Tomorrow’s successful apparel companies will be those that take the lead to enhance the apparel value chain on two fronts: nearshoring and automation. Both must be addressed, and in a sustainable way. Apparel companies can no longer conduct business as usual and expect to thrive. Recently a report on State of Fashion 2019 by McKinsey mentioned to meet customers’ needs, apparel companies need to focus on nearshoring, automation and sustainability. The report is generated by Johanna Andersson, Achim Berg, Saskia Hedrich and Karl-Hendrik Magnus. Here the key points are complied by Fazle Rabby, Research Assistant, Textile Focus.
Two decades ago, USA and European mass-market apparel brands and retailers rushed to shift production to Asia to gain a cost advantage. Since then, they have doubled down on this low-cost strategy, moving production from China to even more cost-efficient frontier markets. Apparel players that have successfully done this, while still ensuring high quality, speed and compliance have traditionally been able to deliver products that consumers want, at competitive prices.
Now, however, a perfect storm of factors is changing this calculus by making it critical for companies to bring new styles to market more quickly and switch out lines mid-season. Internet shopping and stagnation in key markets have made competition fiercer than ever and consumer demand more volatile and difficult to predict. Mass-market apparel brands and retailers are competing with pure-play online start-ups, the most successful of which can replicate popular styles and get them to customers within weeks. Furthermore, apparel companies’ marketing departments have lost much of their clout in trendsetting, with today’s hottest trends now determined by individual influencers and consumers.
The pressure for smaller batch sizes and on-demand replenishment is driven partly by profitability, but also by a desire for sustainability. Consumers are becoming increasingly aware of the environmental impact of traditional linear Apparel production modes, and public outcry around overstock liquidation is becoming louder (about three percent of unsold apparel is liquidated).
Some 78 percent of sourcing managers believe that sustainability will also be a somewhat or highly likely key purchasing factor for mass-market apparel consumers by 2025.
Nearshoring Opportunities and Challenges:
In addition to concerns about the ecological footprint of offshore sourcing, rising wages for factory workers across Asia mean production in the Far East is no longer as cost-efficient as it used to be. For instance, labour costs in China in 2005 were one-tenth of those in the US; today, they are about one-third. In some near-shore markets, the gap between near-shore and offshore labour costs has disappeared: today, for example, Mexico offers lower average manufacturing labour costs than China. In near-shore countries for the Western European market, manufacturing labour costs are still higher than those in China, but the gap is shrinking: whereas hourly manufacturing labour costs in Turkey were more than five times higher than those in China in 2005, in 2017 the gap was only 1.6 times.
And that’s before transportation is taken into account. Today, even from a mere landed-cost price perspective, near-shoring can be economically viable in certain cases due to savings in freight costs and customs duties. For instance, a US apparel company that moves production of basic jeans from either Bangladesh or China to Mexico can maintain or even slightly increase its margin, even without higher full-price sell-through. For Europe, as another example, reshoring from China to Turkey can reduce landed-cost prices for denim by 3 percent. Near-shoring works where full onshoring doesn’t: bringing production back to the US or to Germany will not yet result in breaking even. From a landed-cost perspective it is becoming more attractive for production to move closer, but not to come all the way home. But the real prize is shorter lead times. By reducing time-to-market, companies can produce more closely in line with demand, reducing overstocks and increasing full-price sell-through. For example, increasing full price sell-through by 5 percent as a result of shifting to demand-focused processes not only makes near-shoring in Mexico even more attractive, but also takes US onshoring to break-even. In this paradigm, sourcing considerations move from a focus on cost alone to a focus on increasing the net product margin and on avoiding wastage. Despite its attractiveness, the apparel manufacturing industry in near-shore countries in the Americas, Turkey, Eastern Europe or North Africa still lags the Asian manufacturing powerhouses. The current import volume from the five biggest near-shoring markets to the US, for example, does not even account for half of the US imports from China. The industry is more fragmented and quality and labour productivity in some near-shore countries is more volatile. Near-shoring also creates a new set of trade-offs and challenges with regards to industry structure, productivity, operating model, sustainability and supply. The biggest challenge currently is sourcing raw materials, fabrics and ingredients for mass-market apparel. Only a co-located value chain can offer the full speed and flexibility promised — without it, the longer lead times just shift further up the value chain. However, the current bulk of production and consumption of the main fiber types is still centered in Asia, especially China.
The Potential for Automation:
Near-shoring and automation go hand-in-hand. Near-shoring — and, in some cases, onshoring — will make even more economic sense as technology develops, because automation will increase labour productivity and offset higher labour costs in near- and onshore production. Mass-market apparel brands and retail buyers will consider automation capabilities when deciding where to manufacture products in the future, in addition to the commercial importance of shorter lead times and cost efficiencies mentioned above. Local governments and garment industries in near-shore and onshore locations will also need to build the skills and capabilities needed for advanced manufacturing among their workforces.
To date, the apparel industry lags other sectors when it comes to automation. Neither automation nor advanced manufacturing have been a priority for apparel buyers. One reason is that they have relied on relatively low labour costs in the core Asian and other low-cost sourcing markets. Automation also presents technical challenges, especially in sewing: only recently have fully-automated solutions for sewing become market-ready. But now, as on-demand production gains importance and technologies develop, automation is becoming more relevant for US and European mass-market apparel players, especially combined with near- and onshoring. Recent advances in technology span the whole gamut from sewing to gluing, knitting and finishing to warehousing and intralogistics.
