel market is estimated to be approximately $115 billion annually. “Indeed, retail sales have picked up since September, on the back of the festive demand,” noted Rahul Mehta, adding that domestic production had been hit much more severely. “But retailers were primarily disposing off their inventories from early in 2020–and in many cases, inventories held by their vendors. There was very little movement of fresh production. My estimate is that even until mid-November, domestic production did not cross the 10 to 20 percent capacity. “The positive aspect is that with little fresh inventory going in to the stores for the last six months, it will allow for a robust resumption of production activity post Janu-

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ary, depending on how the second wave of Covid-19 pans out, especially in the metro cities of New Delhi and Mumbai,” he said.

INDIA’S COMPETITIVE DISADVANTAGE

Raja M. Shanmugham, president at Tirupur Exporters’ Association, observed that one of the biggest disadvantages Indian exporters face is a lack of foreign trade agreements with the European Union, despite years of talks. This gives advantages to other countries in the region, including Vietnam’s foreign trade agreement with the EU inked in 2020, and the benefit to Bangladesh of having Least Developed Countries status which gives them preferential market access. Sri Lanka and Pakistan also get preferential treatment–and zero duty from the EU. Other countries such as Mynamar, Cambodia and Vietnam also benefit additionally from Chinese investments in the region.

INDIA’S EXPORT GROWTH HAS BEEN HAMPERED BY A LACK OF FREE TRADE AGREEMENTS. CREDIT: MAYU SAINI

“What we need is no quick-fixes but a long-term vision. Promoting garment clusters, initiating structural reforms and tailoring policy interventions accordingly will be a way forward,” Shanmugham said, expressing the hope that the government would take an initiative to help pave the way forward in 2021.

LOOKING AHEAD

Perhaps one of the biggest pivots expected this year is the way online communication and transactions will change operations. The global pandemic has altered business that was done at a slower pace, over multiple meetings, with more decisive online meetings. Retail has been moving toward online sales with malls and stores seeing slower footfalls, and e-commerce altering the way global manufacturers can access the Indian market. The four-week period kicking off the festive season from Oct. 15 to Nov. 15 registered e-commerce sales of $8.3 billion, up 65 percent from the same period last year, according to Redseer Condulting. Analysts also note that the industry has been moving toward a higher focus on sustainability, driven by stronger parameters by

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brands as well as a growing awareness by the factory owners themselves. Although it will take time, the factors that gave the industry strength in India remain–the abundance of raw material, the farm-to-factory supply chain and a plentiful supply of labor at competitive costs. Meanwhile, manufacturers are holding on to their bootstraps, finding ways to keep it together, and negotiating with global brands and retailers after the impact of cancellations, delayed payment terms, and lack of assistance. “The industry is still facing a lot of defaults due to bankruptcy filings by big brands and buyers, delayed export realizations, and an inability to restore manufacturing to preCovid 19 levels,” observed A. Shaktivel, chairman, Apparel Export Promotion Council (AEPC). He said that requests for extensions of loan moratoriums on term loans should be extended to 2021, to help find ways to support the millions of workers in the industry and its allied fields. Even while lamenting the lack of commitment from global players, factory owners are holding on to the hope of better cooperation. “We are working on changing orders to meet the state of the changing world,” observed one factory owner from Tirupur.

“What we need is no quick-fixes but a long-term vision. Promoting garment clusters, initiating structural reforms and tailoring policy interventions accordingly will be a way forward.” —Raja M. Shanmugham, Tirupur Exporters’ Association

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A New Chapter in Bangladesh THE RSC HAS TAKEN THE REINS FROM THE ACCORD AS A “LOCAL ENTITY, BUT A GLOBAL OPERATION,” AS IT LOOKS TO KEEP SAFETY STANDARDS IN THE COUNTRY ON THE UPSWING. M AY U S A I N I

qbal M Hussain, who has taken on the roles of first managing director and acting chief safety officer at RMG Sustainability Council (RSC) in Dhaka is venturing into new territory–in many different ways. His move takes him from London to Bangladesh to join a newly incorporated organization that aims to weave the local into the global as it takes over the work of the Bangladesh Accord on Fire and Building Safety. The Accord, a consortium of more than 200 brands and retailers, mostly European, including Spanish companies Mango and Zara owner Inditex, Swedish firm Hennes & Mauritz AB (H&M), UK companies Tesco and Marks & Spencer, exited Bangladesh after seven years of executing on its mandate to improve factory and worker safety. RSC acquired the office and teams of the Accord in Dhaka, and included the Bangladesh Garment Manufacturers and Exporters Association in its tripartite platform, along with labor rights groups. As Covid-19 continues to ravage countries across the world, RSC has been getting underway with its mission, having completed more than 975 factory inspections by end-November –and work continues with the 1,700 factories that were being remediated over the past years.

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The Accord, which started out for a fiveyear period after the collapse of the eight floor Rana Plaza in 2013, added on another three years with a Transition Accord to operate from 2018 to 2021. Unresolved questions about the coming year remain: will RSC continue to be funded by the Accord signatories after May 2021? Will safety inspections by RSC be taken as the final proof by brands after that time? Will factories that were earlier covered by the Alliance for Bangladesh Worker Safety, which was mostly made up of U.S. and North American brands and retailers be incorporated? While the answers to these remain to be seen, one thing is without question, Hussain has picked up the mantle and is ready to get to work. He spoke to Sourcing Journal about some of the challenges facing RSC as he takes on the new position. Sourcing Journal: It is a momentous change, as the Accord has made the hand off to RSC, which has more representation of the local industry and trade unions. What does it really mean in terms of implementation for you as its first managing director?

Iqbal M Hussain: : The RSC is a tripartite organization. I call it the “unification” of trade unions, brands and industry, and in that respect collaborative work needs to be done. We need to work with our stakeholders to deliver on remediation and worker safety, with the factory owners, their engineers and the RSC staff. One of the pilots that we’ve already initiated is to do an “ICU deep dive,” so we are going into our corrective action plan and are improving the language in it to make sure that all of us can understand each other better. I am working on improving communications, using more “pull techniques” in which you pull people together, you draw people into the conversation and work together to be creative-solutions orientated and pragmatic. So, the RSC engineers work with the factory engineers more peer-to-peer, using better communication, which will help remediation happen at a faster pace. That’s part of the day-to-day. It’s not to say there wasn’t understanding before, but more that incremental change has a chance to get bigger results. SJ: Does RSC have the advantage that it is being seen as more local, rather than an outsider trying to make the rules

in Bangladesh? I.H: : RSC is a local entity, but it is a global operation in a respect. The trade unions in Europe have local affiliations, our brands are international, the factories are local. We are all interconnected-so it’s a local entity but our impact is global. SJ: Is it a challenging change of work and environment for you? I.H: : I’ve worked on many projects in the UK, in the Middle East and Asia, and in my previous job I was head of the global structural and integrity program for an Accord brand signatory. The supply chain was rather big, some 35 countries, so I had the opportunity to travel– not to all of them though. I’m an engineer, I’m detail-orientated, solutions-driven, and with the program’s management I am able to create a strategic vision, but yes, I have been exposed, and learned very quickly about the global fashion industry and in terms of its business parameters at one end…and safety compliance at the other end. In terms of supply chain management, it’s basically that you’re all in it together. Strategically, it’s about partnership-because getting it right at one end has an impact on the other end.…so it’s all a collaborative effort. SJ: You’ve taken over the RSC at a difficult time, both in terms of the pandemic and the business situation globally. I.H: : Yes, the Covid-19 pandemic is unprecedented. Covid-19 is ever present in many countries, 180 plus countries globally–it’s a challenge that humanity is facing together. Although there is lockdown to try to control it, the world is still turning and we still have to do the things we’ve promised to do. So, the RSC and the safety program continues, it needed new leadership, and I’m here to add value and make a difference. SJ: Are the factories in Dhaka responding to the modified means of communication for Covid times? I.H: : Over the course of this year we’ve all learnt to dress in two halves. Above is well dressed, and below is probably…shorts or sweat pants.

IQBAL HUSSAIN

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In 2020, we’ve all learnt that we can get quite a lot done online. Our safety program is delivered online, as are a lot of the technical meetings and those with my colleagues. We share things, review documents together– there are new work-arounds for everything. It’s not without its challenges though, because sometimes to meet face to face, to have that body language of an interaction, that’s kind of missing.

“In terms of supply chain management, it’s basically that you’re all in it together. Strategically, it’s about partnership-because getting it right at one end has an impact on the other end.…so it’s all a collaborative effort.”

SJ: Has the number of inspections been reduced now because there is so much more work involved in the safety procedures with Covid-19? I.H: : We’ve surprised ourselves by finding a lot of efficiencies. Of course, the Covid-19 related health and safety measures do add a layer of complexity because it means we need to look at transportation, the time spent working from home, the needs of self-isolation, etc. We resumed inspection operations in September when we were able to carry out more than 300 inspections, with similar numbers for October. We’ve done over 300 a month, including November…975 inspections. Considering the challenges at this time, we’ve been doing a pretty decent number of inspections I would say. SJ: What is the status on the boiler safety program? How are factory owners responding to this as an additional point. I.H: : Well, the boiler safety program pilot was carried out earlier. We were in the process of developing the next stage but then were hit by Covid-19. In the present situation, we need to ensure any residual action or follow up of the boilers that were inspected, and finalize the pilot into a program going forward. If you have a potentially unsafe boiler the consequences–I hesitate to say–can be catastrophic. And nobody wants to be in that situation. The RSC will look at this, develop it, and roll it out in time. SJ: Many brands feel that the future of RSC will be insecure as the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) changes leadership next year. Is that a genuine concern?

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I.H: : The RSC is independent of BGMEA leadership, and we have a constitution, we have our scope and programs and a commitment to deliver our objectives. We have our own leadership and we will go on. SJ: Is RSC finally expected to merge with the Remediation Coordination Cell (RCC) in the long run or continue as a separate unit? Is it still unclear at this time? I.H: : My focus currently as the managing director and acting chief safety officer is to work with the 230 plus colleagues I have, looking at the 1,600 plus factories and some one to two million workers who are within the scope of our program, and the focus is to deliver on the remediation and safety training. The long-term kind of situation and connectivity with other similar organizations like RCC, I think those conversations will develop in due course. SJ: Has Bangladesh become one of the safer countries for production? Do brands acknowledge this change? What is your vision to take this further? I.H: : Yes, absolutely. Bangladesh is one of the safest garment manufacturing sectors in the world. Brands do know this too, and their support as signatories for the Accord is testament to that commitment. The brands have been super supportive over the years, and they continue to do so. My vision for the RSC is for it to be “A world class safety program, enabling sustainable business and developing the supply chain.” That simple statement covers the key kind of components and objectives of the tripartite and we will continue to develop and deliver on that. Health and safety itself as a process, it is ongoing. SJ: Does the fact that so many global companies have canceled orders make it harder to execute the same degree of efficiency…especially after the Covid-19 related lockdown in Bangladesh? I.H: : Safety issues related to structural, electrical and fire are important, even though addressing Covid19 related issues is important, too. We can’t choose one over the other. Both involve the safety and well-being of people.

What we can do, is manage risks responsibly and effectively and develop and apply more pragmatic risk management and control procedures recognizing that there are some difficult situations coming up. The spring lockdown was a reaction to an unprecedented circumstance. We entered into a complete unknown with a global pandemic and nobody could really see the light at the end of the tunnel. People made decisions not knowing what to expect. But this time around as we face what is apparently a second wave of the virus, and Europe and many nations in Europe are in– or went in to–lockdown, what we can say is that we learned a lot from the first lockdown and I am sure we will make decisions with a view of lessons learned and a better symbiotic partnership with industry will prevail. SJ: This particular structure of RSC is until May 2021. So, are you still looking at one year plans? Six- to seven-month plans? I.H: : You’re right to point out that there is a potentially some kind of a timeline of May 2021. But we will be working on that to continue of course, because it is in the interest of the tripartite relationship for the RSC to continue its work. The international trade unions want to see a better work place situation, the brands want to continue to meet their CSR objectives and see that their supply chain develops and continues to become the best and the safest RMG sector in the world; trade unions want to see workers develop, and of course the factory owners want sustainable business. On all sides, the idea is for a stronger better more developed garment sector. It is a kind of circle–a perpetual circle almost. Safety issues are ongoing. They need to be supported SJ: None of us are astrologers, and it’s been a bit of a roller coaster year, but looking ahead how do you see it panning out for RSC? I.H: : Well, Covid-19 aside, because we really don’t know, we will continue to deliver on that promise that was made all those years ago and we will strive to become a world class organization for workplace safety and

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the Bangladesh garment sector, to be best in class and to underpin Brand Bangladesh, supporting the millions of workers who work in the sector. We will continue to work to deliver the remediation, and as a chartered structural engineer one of the things I am required to do by the code of ethics of the institution of structural engineers amongst other things, is to develop the next generation of engineers. I have the opportunity work with 230 plus colleagues, and I hope to add some value to their development as well. SJ: Is there anything that global brands/retailers should understand better about the situation on the ground? I.H: : Yes. I think the royal, “you” as in the royal “we” have supported and invested and developed the supply chain including all the workers in the garment sector and now Bangladesh is amongst the safest garment sectors in the world and will only continue to improve. But Covid19 is a challenge for all of us and let’s work together to come out at the other end as a collective, recognizing the symbiotic relationship underpins sustainable business, growth and people development. SJ: You moved to Dhaka for this job, and have always lived and worked in UK, UAE, etc. Is it a big challenge for you personally? I.H: : Yes, of course, my family is still in London, all being well they will join me here. I have a son who has just turned 6, and a daughter who is 3 and I haven’t seen them for weeks. It is the longest I have been away from them. My daughter is at the age where she asks “why” questions. She asks, “Baba, why aren’t you home? Why are you in a hotel?” So I try to answer her. I say, “I’m in Bangladesh.” And then she asks “Why?” And I’ll say “because a lot of people need my help.” Then she thinks about it, and says, “Are they in trouble?” And I say, “Well, we’re working to make a better, safer, work environment.” And she kind of gets that when I say “safe,” because as parents we always teach our children about being safe. And her brother wants to be a fireman; so, they kind of get that, helping people.

