Evolving Sourcing Strategies of U.S. Apparel Companies

The full article is available HERE

To better understand companies’ latest sourcing practices, we recently examined the detailed sourcing portfolios of the 50 largest U.S.-based apparel companies ranked by the Apparel Magazine. Specifically, we conducted a content analysis of each company’s publicly released annual reports and their financial statements from 2014 to 2017 (the latest information available), with a focus on the following two research questions: 1) How have the sourcing strategies of U.S. apparel companies evolved? 2) How have the evolving sourcing strategies affected companies’ financial performance? Here are the key findings:

First, U.S. apparel companies overall adopt a diverse sourcing base. Among the 50 companies we examined, on average they sourced from over 20 different countries or regions using more than 200 vendors in 2017. These results echo the findings of the 2018 U.S. Fashion Industry Benchmarking Study released by the U.S. Fashion Industry Association (USFIA) in July. Based on a survey of nearly 30 executives from leading U.S. fashion brands and apparel retailers, the study also found companies with more than 1,000 employees typically source from more than ten different countries and regions. Also, larger companies, in general, adopt a more diverse sourcing base than smaller ones.

Second, while U.S. apparel companies are actively seeking new sourcing bases, many of them are reducing either the number of countries they source from or the number of vendors they work with. Specifically, among the top 50 U.S. apparel companies examined, around 28 percent increased the number of countries or regions they use as sourcing bases between 2014 and 2017. However, over the same period, 52 percent chose to consolidate their existing sources base, but on a small scale. Likewise, among the top 50 U.S. apparel companies examined, approximately half reduced the number of vendors they use between 2014 and 2017, compared with 33 percent that chose to source from more vendors.

Third, for risk control purposes, most U.S. apparel companies avoid relying too much on any single vendor; however, some companies have begun to allocate more sourcing orders to its largest vendors. The top 50 U.S. apparel companies we examined on average assigned no more than 10 percent of their total sourcing value or volumes to any single vendor in 2017. This practice suggests that minimizing supply chain risks is a critical consideration of U.S. apparel companies’ sourcing strategy. Nevertheless, between 2014 and 2017, around 45 percent of apparel companies we examined raised the cap slightly.

Fourth, regarding the financial implications of the adjustment of sourcing strategies, companies that diversified their sourcing bases between 2014 and 2017, in general, were able to reduce sourcing cost and improve gross margin. In comparison, U.S. apparel companies we examined that consolidated their sourcing base between 2014 and 2017 suffered a slight decline in their gross margin percentage.

On the other hand, however, there was no clear pattern between a company’s choice of sourcing strategy and their net profit margin. While multiple factors could come into play, one possible explanation for the results is that that either diversifying or considering the sourcing base would incur additional management cost for the company.

Recommended citation: Luetje, J., & Lu, S. (2018).How do apparel sourcing shifts impact the bottom line?. Just-Style. Retrieved from https://www.just-style.com/analysis/how-do-apparel-sourcing-shifts-impact-the-bottom-line_id134604.aspx

Regional Supply Chain Remains an Import Feature of World Textile and Apparel Trade

The full article is available HERE

Key findings:

The deepening of the regional production and trade network(RPTN) is a critical factor behind the increasing concentration of world textile and apparel exports. RPTN refers to the phenomenon that geographically proximate countries form a regional supply chain.

In general, three primary textile and apparel regional supply chains are operating in the world today:

Asia: within this regional supply chain, more economically advanced Asian countries (such asJapan, South Korea, and China) supply textile raw material to the less economically developed countries in the region (such as Bangladesh, Cambodia, and Vietnam). Based on relatively lower wages, the less developed countries typically undertake the most labor-intensive processes of apparel manufacturing and then export finished apparel to major consumption markets around the world.

Europe: within this regional supply chain, developed countries in Southern and Western Europe such as Italy, France, and Germany, serve as the primary textile suppliers. Regarding apparel manufacturing in EU, products for the mass markets are typically produced by developing countries in Southern and Eastern Europe such as Poland and Romania, whereas high-end luxury products are mostly produced by Southern and Western European countries such as Italy and France. Furthermore, a high portion of finished apparel is shipped to developed EU members such as UK, Germany, France, and Italy for consumption.