For certain products, automation will not only make near-shoring more attractive for US and European mass-market apparel brands and retailers, but it will also make onshoring to the US economically viable in the future. The overall impact is considerable: assuming all key technologies currently in development are implemented in the future, about 40 to 70 percent of labour time can be reduced through automation. From a pure cost perspective, automation levels the playing field and makes Mexico cost-competitive with Bangladesh. Even onshoring from China to the US achieves break even from a pure cost perspective if the optimistic 70 percent labour time reduction can be achieved. For European markets, the economic viability of near- or onshoring also improves with automation. Onshoring to a higher labour cost country such as: Germany, however, does not break even in any of the scenarios. When additional commercial benefits arising from increased speed and flexibility are added to the mix, the case for implementing advanced manufacturing technologies in near- and onshoring markets is even stronger. The next decade will be critical for the adoption of automation. Executives are bullish about the future of automation. In our survey, 82 percent of respondents believe that simple garments will be fully automated, leading to an 80 percent labour reduction by 2025. 70 percent think that it is highly or somewhat likely that more complex garments, such as dresses and jackets, will be significantly automated (resulting in a 40-percent labour reduction.) Within five years, semi-automated factories could enable near-shoring and selected lighthouse projects of new business models, such as store factories, that could help build customer excitement. Within five to ten years, suppliers with fully automated factories could enable full on-shoring. More complex silhouettes will be semi-automated within a decade.
Sustainability:
Near-shoring and automation have environmental and social benefits, in addition to the commercial benefits described above. By bringing production closer to home and investing in advanced manufacturing, companies in the apparel sector will become more sustainable and less wasteful by reducing overproduction and decreasing the ecological footprint from reduction of transport. Taken together, near-shoring and automation could enable a circular value chain.
How to Get Started:
Looking at the trajectory of both consumer preferences and the development and adoption of automation technologies, mass apparel brands and retailers should embark on the journey toward a demand-focused value chain now or risk losing touch with their consumers. To position themselves for success, they need to take four actions:
- Define their future sourcing and production strategy,
- Nurture new skills and capabilities
- Build an ecosystem of partnerships and
- Dig in to accelerate the learning curve.
Strategy:
Knowing where they want to go and how to get there will be crucial for mass-market apparel brands and retailers. Near-shoring and automation will not make financial sense for every single product. Decisions on the future production footprint of each product type should be based on two main criteria: the feasibility of near-shoring and the commercial value of reducing lead times. Companies should model different financial scenarios to develop a fact base that guides their strategy.
Labour intensity and automation feasibility vary greatly between different product and design types but are mainly driven by the same characteristics: for instance, number of pieces, finishing and intricate details, movement of parts and type of raw materials. Taking these factors into account when classifying a product helps mass-market apparel brands and retailers establish a high-level view of what the future holds when it comes to the sourcing and production footprint.
Skills and mindsets:
A new, demand-oriented supply chain requires a very different mindset and skillset — more consumer oriented and more agile. The traditional approach of cost orientation from more traditional sourcing optimization will not be sufficient. Access to talent will be a major success factor in creating the supply chain of the future. The biggest talent gap today is likely in digital or advanced manufacturing and managing intelligent sourcing decisions in the more complex apparel value chain. Brands and retailers will need more talent who can develop or identify winning technologies, making the decision on where to build new technologies themselves versus forming partnerships or acquiring new capabilities.
Partnerships:
In a world where innovation is taking place at breakneck speed and where there is still uncertainty about which technologies will create real value, partnerships will be critical for building a sustainable competitive advantage. Apparel brands and retailers will need to forge relationships with global mega-suppliers to build manufacturing capacity and capabilities in new geographies. They will also need to collaborate with technology companies to develop innovative automation solutions since, currently, neither apparel brands nor (most) manufacturers are likely best positioned to develop disruptive technologies. Financial partners such as private equity or venture capital firms can also play a critical role in the ecosystem, making capital investments to build local end-to-end supply chains in frontier near-shore countries.
Digging in:
Starting the near-shoring journey now, rather than waiting for automation to further improve the economics, is critical for those who want to leapfrog the competition. Near-shoring some product lines and categories already makes economic sense; even for product lines that are not yet economically favorable, it could be a worthwhile investment for brands to make a slightly lower profit to gain an edge on competitors. In addition, apparel companies should place several bets, e.g. collaborate with manufacturers, invest in technology firms and recruit talent for in-house engineering. Technological advances have pushed automation in apparel manufacturing to the brink of a breakthrough, and further investment could very soon lead to a disruption. Apparel companies that are active in driving the development should expect to see great returns. The disruptions ahead are so profound that mass-market apparel players making big moves and capturing the advantages of near-shoring and automation will have a significant first-mover advantage. The business models they build will drive growth and be difficult for others to replicate. As it turns into a source of competitive advantage, sourcing and supply chain management has completed its journey from mere savings generator to focus topic on the chief executive agenda. Although apparel manufacturing may not be coming home in the near future, some of the production will at least be moving ever closer — and mass-market apparel brands and retailers will want to be prepared.