Wage Worries in Asia STEADILY INCREASING WORKER PAY IS ONLY ONE PART OF THE EQUATION WHEN CONSIDERING A COUNTRY FOR MANUFACTURING. M AY U S A I N I

sian countries that have become nerve centers for garment production live with one constant fear: that global brands are fickle and quick to pick up and move to the next best option. Covid-19 has amplified these concerns. Manufacturers in Asia are worried that lower consumer spending could cause brands and retailers to look for cheaper alternatives, and this anxiety has escalated as global players reevaluate their supply chains amid a rapidly changing world situation. “Some countries are much more vulnerable, because they don’t have a replacement for the garment industry. Cambodia has raised its labor costs every year but it does not really have other developed manufacturing sectors, like Vietnam has mobile phone manufacturing. Other costs, such as shipping and electricity are high for the region in Cambodia,” observed William Conklin, country program director, of the U.S. based Solidarity Center, Cambodia. “Across the region brands see labor costs as a variable they can try to influence and that often becomes like the tripwire that goes off. Once they leave the country, they don’t care about the mess they leave.”

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Wages slowly, but surely, on the rise The Asia-Pacific region has long been a manufacturing hub for apparel and footwear, while also being pivotal for sourcing textiles and cotton. More than 60 percent of apparel and textile sourcing has come from Asia over the last decade according to the World Trade Organization (WTO). Global exports for apparel were valued at $492 billion in 2019 (down 0.4 percent from 2018), and textiles at $305 billion (down 2.4 percent from 2018 ). In a snapshot indicator of the top apparel exporting countries for 2019: China was at $151.6 billion, followed by EU at $135.6 billion, Bangladesh at $33.6 billion, Vietnam at $30.6 billion, India at $17.2 billion, Turkey at $15.9 billion, Hong Kong at $12.3 billion, the UK at $9.1 billion, Indonesia at $8.6 billion, and Cambodia at $8.5 billion, according to the World Trade Statistical Review 2020 report by WTO. Needless to say, the economies of several countries have become heavily reliant on these exports. • As of 2019, more than 80 percent of Bangladesh exports were based in the garment sector, which employed more than four million workers.

“As you know in the cost of a garment the wage bill is very low, but it is the one that employers have the most control over.” —Christina HajagosClausen, IndustriALL

ORGANIZATIONAL OUTREACH

According to a 2019 study by the Clean Clothes Campaign, “Tailored Wages 2019,” on the state of pay in the global garment industry, “The dominant business model pits country against country, and supplier against supplier in a global race to the bottom. In the face of the huge downward pressure on price and wage, almost all initiatives to tackle poverty wages have been unsuccessful. The brands’ business model is the real reason that workers remain mired in poverty.” Many global initiatives, however, are geared toward helping workers by pushing wages higher. The German Textile Initiative and the Dutch Textile Covenant, both government-backed programs, have initiatives to look at purchasing practices and provide training for brands on what to do to move toward a living wage. IndustriALL, is also among several global unions with a similar mandate. “At IndustriALL one of our main policy goals is to increase the wages in garment producing countries and that’s not only

• Cambodia saw 64.8 percent of total export earnings from apparel exports, with more than 575,000 workers working in the industry. • In India, which also has a large domestic market, textile and apparel is the second largest employer in the country, after agriculture, with more than 100 million workers in the sector. Textile and garment exports accounted for 15 percent of total exports in 2019. With the growth of the industry, has come the awareness of collective bargaining, stronger laws for increasing minimum wages and a movement of these wages upward. Even though minimum wage rates are low–at less than $100 a month in Bangladesh and Sri Lanka for instance–they have been slowly creeping higher over the past decade. Vietnam, for example, has had more than a 453.6 percent minimum wage increase in the sector between 2011 and 2019; Pakistan has seen more than a 185.2 percent increase; Cambodia 250 percent since 2014.

MONTHLY MINIMUM WAGE ACROSS COUNTRIES SOURCE: WAGEINDICATOR.ORG

400

$165– $359

350 $120– $298

300

$248– $265

$94– $236

250

$132– $190

$192

200

$150

150 $116 $95

100

$80

$67

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$270– $295

Asia, but across the globe. ACT (Action, Collaboration and Transformation) is based on a memorandum of understanding between global brands and IndustriaALL,” said Christina Hajagos-Clausen, textile and garment industry director, IndustriALL Global Union. “As you know in the cost of a garment the wage bill is very low, but it is the one that employers have most control over, if you look at overhead, electricity, freight, fabric, there is no control that buyers have, that is a dictated price. But the cost of labor is one they have control over.” While pushing for higher wages for their labor, manufacturers in Asian countries observe that they find themselves in the difficult position of looking out for workers while keeping costs at a minimum. In countries like Bangladesh, Cambodia, Myanmar and Vietnam, the preferential status that brings with it tax benefits for manufacturers is always under threat unless the labor situation is handled better. Meanwhile, brands and retailers have been looking at other options, like Ethiopia for instance, where wages are less than a third than even those in Myanmar.

WAGES ARE JUST PART OF THE EQUATION

“Generally, that kind of argument is overplayed,” explained David Williams, project manager, Decent Work in Garment Supply Chains, ILO, and a labor economist, adding that it isn’t really so practical –or even desirable- for brands to pick up and move on as is often implied to be the case. “It is a labor-intensive industry, but there are other elements that are important. Brands and manufacturers investing in Vietnam, for instance, see it as much more of a full-package supplier these days. They can produce a broad range of garment types, they have a huge footwear industry, a highly literate and skilled labor force, good roads, ports, infrastructure, there are a lot of tax incentives for investors. They have signed a trade deal with the European Union for preferential market access. They have also made progress on compliance issues. The overall cost of production is still a very good value.” “It is not just about wages,” he said. “All

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these need to be aligned beyond the wage issue, and of course the ILO has also been advocating that the cost of production be viewed beyond just the labor in the garment sector.” His argument is borne out by the numbers. Despite the increasing wages, the value of U.S. apparel imports from Vietnam increased by 131 percent between 2010 and 2019. Vietnam’s shares in the US apparel import market also quickly increased from only 4 percent in 2005 to 16.8 percent in 2019 (and 20.2 percent from January to August 2020). The wage outlook for 2021 in the Asia-Pacific region The frequency of adjustment of the minimum wage differs from country to country. In some, like Vietnam, Cambodia and Indonesia it comes up for review each year, is negotiated and comes into force by Jan. 1 of the following year. In Cambodia, where monthly wages for 2021 were increased by $2 to $192, “There is an annual review of the labor wage but the adjustment depends on the actual situation,” said Ken Loo, secretary-general, Garment Manufacturers Association in Cambodia (GMAC). This increase makes it higher than the minimum wage in Vietnam, which has four zones for its minimum wages. Both Vietnam and Myanmar, have decided to forgo any increase for 2021. Indonesia also has a Covid-19 related embargo for 2021. Since 2013, when Indonesia saw a 55 percent minimum wage increase, the usual increase has been an approximately 8 percent each year. It is a tripartite dialogue where employers and trade unions sit at the table and talk but varies in each province. Among the lowest in the region are Bangladesh and Myanmar. Bangladesh which has an increase every five years, raised wages in 2018 to $94.45 a month, up from $68.46 set in 2013. In Myanmar, the minimum wage has been approximately $80 per month since 2018.

INTRA-COUNTRY OPTIONS

Varying minimum wage rates within a single country also cause manufacturing flight from one region to another. According to the ILO’s Global Wage Report 2020/21 released on Dec. 2, only 48 percent of the countries in Asia-Pacific have one

minimum wage rate. China, India and Indonesia are particularly complex. In China, for example, there is no national minimum wage floor and minimum wage levels are set by local governments. The ILO report shows that, in 2019, the minimum wage was 65 percent higher in Shanghai, where the rate is highest, than in Qinghai, where it is lowest. Although in some provinces, such as Beijing, Shanghai or Tianjin, there is only one minimum wage, in the majority of the provinces there are multiple. For instance, in Guangdong Province there are five different rates covering 21 municipalities. The report noted that in India, before the recent reform aimed at extending coverage of the minimum wage through a universal national “floor wage” and reducing the number of rates, each state used to set different minimum wage rates for employees in each occupation and in “scheduled” employment. “This gave rise to over 1,915 occupational minimum wage rates across state spheres and 48 minimum wages in the central sphere,” according to the Economic Survey 2019–20, which covered two thirds of all wage earners. “The implementation of the Code on Wages will reduce the number of rates to a minimum of four and a maximum of 12 per state, and is intended to make the wage setting process in India more efficient and dynamic.” The report also took into account the complexity in Indonesia, where there are about 250 different rates that are defined for districts within provinces.

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While some provinces have one single rate that applies to all districts, most have multiple. No prevailing national minimum wage exists. Since 2015, all rates are adjusted by a formula combining the inflation rate and the rate of growth of GDP. Analysts across the sector don’t believe brand flight from the region is imminent in any case, although it could shift between countries, and in different regions within a country itself. Moving from China to Myanmar for instance, or from Bangladesh to Cambodia.

THE UPWARD EFFECT

“In the garment sector, the minimum wage has a dynamic of pushing the floor,” Daniel Kostzer, wage specialist, ILO explained. “The government increases the minimum wage, and this forces the other workers in the garment sector to negotiate. Because you have different levels of workers, those who are there in the middle say, ‘I used to earn 40 percent more than the minimum wage, now I earn 20 percent more than the minimum wage. Let’s start to negotiate.’” It is also true that wages in the garment sector function largely on overtime, and changing dynamics with collective bargaining are part of the big picture transition in labor compensation. Kostzer, who has been studying wage issues intensively across the world does not believe brands will just pick up and leave the Asia-Pacific region because of the wage creep. “Global companies have this strategy to diversify–but it is not a problem with the minimum wage,” he observed.

“It is a labor-intensive industry, but there are other elements that are important.” —David Williams, ILO

Rebuilding Relationships: Manufacturing Trust in the Supply Chain CANCELLATIONS IN THE WAKE OF THE PANDEMIC STRAINED THE BONDS BETWEEN BRANDS AND THEIR MANUFACTURERS TO THE BREAKING POINT. G L E N N TAY LO R

he Covid-19 pandemic threw constraints on many areas of the apparel industry, but perhaps no greater tension was created than that between retailers and their suppliers. Amid the abrupt stop in demand, many retailers delayed or even canceled their apparel orders entirely, sticking factories with a bill that they could ill afford to pay. While many relationships were damaged or even fractured entirely, the black swan event should serve as a lesson for all apparel retailers going forward in terms of how they must approach their relationships with those who produce their goods. To get to the bottom of which retailers weren’t holding up their end of the bargain, the Worker Rights Consortium (WRC) in association with the Center for Global Workers’ Rights (CGWR) at Pennsylvania State University, tracked a list of major retailers and brands and their commitments to pay

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in full for orders completed and in production. Names such as Adidas, H&M and Zara owner Inditex committed to pay suppliers in full for previously canceled finished and in-production orders, while companies like Lululemon and Uniqlo parent Fast Retailing paid for their committed merchandise orders up front. The latter option is preferred by suppliers, as they would get their payment immediately, easing worry about paying their employees. The situation and sentiment from the manufacturer side, however, was crystalized by Denim Expert Limited’s managing director Mostafiz Uddin from a Sourcing Journal summit panel last fall. “During this pandemic, we have realized that partnerships are a marketing tool for brands and retailers,” he said. “And we talk a lot about partnerships, but I don’t see one single example of a true partnership.” Last year, Uddin’s factory experienced a

number of cancellations on finished and unfinished goods—both of which required raw materials that the factory purchased itself. “When the pandemic started, they canceled all of their orders just by sending a letter—that’s all,” he said. “Millions and millions of dollars, raw materials, finished goods, unfinished goods—all just [canceled] in a simple e-mail. Obviously, our relationship is totally destroyed, the trust is broken, and it will take a lot of time to rebuild this relationship.” Attention has since turned to another issue. An October report from the CGWR found that suppliers were asked to make their prices an average of 12 percent cheaper than last year, with the organization describing such practices as “leveraging desperation.” The study, conducted in July and August, said 65 percent of suppliers reported that buyers have demanded price cuts on new orders that are bigger than the year-over-year reductions buyers usually ask for. In the survey of 75 factories in 15 countries, suppliers said they had to wait an average of 77 days for payment, compared with 43 days before the pandemic, raising fears of further factory closures in an industry employing 60 million people worldwide. “We are seeing a dramatic squeeze down of price, reduced orders and late payment,” said Mark Anner, author of the report and director of the CGWR. “This worries me for the wellbeing of the suppliers and the workers. This will affect the small and medium suppliers first. It’s a little hard to see right away the gravity of the crisis because the new order volume is being mixed with the pay up of old orders that were pent up. It’s hiding the new crisis, which is the decline in order value.” In a conversation with Sourcing Journal, Ken Loo, secretary-general, Garment Manufacturers Association in Cambodia (GMAC), put the situation rather bluntly, “Prices are still no good, we are accepting quite ridiculous payment terms.” In an era when social media is prevalent and technologies are available to build out transparency and sustainability, brands don’t have an excuse to put their head in the sand regarding the wellbeing of the work-

ers, particularly those in the factories that had to handle both the order delays and facility closures. “I think that the side issue that brands are going to need to address is not so much around the orders and order cancellations— we already know clearly that that needs to be addressed—is are they doing the right thing in terms of looking after workers’ safety,” said Chris Rogers, research analyst, global supply chains at global trade intelligence firm Panjiva. “Going into next year, there needs to be a holistic discussion between the brands and the manufacturers around safety of staff, and of course the usual topics like ESG, environmental footprint and so on.”