Western-Hemisphere(WH): within this regional supply chain, the United States serves as the leading textile supplier, whereas developing countries in North, Central andSouth America (such as Mexico and countries in the Caribbean region) assemble imported textiles from the United States or elsewhere into apparel. The majority of clothing produced in the area is eventually exported to the UnitedStates or Canada for consumption.

Associated with these regional production and trade networks, three particular trade flows are important to watch:

First, Asian countries are increasingly sourcing textile inputs from within the region. In2017, close to 80 percent of Asian countries’ textile imports came from other Asian countries, up from around 70 percent in the 2000s.

Second, the pattern of EU intra-region trade for textile and apparel stays strong and stable. Intra-region trade refers to trade flows between EU members. In 2017, 55 percent of EU countries’ textile imports and 47 percent of EU countries’ apparel imports came from within the EU region. Over the same period, 68 percent of EU countries’ textile exports and 75 percent of their apparel exports also went to other EU countries.

Third, trade flows under the Western-Hemisphere textile and apparel supply chain are becoming more unbalanced. On the one hand, textile and apparel exporters in the Western-Hemisphere still rely heavily on the region. In 2017, respectively as much as 80 percent of textiles and 89 percent of apparel exports from countries in the Western Hemisphere went to the same region.  However, on the other hand, the operation of the Western-Hemisphere supply chain is facing growing competition from Asian suppliers. For example,  in 2017, only 24.8 percent of North, South and Central American countries’ textile imports and 15.7 percent of their apparel imports came from within the region, a record low in the past ten years.

Look ahead, it will be interesting to see how will the reaching and implementation of several new free trade agreements, such as CPTPP, RCEP, EU-Vietnam FTA, and the potential US-EU and US-Japan FTAs,  affect the regional pattern of world textile and apparel trade.

Recommended citation: Lu,S. (2018). How regional supply chains are shaping world textile and apparel trade. Just-Style. Retrieved from https://www.just-style.com/analysis/how-regional-supply-chains-are-shaping-world-textile-and-apparel-trade_id135021.aspx

Apparel Specific Rules of Origin in NAFTA 2.0 (US-Mexico-Canada Free Trade Agreement)

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The full article is available HERE

Key findings:

First, in general, USMCA still adopts the so-called “yarn-forward” rules of origin. This means that fibers may be produced anywhere, but each component starting with the yarn used to make the garments must be formed within the free trade area – that is, by USMCA members. 

Second, other than the source of yarns and fabrics, USMCA now requires that some specific parts of an apparel item (such as pocket bag fabric) need to use inputs made in the USMCA region so that the finished apparel item can qualify for the import duty-free treatment.

Third, USMCA allows a relatively more generous De minimis than NAFTA 1.0.

Fourth, USMCA seems to be a “balanced deal” that has accommodated the arguments from all sides regarding the tariff preference level (TPL) mechanism:

  • 1) Compared with NAFTA, USMCA will cut the TPL level, but only to those product categories with a low TPL utilization rate;
  • 2) Compared with NAFTA, USMCA will expand the TPL level for a few product categories with a high TPL utilization rate.

Fifth, USMCA will make no change to the Commercial availability/short supply list mechanism in NAFTA 1.0.

Sixth, it remains to be seen whether USMCA will boost Made-in-the-USA fibers, yarns and fabrics by limiting the use of non-USMCA textile inputs. For example, while the new agreement expands the TPL level for U.S. cotton/man-made fiber apparel exports to Canada (currently with a 100 percent utilization rate), these apparel products are NOT required to use U.S.-made yarns and fabrics. The utilization rate of USMCA will also be important to watch in the future.

About USMCA

On 30 September 2018, The United States reached an agreement with Canada, alongside Mexico on the updated North American Free Trade Agreement (NAFTA), now called the United States-Mexico-Canada Agreement (USMCA)

Before taking into effect, USMCA still needs to be ratified by all member countries. In the United States, the earliest that President Trump can sign the agreement will be 11/29/2018 (i.e., 90 days after notifying the Congress). The U.S. International Trade Commission has until 3/14/2019 (i.e., 150 days after President signing the agreement) to release an assessment of the new trade agreement. Afterward, the Trump Administration will need to work with the Congress to develop legislation to approve and implement the agreement.