ALTERNATIVE FINANCING COULD HELP BRIDGE PAYMENT GAPS

For the brand-supplier relationship to continue evolving, especially as money remains tight, alternative solutions that otherwise might not have been relevant in the past may need to be considered. One such example, especially in the light of the rough financial climate, is the introduction of trade finance, particularly as companies that saw major supply chain disruptions seek out more flexible and faster sources of funding. Firms offering vendor financing can pro-

MANY SUPPLIERS WERE LEFT UNPAID FOR FINISHED GOODS AT THE ONSET OF THE PANDEMIC. CREDIT: IMAGINECHINA VIA AP IMAGES

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vide funding to suppliers almost immediately and support longer payment terms for buyers. In some cases, these firms can finance payment terms up to 180 days. For small- and mid-sized apparel and footwear companies that are out of options with banks and might need funds in addition to those provided by the government, alternative financing can be an effective option to inject liquidity into their business in the short term. “Alternative financing allows for quick and flexible funding, with advance payments on invoices provided within two days of invoice submission in some cases,” said Peter Maerevoet, chief financial officer at Tradewind Finance. “The requirements to qualify for funding are less rigid, and no collateral is necessary, which is especially beneficial for companies already struggling financially. Since alternative financing is not a loan, the fact that it does not have to be repaid can take the pressure off of a company experiencing tight cash flow. When demand does rebound, funding increases as the business generates more sales.” The application process to receive trade financing is designed to be simple, so both the brand and the supplier can focus on running their business instead of navigating a potentially cumbersome situation. In particular, leveraging trade finance can strengthen areas like R&D by freeing up working capital for retailers and their supply partners, according to Maerevoet.

FROM OVERSIGHT TO EMPOWERMENT

The increased burden of financial woes temporarily placed the ongoing issue of work conditions and worker safety on the back

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burner. But ultimately, this needs to be addressed as well. While efforts to eliminate the policing aspect of inspections and factory audits have been rampant in recent years to move toward a more collaborative environment focused on continuous improvement, Michael Bland, senior director of Qima, says the problem has been a lack of data. “How are you collecting whatever information you need on your products?” Bland said. “I can tell you in China, where I was based for about 12 years, that everything’s paper based at the factory, amazingly enough, even today. Certainly whatever you’re getting is just scattered e-mails throughout multiple staff at the retailer.” Bland cited a report from the Business Continuity Institute that said Excel was still the software of choice for 46 percent of supply chain professionals, indicating that there is a significant need for an upgrade to a centralized system that collects inspection and audit data on a cloud server in real time. Additionally, a focus on empowerment through training is key toward building twoway trust and ultimately making the production facility more self sufficient. With more e-learning modules now available to train factory workers and managers remotely on best practices, a better path forward can be seen as possible. “It’s about making that training available and then nominating those people,” Bland said. “There could be one or two key people that you identify at a factory, you get them trained up and they become the nominated QC at that factory. They’re the one who’s responsible for it. You’re not only empowering that factory but you make a person feel empowered and motivated by giving them a title and a certificate.”

“It’s a little hard to see right away the gravity of the crisis because the new order volume is being mixed with the pay up of old orders that were pent up. It’s hiding the new crisis, which is the decline in order value.” —Mark Anner, CGWR

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VIEW TOP FROM THE

LEADERS FROM FOUR MAJOR COMPANIES SPOKE WITH SOURCING JOURNAL ON HOW THE LANDSCAPE HAS CHANGED, WHAT THE PRIORITIES ARE AND WHERE THEY SEE THINGS HEADED IN 2021 AND BEYOND. SEE PAGES 63 TO 79

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VF VP Talks Innovation and Sustainability CAMERON BAILEY OFFERS INSIGHT INTO THE COMPANIES METHODS, ITS LESSENING DEPENDENCE ON CHINA AND THE IMPORTANCE OF RESPONSIBLE SOURCING. V I C K I M. YO U N G

F Corp. has long been a leader in the global apparel space, and over the years it has shifted operations as the company pivoted to a retail focus after setting down roots as primarily a wholesaler. Cameron Bailey, executive vice president, global supply chain at VF, is in his second tour of duty at the apparel giant. Here, he talks about the changes he has seen, how digitization is helping the business, and how VF is meeting consumer needs while keeping an eye on environmental sustainability. Sourcing Journal: You began your VF career in 1989 working primarily in the company’s intimates apparel business. What were the sourcing and supply chain operations like at the time and how have things changed or evolved? Cameron Bailey: Back then, the production for VF Intimates was based in the U.S. with no real sourcing in place. Starting in the mid-90s, VF began starting up offshore manufacturing and developing relationships with sourcing partners in countries around the world. Over the subsequent years, our product supply base evolved into a diversified global model with a mix of sourcing partners and owned manufacturing. Additional changes we’ve made to our company

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in recent years, such as spinning off our jeanswear business and the planned sale of our Occupational Workwear businesses, continue to reduce our internal manufacturing footprint. And, as we shift away from internal manufacturing, we also prioritize retaining some of our internal manufacturing talent, which really helps to foster strong, mutually beneficial relationships with our sourcing partners. Many of our leaders have decades of manufacturing experience and they work to transfer that acumen and know-how over to our sourcing partners to enable them to continually improve their operations. SJ: How has the company adapted to the changes required as needs shifted through divestitures and acquisitions to VF’s brand portfolio? C.B.: Since VF was founded 121 years ago, we’ve been constantly evolving and adapting to remain a leader in our industry. One of our greatest strengths is how our incredibly talented teams embrace change to ensure we meet the various needs of our consumers and our portfolio of brands. Our people are comfortable with being uncomfortable, and a willingness to change is ingrained in VF’s culture. This enables our ability to quickly pivot so that we can always leverage the scale of our global business platforms and provide

CAMERON BAILEY

SJ: Is the current product mix still 77 percent sourced, and 23 percent manufactured internally? C.B.: We currently manage about 89 percent of our unit production with our global sourcing partners and about 11 percent in our owned manufacturing. This is the mix today following the spinoff of our jeanswear business.

value to all the brands in our portfolio. This is especially true within our Global Supply Chain organization.

“Many of our leaders have decades of manufacturing experience and they work to transfer that acumen and know-how over to our sourcing partners to enable them to continually improve their operations.”

SJ: Over the years, VF has moved from a wholesale firm to include its own retail stores and e-commerce. What changes were needed to shift logistics and distribution strategies? C.B.: Consumer behaviors and shopping trends have evolved significantly in recent years. These global marketplace dynamics have led us to think differently as it relates to the location, layout, level of automation, and other factors within our distribution centers as well as our overall logistics network. The need for a truly omnichannel network that services our direct-to-consumer channels as well as our wholesale channel, which still represents about 60 percent of our revenue, has become more critical than ever. And, this network must be seamlessly enabled by the logistics required to meet our consumers’ and customers’ expectations globally. We currently have several large-scale programs underway as part of our global business transformation that are strengthening our position for the years ahead.

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SJ: As for digital and technological improvements, how is VF using that to improve its sourcing and supply chain? For example, is VF using digital, such as 3D, to help with design and decision-making to help shorten the production time and cut the need to ship samples back and forth for approval? C.B.: VF’s global business strategy is underpinned by our transformation to become a consumer-minded, retail-centric and hyper-digital company. We have multiple bodies of work in progress to further drive the digitization of our global supply chain. We have an intense focus on ensuring we have the right enabling capabilities in place, from consumer insights to product creation to seamless delivery of products when and where our consumers expect them. Also, we’ve been able to shorten production times with technology, which also helps us continually reduce our environmental impact by requiring fewer materials and shipment/ transportation needs. SJ: What about AI? Is there a system in place that can help VF’s brands know when to put more goods into production, how much to produce and where to ship the goods to in order to get them where they are needed? C.B.: We are continuing to increase the intelligence and sophistication of our supply chain through the use of AI, but I’m unable to share any specifics. SJ: VF has an extensive supply chain across the globe, with 30 plants, 34 distribution centers and 16 third-party partnerships. C.B.: As VF has continued to evolve in recent years, so, too, has our supply chain footprint. Today, we have fewer than 10 owned

“Last year about 6 percent of our total sourcing in China was bound for the U.S., and this year it will be down to about 3 percent.”

manufacturing facilities and 27 distribution centers. The changes within our portfolio, specifically with the spinoff of our jeanswear business and the planned sale of our Occupational Workwear business, are leading us to become a more agile supply chain. SJ: How much of the proportion of the work is centered in China and how has it shifted or changed over the years? C.B.: As part of our strategy to achieve greater balance and diversification with our global product supply footprint, we have continued to lessen our reliance on China as a sourcing hub. Last year, approximately 16 percent of our total product was sourced from China, with most of this product intended for the China market. Also, last year about 6 percent of our total sourcing in China was bound for the U.S., and this year it will be down to about 3 percent. SJ: Tell me a little bit about how VF’s supply chain organization has helped develop a responsible sourcing program. What are the elements of the program? C.B.: Our decision-making process at VF leads with our Purpose, which is about powering movements of sustainable and active lifestyles for the betterment of people and our planet. With this in mind, we recognized through our robust factory auditing process that many supply chain partner factories were struggling to continuously improve their approach to worker rights and safety, and environmental sustainability. Many of our partners were meeting our minimum requirements, but we felt they could do better with guidance and help from VF. So, we established a Responsible Sourcing program and team of experts to provide support to our key supply chain partners. Through this work, we help our suppliers improve their performance, which in turn improves the livelihoods of workers and their families while also reducing the factory’s impact on the environment. VF’s Responsible Sourcing team comprises key subject matter experts in environmental sustainability, community development, labor rights, and health and safety, among other areas. These teams set goals for factories while also developing programs that guide their improvement. An-

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other key aspect of responsible sourcing at VF is the Sustainable Operations team. This global team is spread out across our primary sourcing countries and members work hand-in-hand with our factory partners to deliver best-in-class labor and environmental performance. SJ: In the last few years, we’ve faced issues that involved trade policies and tariffs and port strikes. And, of course, this year saw everyone impacted by the pandemic in connection with inputs and the supply chain. What geopolitical risks do you see coming down the pike? How will that impact VF’s supply chain capacity and capability risks? C.B.: While there are specific potential risks that we identify, monitor and plan for ongoing, I wouldn’t say there are risks we’re anticipating in the near future more than others. The volatility of the past few years, including the challenges associated with the pandemic, has only reinforced our belief that operating an agile and flexible supply chain is imperative in today’s global marketplace. The interconnectedness of our worldwide supply chain requires us as leaders to be ready for virtually anything that comes our way. SJ: What do you see as upcoming issues on the horizon for global supply chains? C.B.: When I look ahead, I don’t see issues but rather opportunities. We’re living in an incredibly dynamic time, driven by the rapid pace of technological change, which also brings with it ever-evolving consumer behaviors. It’s our responsibility to consistently offer consumers compelling new products and experiences while also removing as much of the friction as possible from their shopping experience. And, we must do this while managing an agile supply chain that emphasizes respect for our planet and the millions of workers it employs. When you consider all of the expectations we face today, you can let it overwhelm you or excite you. At VF, we’re energized by the ongoing challenges and believe that we have the right strategies and talent in place to turn them into opportunities.

Ralph Lauren’s Alagöz on Speed-toMarket and Industry Collaboration THE COMPANY HAS RAPIDLY ADAPTED TO CREATING PRODUCT ON SHORTER TIMEFRAMES IN AN EFFORT TO ELIMINATE WASTE AND INEFFICIENCIES. V I C K I M. YO U N G

alph Lauren Corp.’s big initiative—its Next Great Chapter plan—has a key cornerstone whereby leading with digital remains a top priority. Here, Halide Alagöz, executive vice president, chief supply chain and sustainability officer, discusses how Ralph Lauren Corp.’s transformation of its sourcing and supply chains is an example of the company’s mandate. Sourcing Journal: How would you describe the sourcing and supply chain network when you joined the company in June 2016 and what were the top areas that you thought could be improved to further the company’s then Go-Forward Strategy? Halide Alagöz: There has been significant transformation and disruption across sourcing and manufacturing in our industry. Giv-

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en the size and complexity of Ralph Lauren’s supply chain, our focus has been on finding solutions to continue to evolve and accelerate these shifts at scale to become a more agile, resilient and sustainable business. As a part of this, we first redesigned our sourcing network to shift from a geographically concentrated, brand-specific model to a globally integrated category sourcing model. We’re investing in innovations to drive more sustainable practices in our supply chain, collaborating with non-traditional partners to bring new solutions to our company and our industry. We’re also implementing operational changes to make our supply chain more agile and efficient through digitization. And we are deepening and diversifying our relationships with key strategic suppliers to ensure we have a balanced network of partners who share our values and standards to help us achieve these transformations,

“Digitization and the adoption of new technologies has not only enabled us to deliver a wide-reaching yet more targeted customer offering but also significantly improved collaboration internally and externally across our business.”

expand our global footprint and tap into new markets. SJ: The company has been able to shorten the timeframe for some items from over a year to six-to-nine months and the new plan under CEO Patrice Louvet is to shorten production time even further. What considerations do you think about in terms of how to tighten up lead times? H.A.: We approach development for all our products as a demand-driven model with four enablers. Firstly, we are intentional about the products for which we shorten lead times to ensure we maintain integrity and quality. Secondly, we examine how and where we source materials. Thirdly, we empower our key strategic suppliers and make sure we work with partners who are willing to continually evolve and optimize their processes. Finally, our last enabler is that we deliver end-to-end connectivity, which means that we approach product development with the end product in mind so that all the steps—from design, planning and buying to production and delivery—are connected. This approach ultimately enables us to eliminate waste and inefficiency out of the planning and manufacturing process and bring

HALIDE ALAGÖZ

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value to the consumer experience. As a result of this, some of our products, intentionally so, are developed and produced in a matter of days and hours, instead of weeks and months. It would be remiss to not point out that embracing digitization across our supply chain and shifting production closer to demand have been key to driving the efficiency, accuracy and speed required to scale this model. SJ: What role does digitization and 3D Product assets have in sourcing and the supply chain? And what is Digital Product ID? H.A.: Indispensable. Digitization and the adoption of new technologies has not only enabled us to deliver a wide-reaching yet more targeted customer offering but also significantly improved collaboration internally and externally across our business— from our manufacturing partners through to our consumers. We are now using 3D design technology for select product categories. This is a transformative evolution that integrates and consolidates multiple steps at the beginning of the traditional design journey by creating a digital file with a 3D image and all product design information. The ability to provide the product design in this way with our manufacturing partners has helped us operate much faster and more sustainably by reducing the amount of time, materials and logistics that are usually generated by multiple rounds of physical product sampling. In 2019, we started adding Digital Product Identities (Digital Product ID) to tens of millions of Ralph Lauren products as a way to power product authentication, further digitize our supply chain operations and deliver an enhanced consumer experience. By scanning the Digital Product ID on the product label with a smartphone, consumers can confirm whether their purchase is authentically Ralph Lauren, learn about the product detail and receive styling tips and recommendations. The use of Digital Product IDs has also helped us gain unprecedented, real-time visibility to track product from the point of manufacture and having this depth of insights has helped drive efficiency

around orders and inventory management. This mass-scale product digitization is a first for the retail industry. We’ve hosted the program on an agile platform so that as it scales, we can continually explore new features. This technology will enable a number of capabilities for our products, including track and traceability, a circular lifecycle through reuse, resale and recycling and a more personalized consumer experience.

“Our vision for the future would be to produce only what is needed and eliminate overproduction altogether through shorter lead times and agile production models powered by digital.”

SJ: The company has product lines segmented into development tracks, and a separate Fast Track production platform. Can you walk us through the different programs? And is Fast Track the platform where you test certain styles before making larger commitments on production? H.A.: We took a look at all our product lines and analyzed what types of decision models were necessary for each. We then applied a segmented approach that has helped us find new opportunities to optimize our processes and increase speed-to-market without compromising on quality. Last year, we created fast-track production models to design, produce and deliver products in just days/weeks versus months. While we aren’t looking to move our entire supply chain to such shortened lead times, we are using this model for projects where we want the flexibility to react very quickly and better position ourselves for various customization opportunities that arise. For example, around the holidays last year, we designed, produced and delivered an exclusive fleece sweater to a key wholesale customer in just 16 days, right in time for Black Friday. SJ: What are the platform innovations that you are using to scale on-demand manufacturing? H.A.: We are continually exploring new platforms and technologies to add to our pipeline of solutions for on-demand manufacturing. A few years ago, we launched a digital-first, on-demand customization experience, anchored by the Create Your Own Custom Crewneck Sweater, that gives consumers the opportunity to co-create a one-of-a-kind, personalized piece, knit to

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order and shipped within two weeks. Most recently, we expanded this Create Your Own (CYO) program to outerwear with the custom packable jacket. In a way, this CYO experience represents the next phase of on-demand manufacturing as it nearly automates all the steps between concept and production by sending actionable product data directly to the factory at the point of design. This solution presents us with a lot of immediate and future benefits—from reducing product inventory, material waste and eliminating the need for markdowns to allowing for greater agility and rapid fulfillment of high-quality products that meet our consumers’ desires and tastes. SJ: In terms of diversification of the supply base, what are the key considerations in thinking about agility and resilience? What about supply-demand matching with each region or market? And how has that changed, if indeed it has, post the Covid-19 pandemic? H.A.: Our ongoing efforts to reshape how we work and unlock agility and resilience across our supply chain put us in a strong position to control our inventory from the start of the pandemic and manage through these times of uncertainty. Diversifying our global supply base has led us to consolidate and strengthen our relationships with strategic partners as well as facilitate nearshoring opportunities so we have the flexibility to shift supply and production closer to the point of demand. This is a growth opportunity for us as it means creating less, faster, more sustainably and more responsively. SJ: In thinking about the sourcing and supply chain in a post-Covid world, what changes or considerations come to mind? Is reshoring a possibility? What about the logistics in terms of where raw materials or inputs are located? H.A.: As uncertainty persists, the ability to remain agile and react quickly through on-demand models has become a critical capability. We recently refreshed our Global Sourcing Strategy to further diversify our Global

Sourcing Network and facilitate nearshoring opportunities for our regions and channels. As part of this strategy, we also aim to source more locally, including components, raw materials and fabrics. This approach combined with our digitization efforts, not only allows us to gain speed to market, but also source and manufacture more sustainably while retaining product and brand integrity SJ: Can you talk about some of the partnerships you have with your suppliers? How do you work with them on strategy and how do you keep track of those partnerships to make sure they’re meeting the company’s strategic goals? H.A.: Having the right network of responsible, strategic partners who share our values, our ambitions and with whom we can collaborate to solve long-standing sustainability challenges is one of the most critical components of our supply chain. And last year, we implemented a new supplier engagement strategy to help us drive transparency, efficiency and accountability around our partnerships. We regularly evaluate these relationships based on the performance and potential of our partners, which we define in terms of their business execution, commitment to citizenship and sustainability as well as product integrity

A LOOK AT A DIGITAL PRODUCT ID FROM RALPH LAUREN CORP.

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SJ: Sustainability and sourcing transparency are becoming more important considerations for consumers in choosing what to buy, as well as for brands in keeping brand loyalty. What are some of the company’s key goals at the supplier level concerning the environment and the community where each operation is located? H.A.: Increasing transparency across our supply chain is a priority for us and our Digital Product ID platform is one of the solutions we are leveraging to improve tracking and traceability. As for our approach to sustainability and sourcing, we’ve defined our commitments in Design the Change, our strategy for citizenship and sustainability at Ralph Lauren. Through our own efforts, and in collaboration with partners and experts, we are taking steps to mitigate our environmental foot-

print. Our vision for the future would be to produce only what is needed and eliminate overproduction altogether through shorter lead times and agile production models powered by digital. Our teams are mapping out and reducing the impacts of our energy, emissions, water and waste across our operations and supply chain. Weâ&#x20AC;&#x2122;ve also joined other leading peers and companies as signatories to the We Are Still In declaration and the UN Fashion Industry Charter for Climate Action, pledging to limit our emissions in line with the Paris Agreement goals. We are also members of the G7 Fashion Pact, a group of fashion leaders working to stop global warming, restore biodiversity and protect the oceans. As it relates to people, we aim to enrich the quality of work and life for all workers in our supply chain. One of the critical reasons why we maintain long-standing relationships with our strategic suppliers is so we can partner more closely and transparently for the benefit of the people who make our garments. This work is one we continue to improve upon. While all our efforts aim to ensure workers are treated and compensated fairly, more specifically, one of our goals is to make empowerment and life-skills pro-

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grams available to 250,000 workers across our supply chain by 2030. Furthermore, we have committed to increasing women in factory leadership by 25 percent by 2025 as supervisor positions are mainly held by men in most factories despite women making up, on average, half of the apparel supply chain workforce. SJ: Looking ahead, and thinking in retrospect on the disruptions this year, what keeps you up at night as you plan for 2021? H.A.: I mentioned this earlier, but uncertainty and volatility in the supply-demand space are here to stay. Therefore, making sure we have the right balance of agility and resilience to face future unexpected global disruptions is so important. And, as part of this challenge, weâ&#x20AC;&#x2122;re also accountable for ensuring that we, as a company, along with our partners and suppliers, are acting responsibly during this unprecedented environment. As an industry, weâ&#x20AC;&#x2122;re all trying to solve the same challenges, from improving transparency and traceability to reducing our climate impact across global supply chains. If we want change to happen, we need to partner together to find and align on these solutions.

Tapestry Leaders on The Shift to Digital and Prioritizing Diversity THE COMPANY’S CHIEF EXECUTIVE AND CHIEF OPERATING OFFICERS ON THE “STICKY” SHIFT TO ONLINE, THE MOVE TO SHORTER LEAD TIMES AND THE GROWING ROLE OF DIGITAL PRODUCT CREATION. V I C K I M. YO U N G

oanne Crevoiserat, installed as CEO at Tapestry Inc. late last year, is leading the company during a time of disruption. The firm’s Acceleration Program represents a mandate to use data and analytics to drive efficiency and greater agility. It’s also a program that Crevoiserat played an instrumental role in crafting when she joined Tapestry in August 2019 as chief financial officer. Here, Crevoiserat is joined by chief operating officer Tom Glaser in discussing what they think are key sourcing and supply chain issues now and ahead in 2021. Sourcing Journal: The company conducted a review of operations a year ago. What were the key sourcing and supply chain issues that stood out as needing some reworking as the company pivoted to a digital-first mindset? Joanne Crevoiserat: Ultimately, it was about building in more responsiveness to adjust to an environment where trends are changing at an accelerated pace.

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This drove several areas of focus. One was the need for more focused and productive assortments across brands. Another was the need to develop multi-speed calendars, such as changing how we manage the product development calendar [and] strategically partnering with service providers to introduce or improve capabilities, including pre-positioning raw materials to support chase and read/ react calendars, better managing evergreen/ replenishment programs, and better leveraging pre-packs to improve speed and accuracy on deliveries. Our focus also included addressing the global distribution network to support these objectives. We’re also using technology in a different way. For example, there is a huge opportunity around digital product creation….We would likely continue creating the first design prototype in the more traditional way, but then use digital to explore color ways, embellishments, etc. SJ: In August, you said during a conference call that Covid has been a catalyst

to accelerate Tapestry’s priorities. What are those priorities in Tapestry’s sourcing and supply chain processes? J.C.: One of the most significant shifts that Covid has accelerated is the shift to digital/ online from bricks-and-mortar shopping. This has changed the way we think about distribution centers, which also serve as fulfillment centers. We have rapidly expanded our capacity to address consumer demand globally, and believe the changes we’re seeing in consumer shopping behaviors will be “sticky.” We are seeing strong customer acquisition through the digital channels and continue to build our network to support increasing global demand. The responsiveness of our fulfillment capabilities will be key to continuing to acquire and serve consumers in the future. Covid has also underscored the importance of having a geographically diverse sourcing and supply chain. We were fortunate to have made that a priority a decade ago and it significantly paid off during this last year as different sourcing countries were impacted at different times. We saw little to no disruption as our teams worked quickly to ensure we delivered the right product to our consumers in the right regions and channels, while still supporting newness throughout the fall.

ductive SKUs, i.e., the tails). Importantly, we are better leveraging data and analytics to inform these decisions as we embed these capabilities into our assortment building processes. On sourcing, manufacturing high-quality products that are ethically sourced is a priority across all brands. SJ: Tapestry in May 2019 held an innovation platform that showcased 115 supplier vendors pitching newness and innovation to the creative and product development teams. Is this something the company plans on continuing and how do you see that initial event evolving? J.C.: We are considering evolving the Vendor Fair of 2019 to a more inclusive Innovation Fair. We would include/invite vendors who we are not working with currently, in addition to our key SPs, with a focus on unlocking the true power of the supply chain from end-to-end.

“Covid has also underscored the importance of having a geographically diverse sourcing and supply chain.” —Joanne Crevoiserat, Tapestry Inc.

SJ: Are the sourcing and supply chain priorities the same across the board for Tapestry’s three brands or do they differ accordingly for each? J.C.: Supply chains are driven by two main considerations: 1) product categories—in that way Coach and Kate Spade are similar with the vast majority of their respective assortments focused on bags and small leathergoods, while Stuart Weitzman is focused on footwear—and 2) positioning. Stuart Weitzman at the ‘gateway’ to luxury is more concentrated on having a European-based (specifically, Spain-based) supply chain, whereas Coach and Kate Spade, positioned as accessible luxury, have a more Asianbased supply chain. All three brands are reducing SKU counts, tightening assortments, and focusing on improved SKU productivity (and reducing promotions associated with clearing non-proJOANNE CREVOISERAT

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SJ: Tapestry last year became a signatory to the “Open to All” inclusivity pledge. What are the company’s goals for gender equality, training and education and a living wage in connection with the vendor partners that the company chooses to work with? J.C.: By joining the CFDA, the Open to All campaign, and other fashion houses to collectively support and sign the Open to All pledge, we sent a message that we will not tolerate discrimination and are committed to taking a stand for the rights of our customers, our employees and our partners. We started on our inclusion and diversity path long ago and have continued to expand on these efforts with the establishment of our board-approved 2025 corporate responsibility goals, which we set in 2019. We have also taken other actions to expand our efforts and training and education programs across our company and our supply chain. Equally important to Tapestry is an open and fair supply chain. Our supply chain partners are global, covering three distinct brands throughout many international regions. Our supply chain activities are grounded in our Supplier Code of Conduct, which sets forth our expectations for high standards of ethical behavior from all of our partners. While we do not have a stated position on living wage, we expect all of our supply chain partners to adhere to fair employment practices and treat their employees with dignity and respect. Under our Supplier Code of Conduct, our suppliers are required to meet all legal requirements, including ensuring they adhere to minimum wage requirements and, pay any and all overtime, and provide any benefits due to the employees in full and on time. SJ: Given your financial and operations background, what do you think will be key issues facing companies and sourcing and supply chain executives in connection to global trade, logistics and cross-border commerce? J.C.: Looking at it from 30,000 feet, the biggest issue to monitor is the status of globalization itself. While globalization has proven a big win for many consumers over the years (benefits shared by many including