Sourcing Strategies of U.S. Fashion Brands and Apparel Retailers: Discussion Questions from FASH455

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#1 Assume you are a sourcing manager for a major US fashion brand, how would you rank the followings regarding importance when determining a sourcing destination: 1) Speed to Market; 2) Sourcing Cost; 3) Risk of Compliance; 4) other factors (please specify). Why would you rank them as such?

#2 According to the 2018 US Fashion Industry Benchmarking Study, some apparel retailers report sourcing from more than 10 or even 20 different countries or regions. What are the benefits of adopting such a diversified sourcing base? Is it necessary?

#3 How has President Trump’s trade policy agendas affected U.S. fashion brands and apparel retailers’ sourcing strategy? What could be the long-term effect and why?

#4 U.S. fashion brands and retailers plan to source less from China and move towards other apparel suppliers like Vietnam or Bangladesh. Is this a short-term response or a reflection of companies’ adjustment of its long-term sourcing strategy? Why?

#5 Most U.S. apparel companies have already shifted their businesses to non-manufacturing activities such as design, branding, sourcing and retailing. Why or why not do you think it is still meaningful to give attention to apparel manufacturing in the U.S.?

#6 Based on the 2018 US Fashion Industry Benchmarking study, why or why not do you think U.S. fashion brands and apparel retailers have given enough attention to sustainability and social responsibility issues in their sourcing practices? What could be done further?

#7 Any other topics/questions do you think next year’s US Fashion Industry Benchmarking Study could include and why?

[For FASH455: 1) Please mention the question number in your comments; 2) Please address at least two questions in your comments]

USITC Releases New Study on the State of the U.S. Textile and Apparel Manufacturing Sector

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A recent study released by the U.S. International Trade Commission (USITC) provides a comprehensive review and valuable insights into the state of textile and apparel manufacturing in the United States. According to the study:

First,  data suggests a mixed picture of the recovery of textile manufacturing in the U.S.

  • Total capital expenditures in plants and equipment for the textile sector increased by 36 percent in the 2013–16 period. Interesting enough, much of the new investment is by foreign firms, including new investments by Chinese and Indian firms, as well as by firms from Mexico, Canada, Turkey, and Saudi Arabia.
  • U.S. textile shipments increased in 2017 to $39.6 billion, but remained 3 percent below the 2013 level. The result suggests that rather than simply increasing capacity, some of the new investment is likely replacing existing equipment, as firms upgrade and modernize their manufacturing processes and/or focus their operations on different products. [Note: shipments measure the dollar value of products sold by manufacturing establishments and are based on net selling values, f.o.b. (free on board) plant, after discounts and allowances are excluded]
  • At $10.6 billion, U.S. textile exports in 2017 were also below the five-year high of $12.1 billion in 2014.
  • Employment in the textiles sector declined by 4 percent from 131,000 in 2013 to an estimated 126,000 in 2017. Meanwhile, official data on labor productivity index for yarns and fabrics show steady declines during 2013–16.

Second, some evidence suggests that reshoring has taken place in recent years in the apparel sector, although on a modest scale.

  • For the 2013–16 period, capital expenditures were up 5 percent to $301 million, suggesting capital investment in the apparel sector may be increasing, as the industry begins to adopt more labor-saving technologies.
  • Domestic shipments of apparel showed modest increases in the past two years, reaching $12.0 billion in 2016 and $12.5 billion in 2017, after a record low of $11.5 billion in 2014 and 2015.
  • Employment in the apparel sector steadily declined during 2013–17, down 21 percent from 145,000 workers in 2013 to 120,000 workers in 2017. Official data on labor productivity also showed steady declines during 2013–16.
  • U.S. fashion companies continue to source apparel from the United States, although in a relatively small amount.

Third, the advantages of making textiles and apparel in the United States include:

  • Advantages of producing textiles in the United States include local and state incentives for investment, and the benefits afforded by free trade agreement (FTA) preferences (i.e., the “yarn-forward” rules of origin) that encourage the use of U.S.-produced inputs in downstream production in FTA partner countries, energy cost and the availability and reliability of high-quality cotton. Meanwhile, product innovation and automation are important aspects of the U.S. textile sector’s competitiveness strategy.
  • Advantages of producing apparel in the United States include improved lead times, better quality control, and more flexible production. Many domestically made products also use “Made in USA” branding to capitalize on the buy-American trend and the appeal of “Made in USA.” The adoption of various automation and digital technologies to accelerate the process of product development, improve the fit of the final product and reduce the needs for skilled sewing operators may also help improve the competitiveness.  