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consumers and supply chains), it has caused localized/concentrated risk (job loss/migration) in domestic markets. This has created pressures in many pockets, from Brexit in the West to rising tensions between the West (US/EU) and East (Asia/China). Managing supply chains in such a dynamic environment requires constant monitoring and a globally diversified network positioned to flex as needed. Global logistics networks are also in focus. Today these networks are challenging— it’s not strictly Covid-related—and [are] running contrary to efforts to shorten lead times, whether port congestion (on either end of the supply chain), container shortages, UPS/FedEx issues, etc. TOM GLASER

SJ: How does the inclusion of digital in Tapestry’s sourcing and supply chain processes help the company become more agile on the production front? How is this different for each brand? Tom Glaser: We’ve traditionally used data analytics much more for hindsighting. With our enhanced analytics capabilities and algorithms, we can use data for forecasting. Our data analytics teams are now working directly with our merchandise planning teams, changing the process of demand planning moving to Integrated Business Planning (IBP). The point is to combine the right talent, with the right structure [and] with the right

“The point is to combine the right talent, with the right structure [and] with the right technology.” —Tom Glaser, Tapestry Inc.

technology. In addition, digital product creation (3D printing) has enormous potential that we’re just starting to tap. SJ: Sourcing has gotten more complex over the years. And while manufacturing is often what’s thought of first, logistics and transportation are important, too. What’s new on this front? What about the idea of having distribution centers located in multiple locations to receive and store goods in case of disruptions, such as what happened with the Coronavirus shutdowns or port strikes? T.G.: Actually, I’d turn this question on its head and flip it around. For us, it starts with consumers and being customer centric— wanting to be close to them and provide the best/quickest possible service. That means having multibranded distribution/fulfillment centers in multiple locations as a way to be closer to the customer. That’s where we want to move to over time. The added benefit is the risk mitigation gained with diversification. SJ: The company’s sourcing model has allowed it to reduce production lead

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times from four months to three. How was this accomplished? What role do raw materials and service suppliers have in this reduction and is there room for them to drive even more speed through the entire process? T.G.: It was really about bringing in the right group of service providers from a broad and diverse geographic footprint, as well as pre-positioning materials, pre-packing, etc. In the wake of the Kate Spade acquisition, we streamlined our suppliers for both raw materials and finished goods. With a more focused group of suppliers, we were then able to leverage our scale and size and drive down our raw materials lead times from order to ex-factory from six weeks to four weeks and finished goods from six weeks to three-and-a-half to four weeks. Overall we were able to reduce lead times by approximately 25 percent. SJ: What are the areas in sourcing and the supply chain that you think will continue to see the most change in a postCovid-19 world? T.G.: The focus on online/digital will most certainly continue. Similarly, distribution and logistics will continue to evolve.

A LOOK INSIDE TAPESTRY’S LEATHER WORKSHOP.

A&F’s Fran Horowitz Talks Supply Chain Changes THE CEO HAS OVERSEEN IMPROVEMENTS IN EFFICIENCY AND AGILITY WHILE PLACING AN EMPHASIS ON SUSTAINABILITY AND CORPORATE RESPONSIBILITY. V I C K I M. YO U N G

ran Horowitz, chief executive officer of Abercrombie & Fitch Co., created a playbook for the Hollister brand before taking those learnings to revitalize the company’s core A&F brand. Included in that was a rethinking of the merchandising and related supply chain needs. Here, Horowitz discusses the need for agility, and how the ability to quickly respond to customer demands dictates adjustments to sourcing and the supply chain. Sourcing Journal: What was the state of the supply chain for the Hollister brand when you joined the company as brand president in October 2014? One of your priorities was to reposition the brand and its product offerings. As you worked through that strategy, how did that impact the supply chain and what were the related changes that were needed? Fran Horowitz: Our company, including our Hollister brand, has always benefited from a diversified sourcing base focused on achiev-

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ing quality, value and speed. We are fortunate to have long-term relationships with our suppliers and agents. Some relationships have existed for over 10 years and several key suppliers have been partners for more than 20. I have enjoyed getting to know our vendors through both visits to Asia and our biannual vendor conference that we typically hold in the region, travel permitting. It’s been great to broaden and strengthen these existing relationships. Our sourcing base has been a key factor in successfully repositioning our brands and differentiating our product offerings. We benefit from our suppliers’ expertise, agility and flexibility, all of which help us maintain a strong commitment to quality while always keeping our customers top of mind. SJ: You were later named CEO of the company which then began restructuring work at its Abercrombie brand, relying largely in part on the playbook you formulated at Hollister. What did you see were the adjustments needed to the sup-

ply chain in terms of how to improve the Abercrombie product line and the logistics needed to adjust inventory levels for the brand? F.H.: I joined A&F Co. because of the opportunity to build on the strong attributes that were already in place. In terms of adjustments, we have implemented an increased focus on efficiency, both externally and internally. Externally, we have partnered with our agents, vendors and factories to reduce product development and production lead times. Internally, something that I did early on was redefine our merchandising and sourcing roles. As part of that, we reviewed our internal milestones and deliverables to ensure all processes operate as efficiently as possible, while also fostering a creative environment that keeps a pulse on customer demand and supports trends and newness. This has allowed us to condense our production calendar and ultimately speed up the supply chain. This vendor and factory speed and agility allow us to tightly control inventory and seamlessly react to customer demands. SJ: Does the company rely on separate sourcing and supply chains for each brand? F.H.: We have implemented a cross-branded supply chain, which allows us to not only leverage total company volume, but to also offer differentiated raw materials and products for our customers across our brands. SJ: When did the company begin to diversify its sourcing and supply chain network? Was China at that point still a large manufacturing base? What was the thinking behind the need to expand the network? F.H.: Our company has maintained a diversified sourcing base. We believe it is important to maintain a balanced country-of-origin mix that allows for speed, quality and value. We continue to have strong partners in China who have worked with us to share the burden of tariffs, and we have maintained a presence in the region in the mid-teens. While we have added additional capacity and new production facilities in other countries, it has been within our network of existing Chinese parent companies. FABRICS INSIDE A&Fâ&#x20AC;&#x2122;S INNOVATION DESIGN CENTER IN COLUMBUS, OHIO.

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SJ: Over the past two years, the fashion and retail industries have had to deal with tariffs, specifically connected with the trade dispute with China. On conference calls to Wall Street, you’ve noted that the company was positioned to withstand those tariff pressures. What were the changes made to the supply chain that provided the best benefit to weather the tariff storm? F.H.: As we have previously shared, our China penetration peaked in 2016. We have been actively working to balance our country-of-origin mix, both as a protection against tariff uncertainty and to ensure we were not overly reliant on one country. Through this migration, we have mitigated tariff uncertainty and reduced our overall reliance on China. SJ: How has dealing with Covid impacts influenced supply chain changes or considerations going forward? Is there a rethinking of the logistics in terms of what other improvements might be needed to prepare for possible disruptions to the supply chain? F.H.: A big thank you to our sourcing team and our vendor partners for working together to overcome adversity this year. During the first peak this past spring, 30 percent of our sourcing base was either closed or had significantly reduced capacity for approximately eight weeks. With the help of our long-term partners, we continued operating and were able to manage delivery challenges without a significant impact on inventory levels. A balanced country-of-origin mix and vendor mix protect us from trade uncertainty and pandemic issues. We avoid being over reliant on one supplier, while still maintaining meaningful partnerships and relationships. We balance our sourcing base in China, Southeast Asia and South Asia with sourcing resources in the Western Hemisphere. A look inside a room at ANF’s Innovation Design Center at its campus in Columbus, Ohio.

F.H.: At this time, we have a presence in Mexico and Guatemala, and we remain pleased with our current vendor base and long-term partners. SJ: Sustainability and supply chain traceability have been a key focus for the company and Abercrombie is a participant in the United Nations Global Compact initiative. What is the nature of Abercrombie’s participation in two U.N. Action Platforms, addressing water and sanitation as well as sustainable development goals? F.H.: We were excited to join the United Nations Global Compact in 2019, and this commitment is now weaved into everything we do from a sustainability perspective, both at the corporate and brand level. Our support of UNGC’s Ten Principles is an ongoing process, with some of our sustainability efforts having been in place for nearly two decades. We know there is no finish line to these efforts as we aim to have a positive im-

“We have been actively working to balance our country-of-origin mix, both as a protection against tariff uncertainty and to ensure we were not overly reliant on one country.” —Fran Horowitz, Abercrombie & Fitch Co.

SJ: Is reshoring some production to be closer to home a possibility? FRAN HOROWITZ

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pact on the communities we touch around the world. Regarding water and sanitation, we joined the CEO Water Mandate’s Action Platform on Human Rights and the WASH Platform in late 2019. This aligns with the UNGC’s Sustainable Development Goal (SDG) 6, which promotes access to safe and affordable drinking water. We continue to partner with organizations and launch initiatives that align with the SDG’s. For example, this past spring we launched our partnership with thredUP, the world’s largest fashion resale marketplace. Our partnership allows customers to send their clothing in for gift cards to be redeemed across our brands. This collaboration aligns with SDGS 12 and 17, which encourage responsible consumption and production and building partnerships that support the goals, respectively. SJ: The company has also rolled out its P.A.C.E. program to almost 9,000 factory workers in Cambodia across 10 factories. How did the program come about and how does it help support both your vendor partners and the U.N. Global Compact initiative? F.H.: We know the importance of training, educating and supporting our vendor partners. That is why we have partnerships like Room to Read, HER Project, P.A.C.E. These

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partnerships align with our commitment to caring for our communities and worker safety and well-being, and also support SDGs 3, 8 and 17. Regarding P.A.C.E. specifically, Gap launched this program in 2007. It was initially created to support women in the global apparel industry, and Gap has since expanded the program to community settings and more countries to unlock new possibilities for women and adolescent girls around the world. A&F Co. is one of four brand partners involved in the P.A.C.E. program. In 2019, we rolled out our program in Cambodia, Indonesia and India. This program is connected to SDGs 3 and 5, which encourage good health and wellbeing and gender equality, respectively. SJ: Covid-19 has impacted the sourcing and supply chain on a number of fronts. As you think about logistics and what else could happen in planning for 2021, what keeps you up at night? F.H.: A balanced country-of-origin mix and vendor mix protect us from trade uncertainty and pandemic issues. We avoid relying too much on one supplier, while still maintaining meaningful partnerships and relationships. As we head in to 2021, we remain confident in our supply chain and our strong, long-term relationships with our partners.

Supply Chain Diversity Is Everyone’s Responsibility EXPERTS AGREE THAT THE FIRST STEP IN ANY SUPPLIER INCLUSION PROCESS NEEDS TO BE A CLOSE EXAMINATION INSIDE THE COMPANY AND OF ITS PARTNERS. S A RA H J O N E S

s the industry faces calls for more inclusivity, retailers are responding with plans to make their vendor bases more representative. Prompted by movements including Black Lives Matter and #MeToo, brands are showing their support through goals for greater supplier diversity. As part of its response to the Black Lives Matter movement, Nordstrom has committed to generating $500 million in retail sales from brands owned, operated or designed by Black and/or Latinx individuals by the end of 2025. Earlier this year, Brother Vellies designer Aurora James launched the nonprofit Fifteen Percent Pledge, asking retailers to allocate 15 percent of their total shelf space to Black-owned businesses. Since it was founded, the Fifteen Percent Pledge has gathered support from Rent the Runway, West Elm and others. “We’ve seen most large enterprises making significant commitments to review their business practices, and to start identifying more concrete ways to better support diver-

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sity inclusion as opposed to simply making statements or making policies—which are a great way to start and a great way to frame your CSR management system in terms of addressing those issues. But I think the push now is really what can we tangibly do to ensure to our customers that we are making movements, making changes to address and improve diversity and inclusion, both internally and with our trading partners,” said Maureen Loman, senior sustainability analyst at sustainability ratings firm EcoVadis. By focusing on their own supply chain makeover, companies can also influence broader positive change. “All these actions can cascade in a way that will not only improve your own supply chain but push other companies to think differently about how maybe they manage their own internal systems,” Loman added. According to Daryl Hammett, the former chief operating officer at supplier management software company ConnXus and current vice president of global supplier solutions at ConnXus’ parent company Coupa

“Our supply chains should reflect our consumers that we directly or indirectly are doing business with, so I think that is one of the major forces that are driving organizations to really step up and have more inclusive and diverse supply chains.” —Daryl Hammett, Coupa Software

Software, supplier diversity and inclusion is the top conversation he sees happening in procurement organizations right now. “Our supply chains should reflect our consumers that we directly or indirectly are doing business with, so I think that is one of the major forces that are driving organizations to really step up and have more inclusive and diverse supply chains,” said Hammett. Outside of achieving a brand mix that is more representative of a retailer’s customer base, growing supplier inclusion also makes good business sense. Research from McKinsey found that companies in the top quartile for gender diversity were 25 percent more likely to outperform their peers financially than those in the bottom quartile. In ethnic diversity, the difference between the top and bottom quartiles’ likelihood of outperforming is even higher at 36 percent. “Demographics tell us that diverse owned businesses are growing exponentially every year, so leveraging these businesses in their supply chain is critical to ensuring they remain market leaders,” said Jennifer Ulrich, senior director, advisory at Corcentric, a procurement and finance solutions firm. “While this shift might start as a way to improve corporate image, businesses are finding that expanding their horizons with supplier diversity is providing a lot of other great benefits.” Because companies owned by women, people of color and other diverse groups tend to be small businesses, they come with operational benefits. Per Hammett, these include lower overhead and more innovation. “By having an inclusive, diverse supply chain, you’re going to drive competition, you’re going to drive innovation, new ideas,” said Hammett. “And then your supply chain will be healthier.” While there are business benefits to supplier inclusivity, there are also risks to not taking action. With both consumers and employees wanting to support companies that have strong corporate responsibility, Ulrich noted that retailers could face a loss in market share. Inclusivity also plays a large role in employee attraction and retention. Making the business case for diversity ef-

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forts to top management is one key element of success, since these plans need support from leadership.

ACTION PLAN

Experts agree that the first step in any supplier inclusion process needs to be an examination of the current state of diversity within the company’s partnerships. “You can’t manage what you don’t measure,” noted Loman. ConnXus, part of Coupa, can run a company’s data through an automated system to determine who among their suppliers has been certified or classified as diverse, and who has not. Investigating supplier diversity can also mean more metrics than just company ownership. EcoVadis’ tool digs into the sophistication of vendors’ diversity practices, looking at factors including their policies, how they report data and whether they have a whistleblowing process set up. “Just because you have a person of color or a woman running a business, there’s probably a high correlation that the rest of that company is doing a lot in terms of management for diversity and inclusion, but it’s not necessarily a causation,” said Loman. “And so that’s why we want to go deeper besides ownership to see what kinds of objectives and targets and goals a company has in relation to these issues.” Since governments can vary in their guidelines for reporting on diversity, EcoVadis’ aim is to create a global standard for measuring maturity of these programs. A study conducted by the firm of thousands of companies across sectors found that about half had no policies or measurement plan in place, leaving room for growth. Diversity and inclusion also have different meanings around the world. For instance, in a nation where ethnicity is more homogenous, companies would be more apt to seek out characteristics such as female or veteran-owned businesses for inclusivity. Once companies figure out where they stand, they can use that to inform their strategies and goals. For retailers that do wish to engage new suppliers, there are a number of resources and platforms available to find diverse vendors.

“If you’re a diverse-owned business, raise your flag, don’t hide. Use it as a lever to get more business.” —Jennifer Ulrich, Corcentric

According to Hammett, before making pledges, companies need to make sure that their goals are achievable. This means investigating whether there are actually enough certified or classified diverse vendors to reach a percentage of spend. In retail, if there aren’t enough brands that are a fit, companies can look at other behind-thescenes vendors, such as marketing agencies and website management. Even if suppliers have the right documentation, retailers still need to do due diligence to ensure that a vendor has the infrastructure and logistics needed. “You don’t want to set a business up for failure. So, you set realistic goals based on the suppliers being available to meet those goals,” said Hammett. Rather than simply adding suppliers, a retailer can reach their goals by engaging existing suppliers. If a current supplier is not meeting diversity standards now, that doesn’t necessarily mean that they need to be cut off in support of social responsibili-

DIVERSE-OWNED BUSINESSES NEED TO BE THEIR OWN BIGGEST ADVOCATES.

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ty goals. Companies should look at whether the vendor already has a plan in place to reach acceptable goals over the course of time. If they don’t already have an outline established, the retailer could come up with a corrective action plan. However, sometimes supplier relationships may need to end if a partner is unwilling or unable to change. Raising diversity also doesn’t need to revolve around a retailer’s direct spend. As an alternative, retailers can engage their vendors and stipulate diversity benchmarks in their contracts or supplier codes of conduct to achieve a specific target, targeting tiers two, three and beyond.

SUPPLIER SIDE STRATEGIES

Since diverse-owned businesses are also small businesses, sometimes it can be a challenge to build up awareness since their energy and resources are focused elsewhere on day-to-day management. Many inclusive suppliers that would qualify for certification or classification don’t apply for this documentation. This creates a missed opportunity for both retailers and would-be vendors. One strategy that Ulrich has seen is a retailer mentoring a vendor to guide them through the certification process, including paying any needed fees. There are also opportunities for vendors to directly reach out to retailers that are sometimes left on the table. Retailers such as Walmart and Target have portals where diverse-owned businesses can register to be considered as a new supplier. Merchants like Dollar General also have fairs where inclusive suppliers can seek out an audience The important thing is to not be shy. “If you’re a diverse-owned business, raise your flag, don’t hide,” said Ulrich. “Use it as a lever to get more business.”

Footwear Production Slowly Steps Away From China AS LABELS ARE INCREASINGLY ON THE LOOKOUT TO DIVERSIFY THEIR SOURCING, CHINA BEGINS TO LOSE ITS STRANGLEHOLD ON FOOTWEAR PRODUCTION. KAT E N I S H I M U RA

he events of 2020 have underscored some tough lessons on footwear sourcing. While the landscape has been shifting for years due to factors including trade challenges, the rise and fall of labor costs, and the emergence of new markets for manufacturing, the bulk of shoe production has taken place in China for longer than most sourcing executives can remember. In the world of finance, diversification is a risk management strategy wherein capital is allocated across an array of investments, mitigating danger to any single asset should market conditions change. While this common-sense approach has been employed with success since Nobel Prize-winning economist Harry Markowitz coined it in the 1950s, it’s taken brands much longer to see the theory’s practical applications when it comes to their supply chains. But a contingent of players saw the writing on the wall even before Trump’s trade

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war with China took effect, or a worldwide health crisis ground supply chains to a virtual halt. Savvy direct-to-consumer upstarts and global footwear firms alike have made moves to reduce their reliance on the country—while others built their businesses from the ground up with a broad sourcing foundation and a Markowitzian sensibility for managing risk. Whether footwear brands source largely in China or simply have a foothold in the country, they are now making moves to diversify their portfolios even further. According to Nate Herman, senior vice president of policy for the American Apparel and Footwear Association (AAFA), “This has been a trend that we’ve seen incrementally over the past few years and that our members have been talking about for some time.” The punitive tariffs on China-made goods—a result of the Phase One trade deal signed into law by President Trump and Chinese President Xi Jinping in January—are still hitting brands where it hurts. U.S. foot-

wear imports from China are down by more than one third (35 percent) this year, Herman said, and a whopping 72 percent since 2016. “The desire to shorten the supply chain in response to major crises like Covid-19 has only accelerated this trend,” he added. The biggest factor impacting brands’ decisions to get reduce their reliance on China, though, is a general sense of unease about the future, Herman explained, citing “uncertainty with regard to the international trade environment, uncertainty with regard to geopolitical changes, and uncertainty with regard to Covid-19.” These long-held and now festering anxieties have been a boon to China’s nearby competitors in recent years. Vietnam has taken on its fair share of the superpower’s footwear sourcing, Herman said, though that demand has slowed both due to constrained consumer appetite for shoes during the Covid crisis and a burgeoning need for other goods, which the country has readily taken up producing. “Across the board, Vietnam has become an important sourcing partner, though the high tariffs that the U.S. imposes on imports of footwear continues to be a thorn in the side for brands,” he said, noting that the AAFA is currently lobbying to see those duties reduced. The trade group also remains vigilantly opposed to the “possible imposition of additional tariffs on U.S. imports of footwear from Vietnam,” Herman added—“a distinct possibility in light of the Administration’s rushed Section 301 investigation of Vietnam for currency and timber issues” which began in October. Cambodia, Burma and Bangladesh have all made gains in 2020, he said, though they still remain a small part of the share of imports to the U.S. Aside from challenges stemming from trade relationships with other potentially significant markets for footwear production, China stands to remain a key player because of its massive capacity and its highly-developed infrastructure and investment in the space. “As a key source for inputs used in the production of shoes, China will still be a part of the supply chain even if product is even-

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tually manufactured in another country,” Herman said. “While it may become less of a player when sourcing for the U.S. market, there is still a lot of capacity in China which can, and will, be used to serve other markets such as Europe and China itself, which is a large and fast-growing footwear market.” Michigan-based footwear titan Wolverine Worldwide recognized the need to diversify away from China in 2013, according to the company’s senior vice president of global sourcing, Onder Ors. The executive characterized Wolverine’s reliance on China at that time as “extremely heavy,” with more than 80 percent of its footwear produced in the country. According to Ors, the team began to devise a diversification strategy as a means of becoming more agile in the face of unexpected change. “Our goal was not to replace [China] one-to-one, but really have flexibility in case something happened,” he said, adding that the footwear firm wanted to be able to “flex from one market to another, to support our global needs.” Throughout that transition, Wolverine— which owns brands including Merrell, Chaco, Keds, Saucony and Sperry, among others—nurtured existing relationships with its core tier-one, or primary, production partners, which were also migrating to other markets and building up capacity outside of China for footwear sourcing. Together, they identified Vietnam as an optimal target for the company’s business, along with countries like Indonesia and Bangladesh. Ors said Wolverine prioritized production partners with hubs in multiple markets, allowing the company’s brands to shift production between locales depending on the ebb and flow of trade relationships and other market conditions. Today, Wolverine aims to keep its reliance on China for footwear sourcing below 20 percent, with the goal of hovering around 15 percent for the foreseeable future. The trade war that has proliferated over the past two years prompted some “quick maneuvering” internally to ensure that the company was not exposed to margin-crushing duties. “We don’t want to be out of China by any means— we just want to be balanced,” Ors said.

“It doesn’t have to be the cheapest solution that wins anymore, but the one that has the most flexibility.” —Patrik Berglund, Xeneta

Keeping one foot in China is important, he added, as the country still represents “one of the more stable platforms, compared to other markets we’re developing.” While China was the first country hobbled by the coronavirus during the winter months, it was also the first to emerge, supply chains as robust as ever, while the rest of the globe’s production facilities floundered. Building up a self-sufficient infrastructure for footwear manufacturing is highly capital intensive, Ors said and China has, over the course of decades, invested more in creating this production ecosystem than any other country. “There’s equipment and training required to produce the efficiency that we’ve come to expect.” “There’s such a knowledge base, and equipment, and engineering capabilities that are there,” Ors added—and that expertise extends, notably, to tier-two, or upstream, suppliers. Some brands’ efforts to set up sourcing outside of China have been stymied because they still end up reliant on the country for the integral parts and pieces that make up a shoe.

According to Ors, many of Wolverine’s materials and components manufacturers have followed their tier-one counterparts into new markets, setting up shop gradually. “Now, the rest of the pipeline is moving along,” he said, and there’s been an effort to create regional footprints in multiple locales, true to the company’s overall diversification strategy. Wresting control away from China for these elements is important, Ors believes, not only because it mitigates risk, but because it cuts down on lags in lead times. Shipping these parts to other production hubs for assembly is both time consuming and expensive. Developing a dependable network of second-tier suppliers has been “one of the more important pieces” of the puzzle when it comes to developing a truly diversified supply chain, he said. “Now, we have the same challenge as we’re building out our opportunities in India and Bangladesh, and as we keep extending into Southeast Asia.” It’s not just about maintaining a supply chain to feed into existing product lines, he explained, but developing an infrastructure to support “the

FOOTWEAR IMPORTS TO THE U.S. BY VALUE IN THE FIRST NINE MONTHS OF 2020 SOURCE: THE OFFICE OF TEXTILES AND APPAREL

$5.94B

CHINA $4.77B

VIETNAM $1.04B

INDONESIA ITALY CAMBODIA

$888M $367.8M

5 Billion ($)

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next generation of innovations and technologies,” when much of that forward-looking exploration is still taking place in China. Firing up production in new markets has also been an exercise in patience for the company, which became accustomed to China’s unmatched capacity. “The ramp up is a little longer,” Ors said, when it comes to bringing manufacturing lines fully up to speed, and both training and recruiting at scale have proven challenging. “That takes a while—it doesn’t happen overnight,” he added. Another factor for Wolverine’s diverse roster of brands to juggle is the transportation time from sourcing countries to end markets. “It takes 17 days on average from China to the U.S. on the water, to the ports in Los Angeles,” Ors said. Ocean freighting from Bangladesh or India can easily add 20 days to that equation. The company must also factor in potential disruptions related to trade or weather and the pure distance between a finished product and its destination. “China has such a robust pipeline to the U.S. or Europe,” Ors said, while some of Wolverine’s other partners, like Bangladesh, might see shipping vessels moving through their ports at a lower frequency. “Not everybody has the deep-water ports, and some might see them come through once a week,” Ors said. “That’s a little different than five times a day,” as is standard at Chinese ports, he added. “The far-East is a manufacturing hub that has decades of know-how and machinery and everything in place, coupled with with cheap labor,” echoed Patrik Berglund, CEO of Oslo-based ocean and air freight analytics platform Xeneta. Despite those advantages, Berglund has seen brands espouse a greater desire to move away from “single-sourcing” in a country like China, and put “more of a backup or contingency plan in place.” “It doesn’t have to be the cheapest solution that wins anymore, but the one that has the most flexibility,” he added. This new way of thinking, “could change the landscape in the longer run.” The desire to diversify isn’t unique to footwear, he said. Xeneta’s clients across categories have been bogged down by the political tribulations of the past four years. “The

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trade war that Trump started with China is something that businesses hate—it’s nuts to plan around, nearly impossible,” he said. Multiregional sourcing is a way to “mitigate risk and make supply chains more stable,” he said, and those efforts have accelerated even more in the age of Covid. Berglund said that the year’s unique challenges have shone a light on what it means to have truly diversified operations. An American brand moving its sourcing from China to Vietnam, for example might have implications when it comes to the unique trade agreements and political standing held by each country, but “from a supply chain stability point of view, it’s not really a huge difference,” he opined. The coronavirus swept across Asia this winter and spring, decimating supply chains with no regard for borders, he explained, and the crisis put the whole region out of commission for weeks. While production in Asia has since bounced back with a vengeance, brands need to think more broadly about their sourcing relationships to avoid a repeat of the 2020 meltdown. Eastern Europe, South America and Africa are all viable options that deserve a second glance, according to Berglund. Now that shoppers are feeling less cautious about spending in light of the holidays, brands that canceled orders during the spring and summer months—or saw delays on arrivals that led to stockouts—are desperate to get their hands on whatever product they can wrangle. The mad grab for consumer goods, like apparel and footwear, has driven carrier services’ prices through the roof, Berglund said. The normal rate to ocean freight goods between Shanghai and Los Angeles has increased more than twofold, he said. The same is true for transport from South America to the U.S. “There’s no capacity anywhere,” he added. “Global trade is so hot that carriers are printing profits and jacking up their expectations.” Asian countries like China, Vietnam, Bangladesh and India have become “meccas when it comes to producing fashion cargo,” Berglund said, while developing regions elsewhere are comparatively in their infancy. But, he said, “If the world remains in flux,”