BIS Released Assessment Report of the U.S. Textile and Apparel Manufacturing Sector

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The Bureau of Industry and Security (BIS) under the U.S. Department of Commerce recently released its assessment report of the U.S. textile and apparel (T&A) manufacturing sector. The report was based on a survey of 571 U.S. T&A manufacturers in summer 2017. These respondents include 230 textile mills (NAICS 313), 128 textile product mills (NAICS 314), and 213 apparel manufacturers (NAICS 315).

Below are the key findings of the study:

The state of the U.S. textile and apparel (T&A) manufacturing sector

  • U.S. T&A manufacturing has shrunk significantly: the value of T&A shipments (seasonally adjusted) in 2016 ($68 billion) was almost 56% decrease in real terms since 1995 ($153 billion).
  • U.S. T&A manufacturing has undergone substantial structural change: textiles and textile products accounted for 82% of the total shipments of the U.S. T&A industry as of 2016, compared to 57% in 1995. Notably, only 18% of shipments came from apparel manufacturing in 2016, compared to 43% in 1995.
  • U.S. T&A manufacturing sector is hiring less: Between 1990 and 2016, total employment decreased by 79%, from 1.7 million to 352,000 workers; over the same period, over 86% of apparel manufacturing jobs disappeared.
  • U.S. T&A manufacturers are making more capital investments: The overall total Capital Expenditures (CAPEX) of the 571 respondents increased 90 percent from 2012 to 2016 (from $1.6 billion to $3.1 billion). Particularly, the CAPEX of textile mills grew by 80 percent over that period—mostly on “Machinery, Equipment, and Vehicles.”
  • North Carolina hosted the largest number of U.S. T&A facilities (22 percent of the respondents), followed by Georgia (10 percent), and South Carolina (9 percent).
  • China, Mexico, and Canada are the most popular destinations for foreign investments by U.S. T&A manufacturers.

Competition landscape and factors

  • Respondents listed a total of 1,309 U.S. competitors and 552 non-U.S. competitors. Chinese companies were cited as the number one source of foreign competition.
  • “Quality,” “Lead Time,” and “Innovation” were the top three competitive advantages of U.S. T&A manufacturers as they related to foreign competition. “Labor Costs” was regarded as the top disadvantage of U.S. T&A manufacturing.
  • 43 percent of respondents believed that reshoring was occurring in U.S. T&A manufacturing. Almost all of these respondents believed that “Shorter Lead Times” and the “Marketability of the ‘Made in USA’ Label” were the factors driving the trend.
  • The Affordable Care Act (ACA), Minimum Wage regulations (Federal, State, and Local), and U.S. Trade Policy were the top governmental regulations and provisions cited as negatively impacting the competitiveness of U.S. T&A manufacturers.
  • 61 percent of respondents reported that they had difficulties hiring and/or retaining employees for their T&A operations, specifically production line workers such as operators and machine technicians. The skill gaps in the labor market for those positions were by far the biggest ones identified for the industry.
  • 43 percent of respondents believed that reshoring was occurring in T&A manufacturing (i.e., the practice of transferring a business operation that was moved to a non-U.S. location back to the United States.) Textile manufacturers were more likely to be aware of reshoring.

Trade and U.S. textile and apparel manufacturing

  • On average, respondents say 48 percent of their textile and textile products are “100 percent made in the U.S.”, while for apparel it was around 54 percent.
  • U.S. T&A exports dropped 10 percent between 2012 and 2016, from $2.2 billion to $1.98 billion. On average, exports accounted for only 12 percent of respondents’ total sales.
  • 33 percent of respondents considered themselves to be dependent on foreign sources for supplies, which was highest among textile mills.
  • 37 percent of respondents reported that they considered themselves to be dependent on non-U.S. sourcing for their machinery or equipment.

Berry Amendment and U.S. textile and apparel manufacturing

  • For textile mills, an average of 12 percent of U.S. output was Berry Amendment-related; for textile product mills the average was 21 percent, and for apparel production, it averaged 26 percent. 67 percent of respondents believed that the Berry Amendment had a positive impact on their organization’s business.