72%

The decrease in footwear imports from China to the U.S. since 2016.

whether due to climate change or another health crisis that causes “more volatility and less stability,” businesses are likely to continue to diversify away from China, and Asia in general. “Regardless of industry, we’ve seen a growing appetite for this line of thinking.” Direct-to-consumer sneaker upstart Greats has been an advocate of diverse sourcing since its inception in 2014, according to Neil Callahan, the brand’s president. While the digitally native brand was acquired by Steve Madden in 2019, its sourcing portfolio has remained largely unchanged, Callahan said, with the majority of production taking place in Italy, and the remainder—about 40 percent—split between China and Portugal. Italy played a major part in the brand’s growth and development, he added, contributing to Greats’ cachet as a Brooklyn-based, European-made label. But the brand began to diversify as it started to scale. Greats did not want to “have all our eggs in one basket, or be so reliant on one source,” Callahan said, and eventually looked to Portugal as “another avenue for European manufacturing.” It’s hard to be a sneaker brand and operate totally independently from China, though, and Callahan admitted that the country’s capabilities when it comes to the styles’ required components are still unmatched. Moreover, when faced with the incredibly unique and deeply catastrophic circumstances of 2020, multi-egional sourcing in both Asia and Europe has proven essential, he said. Italy’s struggle with the coronavirus this spring was nothing short of devastating, and as the country went into a period of lockdown during March and April, Greats was able to pivot, relying more heavily on its other sourcing relationships. “Our partners in Asia and our partners in Portugal, to some degree, were a little bit more nimble and weathered things a little bit quicker,” Callahan said. “When Italy was totally shut down, we were probably shipping some more shoes from China than we have in the past,” he said, “and now things have kind of flipped back.” The breakdown of sourcing has a propensity to fluctuate between the company’s three factories in its different sourcing lo-

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SPERRY IS ONE OF THE BRANDS OWNED BY WOLVERINE.

WHY SUPPLY CHAINS NEED A DIGITAL-FIRST STRATEGY TO SURVIVE AND COMPETE The pandemic has demonstrated how far behind many companies are when it comes to digitization. All along the supply chain—from product development to point of sale—less prepared brands struggled to adapt to the new normal. Edouard Macquin, president, Americas at technology company Lectra, noted that this had a detrimental effect on companies’ financial positions due to lost sales, overstocks and delayed manufacturing. “If additional waves hit in 2021, this will have a significant impact, especially since companies that are not digital first have a hard time pivoting and switching to e-commerce rapidly and effectively,” he said. Macquin spoke to Sourcing Journal about how companies can use technology to adapt and excel in the new normal. Which key lessons should the fashion industry have learned from Covid? The real challenge will be the transformation from an outdated, weakened and value-destroying supply chain into a purpose-driven demand chain which ensures that the designs with the maximum appeal and value for customers are the ones that go into manufacturing. The pandemic has accelerated the move to ‘what’s next,’ and as a result companies will need to be super ready, opportunistic and fast. There is a significant need for digitalization to support the acceleration, for example the ability to better forecast in real-time to adapt to changing trends. It’s not about why do it, but how. 2020 was a crash course in remote collaboration. Now that fashion is more familiar with digital design tools, what should companies do to strengthen their capabilities? Now is the time for industry leaders to take immediate action to bring business back and think more strategically to imagine the ‘next normal’ and how to profoundly reform current business models in order to survive or get stronger in a reshaped competitive environment. Transformation is not about technology—it’s about people. Reskill and retrain employees, and identify new talents to close the skills gap in order to upscale innovation and digitalization. It’s time to redouble efforts to develop ecosystems with innovation partners and experiment with new collaboration models. Even in the midst of uncertainty, what makes you most optimistic about 2021? Everything needed to transform the supply chain exists today. We don’t need to wait until tomorrow. The integration of data into a product, adoption of innovative digital tools and the implementation at scale of collaborative processes will be critical assets for a successful transformation.

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SPONSORED

cales, Callahan said, based on what’s going on in their separate markets and where the brand’s focus is in terms of product development. And while each factory typically works on different product lines for Greats, he’s confident that “any one of our partners could probably today make just about any one of our shoes at the same level, because there’s the same expectation on quality,” along with a proven track record of serving the brand. Keeping the network of suppliers tight, yet diverse, gives the brand a “level of control” in an increasingly unpredictable sourcing landscape, he added. “These are good relationships, and it’s better to be more meaningful to few than less meaningful to many.” And as the brand continues to grow, Callahan said Greats will continue to keep its ear to the ground for sourcing opportunities across the globe. “The country of origin is not the priority, or what’s important to us,” he said. “It’s about maintaining our value proposition, and executing on the level of quality that we’re after.” Developing a diverse and effective portfolio of sourcing relationships is “a never-ending, moving target,” he added.

Brazil Puts Best Foot Forward WITH A LARGE SUPPLY OF LOCAL INPUTS AND A FOCUS ON SUSTAINABILITY, BRAZIL IS READY TO MAKE A MAJOR PUSH IN THE INTERNATIONAL FOOTWEAR MARKET. KAT E N I S H I M U RA

t’s no secret that China once owned the lion’s share of the world’s footwear sourcing. But in recent years, tariffs, rising labor costs, and last spring’s Covid concerns have prompted brands to become more wary of placing all their eggs—or sneakers, stilettos and boots—in one proverbial basket. Other well-equipped neighbors, like Vietnam, have already taken a share of China’s footwear business. But across the Pacific, another player could be rising to prominence. Brazil’s roots in footwear craftsmanship run deep, and the industry has played an integral part in the country’s economy for decades, according to Letícia Masselli, trade promotion unit coordinator for Brazilian footwear association Abicalçados. Last year alone, the South American country produced a whopping 908 million pairs of shoes. While much of that output was consumed domestically, 115 million pairs were exported to over 160 locales across the globe. What’s more, Masselli said, “The main destination of exports, since the beginning of shipments, at the end of the 1960s, is the United States.” In 2019, about 10 percent of the country’s shoe exports went to American shoppers. “There are over six thousand companies of all sizes, comprising a chain of supCARIUMA IS A BRAZIL-BASED DTC SNEAKER LABEL

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pliers and tanneries that directly employs over 340,000 workers,” she added. Despite the country’s substantial capacity for production, out-of-country sales accounted for just 14 percent of the country’s overall footwear volume last year. That’s a number that “has been growing,” Masselli said, and stands to continue to burgeon with increased investment from trade groups and the country’s government. “Since 2000, Abicalçados has been working to internationalize Brazilian footwear,” she said, through the Brazilian Footwear program, developed in partnership with the Brazilian Trade and Investment Promotion Agency (Apex-Brazil). Over the course of 20 years, the partnership has solidified relationships with more than 60 new export destinations through an initiative geared toward promoting trade, developing the industry, and elevating Brazil’s presence on the world stage through marketing efforts. But like most of the world’s economies, Brazil took a hard hit with the rise of the pandemic, which tipped the country into crisis last spring. As of early November, more than 160,000 people had perished in Brazil from the virus. Brazil’s president, Jair Bolsonaro has taken a cavalier stance toward wearing face coverings, fueling resistance to

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the potentially life-saving measure among his constituents. The spread of the virus has thrown Brazil’s economy—and its footwear sector—into a tumult. “Before, however, we had been growing,” Masselli said. “The estimate is for a decrease this year, with a more substantial recovery starting in 2021.” Abicalçados’ confidence in recovery and growth stems from the shoe industry’s investment in diversifying its product offerings to satisfy “the different needs of international buyers,” Masselli said. The country already boasts “one of the largest footwear industries in the world,” the Footwear Distributors and Retailers of America’s (FDRA) chief economist, Gary Raines, said. “Brazil is the fifth largest footwear producer, behind China, India, Vietnam and Indonesia.” Still, Raines said, the country has a long way to go in catching up to Asian markets, and even some European production hubs, when it comes to export volume and value. Currently, the country ranks No. 21 on the list of footwear exporters in value terms. “An economic downturn and a slow recovery over the last three years have hindered the industry,” he explained—and the disastrous surge in Covid cases this year has likely further blunted the footwear sector’s

FOOTWEAR FROM ABICALÇADOS MEMBER SUZANA SANTOS.

attempts to find its footing on the international stage. Brazil’s footwear focus, however, is centered on a potentially lucrative category. China once cornered the market on athletic shoes and sneakers—tough-to-make styles requiring a multitude of different inputs and materials, like foams, rubbers, leathers, textiles and plastics. In recent years, Brazil has become one of the few locales outside of Asia to take on the task of building out a self-sufficient, and sustainable, supply chain for sneaker production. “It’s not just the end product, but components and compounds brands may be using in production elsewhere that could be considered as we look at Brazil,” Andy Polk, vice president of the FDRA told Sourcing Journal. The country’s robust network of leather tanneries is a massive asset to Brazil’s footwear industry. According to the Centre of the Brazilian Tanning Industry (CICB), about 95 percent of all shoes produced in the region are made with Brazilian leather—and the footwear industry only eats up 10 percent of the overall volume of leather produced by domestic tanneries. A spokesperson told Sourcing Journal that the use of leather in footwear production only stands to increase, as a result of a “global trend” toward higher-quality products made with materials like sustainably tanned leather. Half of the Brazil-made shoes bought by American shoppers are made of leather, according to Abicalçados. The country also exported more than $91 million worth of leather in October alone, amounting to about 16 million square meters of hide. More than one-fifth of that product went to China, while more than 17 percent was bought by the U.S. Brazil’s footwear sector is also “working pretty hard on new sustainable components, materials and chemistry in particular, some of which is coming to market now,” FDRA’s Polk added. As e-commerce continues to grow, so too does the breadth of opportunity for digitally native startups with unique product offerings that focus on sustainability. Two-year-old Brazil-based DTC sneaker label Cariuma reinvented the standard makeup of a casual cup-sole lace-up with a tight roster of materials that reads more like a recipe than a list of inputs for a shoe.

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Regenerative bamboo fiber uppers, sugarcane-based midsole foam and raw rubber from the country’s Amazon rainforest are a few of the ingredients the company has developed to cut out waste and entice a new generation of conscious consumers—and all of those components are made, grown and harvested locally. It-girl favorite Veja also sources and produces in the country, selling its sneakers chiefly online to an international audience. The brand, spotted frequently on sartorial icons like Megan Markle, touts its network of Brazil-based supply chain with pride, mapping out the locations of cotton crops, spinning facilities, rubber harvesting locales and more on its website, playing into the growing demand from young shoppers for more transparency.

Polk believes that “niche, sustainable sneaker brands” will continue to sprout up in the country, though their collective impact is yet to be seen. “I do not know how much they might be able to scale up in the U.S. market, or how large they may get, but there are some great minds at work there.” The country’s footwear suppliers and component manufacturers aren’t sleeping on the opportunity to engage an international audience of brands despite the year’s unprecedented challenges, according to Kelly Helfman, commercial president for Informa Markets Fashion, which hosts industry events like the Magic trade show in Las Vegas and its adjacent Sourcing show.

THE VEJA STORE IN NEW YORK.

“I do not know how much they might be able to scale up in the U.S. market, or how large they may get, but there are some great minds at work there.” —Andy Polk, FDRA

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ALTERNATIVE FINANCING ADDS FLEXIBILITY TO OVERCOME CASH FLOW CRUNCH Between slowing sales and stalled orders, liquidity has been a prime consideration for fashion companies during the Covid-19 crisis. But some of the methods used to navigate financial obstacles have tested and strained supply chain partnerships. According to Peter Maerevoet, chief financial officer of Tradewind Finance, diversification should be the leading priority for both retailers and suppliers in 2021. “Though relationships that have survived the pandemic may be able to continue like they have been, other business partners that were teetering on failure should reevaluate their options,” he said. Here, Maerevoet discusses the top takeaways and outlook for trade financing this year. Which key lessons should the fashion industry have learned from Covid? Don’t jump ship on your supply chain, for one. Many retailers panicked with Covid, and though in fact it’s been an unprecedented set of circumstances, stopping payments to suppliers shook things up even more. A key takeaway for buyers is to consider their options, especially those that can have long-term benefits for their supply chain. Another lesson the industry was reminded of is that innovation is imperative, especially to cater to demand. Being creative and adjusting your product line will help your business sustain economic upheaval and consumer shifts like what we’ve seen with the pandemic. How can fashion firms best generate liquidity during this time? Alternative financing is one way a fashion business can access capital, even during an economic crisis. While banks may tighten their lending standards, trade finance companies like Tradewind Finance have the flexibility to finance extended payment terms with buyers, up to 180 days. Factoring and reverse factoring are based on the purchase of receivables in exchange for funds. Unlike a bank loan, these types of financing do not need to be paid back. In what ways do you foresee financing changing as a result of the pandemic? What should companies expect when it comes to financing in the next year? We might see finance companies looking at their prospects with a closer lens to see how much information is available to vet them better, to see what the relationships are like with their supply chain partners, and to see if they are living up to modern-day standards, like practicing sustainability where they could. Companies will most likely have different financing options available to them, but will have to pass due diligence measures that may have been absent in the past.

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While Brazilian footwear brands have attended the show as exhibitors of finished products, the fall 2020 market, which is taking place virtually due to Covid constraints, has seen footwear suppliers from the country in attendance for the first time. “They approached us with the interest of their brands to extend manufacturing to produce for U.S. buyers,” Helfman said. The 13 exhibitors on the Sourcing show platform currently have been “heavily featured and marketed,” she added, generating new interest from footwear buyers. “Their manufacturers are very capable and experienced,” and that wide-ranging expertise, which spans multiple categories, has resonated with brands looking to divert or diversify sourcing to new and potentially closer markets. In addition to leather footwear, Brazil has developed an expertise in rubber and plastic styles, Helfman said, and many manufacturers are adept at providing full-service, design-to-production aid to partners. “Brazil’s complete and integrated supply chain results in shorter lead times, faster deliveries, high production quality, flexibility with negotiation terms of volume, and competitive pricing,” she added. “These are all highlights.” Helfman believes that the Sourcing show stands to give Brazil’s footwear producers a new platform for showcasing their skills to an international audience, after primarily serving their domestic market for years. “They’re receiving more and more contacts of buyers and international groups interested in understanding their alternatives to producing in Asia,” she said. With the U.S. being the country’s current primary export destination, Brazilian manufacturers have seen “stronger movement” from American brands in recent months. Helfman expects to see Brazilian footwear suppliers play a more robust role in future exhibitions, as the trend toward supply chain diversification shows no signs of slowing. While competitors across the globe are honing their skills and building out their capabilities, she believes Brazil is gathering meaningful momentum. “Brazil’s footwear strength and options are becoming wellknown worldwide,” she said.

Canadian Cachet: Trade North of the Border WHILE MOST OF ITS DOMESTIC PRODUCTION DISAPPEARED IN THE EARLY 2000’S, CANADA’S TRADE STATUS COULD MAKE IT A POPULAR SOURCING DESTINATION IN THE YEARS AHEAD. L I Z WA R R E N

s the industry’s demand for more ethical, transparent supply chains increases, so does the emphasis on place of origin. And for Canada, a country with three levels of governance and notoriously high standards of living, this opens a realm of possibilities for apparel production—specifically in the denim space. Today, aside from the “Canadian tuxedo,” Canada is not otherwise closely associated with denim—but it once was. Canadian news outlet The Globe and Mail reported that, in 1996, heritage denim brand Levi’s had a total of 34 plants in North America, and began shutting down locations the following year. By 2003, Levi’s closed its last three remaining plants in Canada. According to Sydney Beder, senior design director at Beder and Co. and Roots, Canadian production started taking a dive as far back as the ‘80s when companies first set their sights on developing countries for a quick cost reduction.

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“The entire Canadian domestically produced garment industry was almost wiped out during this period, as off shore imports with their substantially lower prices became the norm,” he told Sourcing Journal, adding that most of the denim looms used in Canada were eventually sold off or dismantled. “When I first started in the industry, there was a large number of denim brands actually producing in Canada,” he said. “There were choices, and it was a great time. Since then, for some reason that’s fallen away.” Beder called attention to Canadian denim brands of past and present such as Second Jeans, Hash Jeans, Rainbow Jeans, Silver Jeans, Parasuco and Naked & Famous, the latter of which remains possibly the most well-known Made in Canada denim brand. A Canadian resident, Beder is known throughout the denim community for bringing premium brands to Canada and breaking the $100 price point during his time as a distributor in the late ’80s, when that was a significant price tag for denim.

“To be able to make within a country that has 14 active trade agreements globally, and is the only G7 country that has trade agreements with all other G7 countries, I think that in itself adds a lot of value when you look at dollars and cents from a sourcing perspective.” —Kathy Cheng, WS & Co”

Despite denim production since moving elsewhere, denim sales in Canada remain strong, signaling the market is ripe for denim labels and retailers to explore new opportunities. According to global data platform Statista, Canadian denim sales amounted to $1.8 billion in 2017, an increase from $1.7 billion the previous year. And now, with the Covid-19 pandemic shining a light on the need for local production, the time could be ripe for transforming Canada into a production destination once again. This very subject was a point of discussion at Kingpins24 Canada late last year, with panelists discussing the pandemic’s impact on fashion’s future. “The consumer seems to be interested in supplying local,” said Beder. “Some of the larger Canadian retailers are looking at strategies to produce more goods locally, having faced challenges with on-time offshore production and shipping delays due to the pandemic.” Kathy Cheng, president of Canadian apparel manufacturer WS & Co., is also optimistic. “I’m excited,” she said. “If we continue to educate and if we have new generations of consumers being more inquisitive, and the more we speak about the country of origin, I think there are opportunities for brands [to invest in Canadian infrastructure].” Cheng’s company is rooted in celebrating Canadian makers, and refers to itself as a “proudly Canadian boutique-style garment manufacturer, whose reputation for high-quality, bespoke activewear and quick-turnaround apparel is as big as the country in which we so proudly operate.” Since it was founded in 1988, the company has been focused on amplifying local makers and democratizing entrepreneurship.

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Cheng feels there’s hope for bringing production back home, and attributes her sentiments to the Covid-19 pandemic. “Covid’s really been a wakeup call for a number of countries and regions realizing that, as much as global trade is important, sustaining some type of infrastructure for different industries in manufacturing is also important,” she said, adding that supporting domestic manufacturing should be done year-round, and not just when it’s convenient. That said, she still believes in the importance of global trade—and noted that Canada has a leg up on other countries in that sense as well. “One thing people aren’t really thinking about when looking at the country of origin is whether it’s taking advantage of trade agreements,” she said. “With the world being the way it is and all the trade imbalances, to be able to make within a country that has 14 active trade agreements globally, and is the only G7 country that has trade agreements with all other G7 countries, I think that in itself adds a lot of value when you look at dollars and cents from a sourcing perspective.” Re-establishing Canada’s production capabilities will require an investment from all parts of the supply chain, as well as from the end consumer—another reason why education is essential. Fortunately, Cheng notes that wider adoption throughout the industry will help drive the cost down. “Every layer of the supply chain needs to invest,” she said. “If we reinvest in the local infrastructure, then there’s more buying power; there’s more abundance. If there are more suppliers, that will also drive the price down. It’s supply and demand 101. Will it ever get to the level of fast fashion? Probably not. But can we bring it down a little bit? I do believe so.”

NAKED & FAMOUS IS PERHAPS THE MOST WELL-KNOWN CANADIAN DENIM BRAND.

Raw Material Outlook Fragile Amid Economic Uncertainty A LESSENING OF GLOBAL DEMAND HAS PUT DOWNWARD PRICE PRESSURE ON COTTON AND SYNTHETIC FIBERS. A RT H U R F R I E D M A N

he global raw materials market has been stuck in the thicket of the worldwide economic crisis resulting from the pandemic and the outlook, according to many, is murky at best. From natural fibers to synthetics, the normal flow of supply and demand has been disrupted more severely than even the Great Recession of 2008-2009, executives contended. Cotton prices have made a comeback from the 50-cents-a-pound level in the heart of the U.S.-China trade war when exports tumbled. Cotton Incorporated noted in its November monthly analysis that all international benchmark prices increased over the previous month. The New York December futures contract climbed from 67 cents to as high as 72 cents per pound before easing back to 70 cents. The Cotlook “A” Index, an average of global prices, rose from 73 cents to 76 cents in the same period. U.S. spot cotton prices averaged 65.02 cents per pound for the week ended Nov. 5, down from 66.19 cents per

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pound the previous week, but up from 61.09 cents a year earlier, according to the U.S, Department of Agriculture (USDA). “The largest increase in prices over the past month was in China,” Cotton Inc. said. “A portion of the gains in Chinese prices has been attributed to speculative forces. However, speculators make trades for a reason, and a range of potential explanations have been offered.” These include concerns over the availability of high-quality fiber to Chinese mills. Cotton Inc. noted that the U.S. crop suffered a series of hurricanes that passed over a lot of acres with exposed bolls. This is expected to impact U.S. fiber quality, but the extent of that damage will not be known until the cotton has been pulled from fields and run through classing. “Collectively, the issues associated with production and international trade could be considered sources of support for prices,” Cotton Inc. said. “However, these factors have to be balanced against the context of global stocks. With COVID and its effects on demand last crop year, the world

made the second-largest addition to stocks on record. Even with the slight downward trend in global harvest estimates in recent months, projections for this crop year’s production still call for another surplus of 2.1 million bales.” Synthetic fiber prices have been soft on lagging demand and slipping market share. The U.S. Producer Price Index for synthetic fibers was down 0.7 percent in September compared to August and was 0.45 percent below year-earlier levels. Unifi Inc., in reporting net sales for the first quarter ended Sept. 27 fell a year-overyear 21 percent to $141.5 million, said the decline was primarily the result of lower global demand and lower selling prices in connection with lower raw material costs. Unifi’s polyester segment experienced a strong demand and order flow compared to

THE RISE AND FALL

the fourth quarter of 2020, but was lower on a year-to-year basis. “Raw materials remain stable for this segment and we believe that the short-term outlook remains unchanged,” Ingle said. Stefan Doboczky, CEO of cellulosic fibers maker Lenzing Group, said the company “reacted quickly to the increased pressure on prices and volume caused by the COVID-19 crisis and consequently held its ground in this extremely difficult market environment due to a comprehensive set of measures.” Lenzing said as of Sept. 30, the price for standard viscose in China was down 2.6 percent for the year. However, on average the price for standard viscose was still 24.8 percent lower than in the comparative period of the previous year. “The general slump in demand on the fiber market, coupled with a significant price

From a Covid nadir of slightly above 48 cents a pound, cotton prices have rebounded strongly. 13.2%

0.75

10.0%

0.73 5.0% 0.70 0.0%

0.68 0.65

–5.0%

0.63 –10.0% 0.60 –15.0%

0.58 0.55

–20.0%

0.53 –25.0% 2020

Feb

Mar

Apr

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May

Jun

Jul

Aug

Sep

Oct

Nov

The pandemic has shown that supply chains need to be resilient and equipped with a fallback plan. As the coronavirus shut and/or slowed down production in various parts of the globe, retailers with diversified sourcing strategies were able to more easily pivot and avoid significant disruption. Hermann Chiu, managing vice president for strategic sales at South Korea-based garment manufacturer Hansae, says the number one lesson that fashion brands should have taken away from Covid is the need for further diversification to mitigate risk. With factories in Vietnam, Guatemala, Haiti, Indonesia, Myanmar and Nicaragua, as well as a recently opened personal protective equipment plant in the United States, Hansae is positioned to deliver this geographic diversity for American and European clients. The challenges of 2020—from overstocks to transportation delays—have also ignited more interest in nearshoring to improve lead times, create trend-right products and reduce inventory. Sourcing Journal spoke to Chiu about the company’s own U.S. onshoring move and what the producer expects from 2021. What are the top concerns you’re hearing from your customers about 2021? Our customers are concerned about the long-lasting effects of the pandemic and the vulnerability of the supply chain. The pandemic continues to impact all the major production countries sporadically, so there is a concern about getting product delivered on time. Getting the right product on time is essential due to buying plans being more conservative. What is the most important investment or innovation needed for supply chains to successfully navigate the next year? Continued investment in automation and robotics will be important to navigate the marketplace. Supply chain automation with robotics will be important to be more agile. Nearshoring has been gaining ground as companies look to minimize risk. How has Hansae capitalized on this trend? Hansae has current facilities in Cap Haitian and Central America to service our customers. In October of last year, we opened our first operation in the U.S. making medical-grade surgical masks. We are exploring other opportunities to make another PPE item in the U.S., which would help us develop the capability to make an apparel item as well, provided the price structure would work. Even in the midst of uncertainty, what makes you most optimistic about 2021? The omnichannel business continues to drive the market, and consumers seem to have switched to this buying mentality. Also, Black Friday was exceptional in the aspect of gross sales and the shipping delays from the retailers.

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GEOGRAPHIC DIVERSITY KEY TO GUARD AGAINST SUPPLY CHAIN RISKS

gap to other fiber types, also had a negative effect on the prices of wood-based specialty fibers.” Lenzing said. “A significant increase in demand led to a gradual recovery of prices towards the end of the third quarter. The prices for dissolving wood pulp, the main raw material for the production of woodbased cellulosic fibers, recorded a development similar to that of standard viscose during the reporting period.” Wool has seen a long-term price and demand decline based on global economic conditions and local issues involving supply, from droughts in Australia to farmers opting for more profitable land usage. According to USDA, the Australian Eastern Market Indicator was up 1 cent to $11.89 per kilogram for the week ended Nov. 13 compared to the prior week. “The wool industry is no stranger to big price movements, but the recent adjustments are far more radical, both in magnitude and velocity,” Australian Wool Innovation said. “This is indicative of the current operational methodology of minimal to zero risk appetite of stock or forward exposure by both buyer and seller.”

Shipping Notes SHIPPING PRICES HAVE ESCALATED DUE TO CARGO SPACE SHORTAGES IN 2020, OFTEN MAKING AIR SHIPPING RATES ASTRONOMICAL. GOING BY BOAT? HERE’S HOW LONG IT TAKES FROM KEY SOURCING NATIONS TO THE U.S. China

24—31 days

Vietnam

28—33 days

India

30—36 days

Bangladesh

28—34 days

Indonesia

30—35 days

Peru

17—20 days

Brazil

24—28 days

Honduras

9—10 days

Nicaragua

9—11 days

Cambodia

29—34 days

Guatemala

9—11 days

Myanmar

29—36 days

Pakistan

27—33 days

Philippines

26—31 days

Sri Lanka

32—39 days

Turkey

25—30 days

Egypt

26—31 days

SOURCE: FREIGHTOS.COM

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