Costs on the rise and the demise of transparency

It’s no secret that the global apparel industry has become more and more competitive, facing pressure to keep costs down. Since the global financial crisis, consumers have remained “price tag conscious” – the expansion of the “fast fashion” industry worldwide is testament to this. Globalisation and the effects of e-commerce have played a hand with consumers able to shop at a discount with the click of a button.

However, the biggest cost drivers are predominantly labour, followed by raw materials. In a recent McKinsey’s survey of apparel CPOs on the global sourcing map, three out of four respondents stated they expect costs to increase over the next twelve months and that rising labour expenses, especially in China, are the main growth driver. A staggering 76 percent predict their costs to rise between one and four percent while 14 percent forecast costs above that. Given the majority of global apparel manufacturing is based in China, this is especially troubling for the industry.

Pricing pressures have also led to a growing threat to brand reputation. As doing business in China becomes more expensive, many players have started shifting supply chains to countries like Bangladesh, Vietnam, India and Myanmar where labour costs are considerably less. The issue that arises from migrating the supply chain is that procurement teams are less familiar with these new locations. As a result, there’s a much greater reliance on third parties which means less transparency. This came to a head last year when the Rana Plaza garment and textile factory collapsed in Bangladesh killing more than 1,000 people, and it became evident that procurement and supply chain teams had a murky understanding of the site’s safety standards and worker conditions. These types of occurrences are a sign of lack of transparency for not just the brands involved but for consumers.

The Rana Plaza incident is a case in point of the ramifications for brands with non-transparent supply chains – the media scrutiny and consumer backlash that surrounded it put a dark light on apparel brands. The fact is, issues of exploitation and unethical treatment within the supply chain (even if it occurs several layers deep) are not tolerated by the global community. While low-cost country sourcing may make the most financial sense for the apparel industry (and many others), it doesn’t make reputational sense unless investment in transparency also happens. The notion of being globally competitive goes out the window once your brand is caught in the consumer crossfire.

So what can be done to strike the right balance? Brands can begin with these three procurement practices to ensure brand reputation and competitiveness remains intact.

Talk through the risks

Develop a risk management strategy which identifies the supply chain’s pressure points and implements solutions to reduce the impact. The first step is to undertake a comprehensive risk analysis by writing down every possible financial, operational, commercial and technical risk which could occur in the supply chain. It might scare you to think of all that could go wrong, but it’s imperative to ensure nothing slips through the cracks.

A significant action which is often side-stepped is reassessing the risks. Constantly monitor the landscape for technological, financial, environmental, social or political changes and subsequently, re-evaluate the risks to the business. Skipping this action means a brand’s risk management strategy is out of date, and hence, useless. And for many companies, it’s missing this important reminder which can lead to problems.

Once you’ve analysed the risks, develop a mitigation plan to reduce or remove their impact.  It can seem like a daunting task so focus first on the risks that not only hold the biggest commercial threat but are more likely to occur.

For example, if a lack of supply chain transparency is a concern, the associated risks can be mitigated by walking the supply chain.

Walk the supply chain

Physically and metaphorically, procurement and supply chain teams need to walk their supply chain. Start from the end product and work your way to the origin. Investigate each layer of the supply chain – the suppliers, their facilities, safety standards and working conditions. As you do so, check each factor against your company’s brand and ethical values to ensure they align.

Walking the supply chain is not about examining the first or second level, it’s about delving into the fourth or fifth level until there’s nowhere else to investigate. If media and consumers catch wind of any unethical practices in the supply chain, even if it is a fifth level supplier who has no contact whatsoever with the brand, you can still be held accountable.

Plan for the worst

Once a risk management strategy is in place and the respective mitigation actions follow, consider the impact of your decisions on the local environment, consumers and the economy. While risk management analysis takes a macro approach and considers all the possible risks which could occur, hypothesis planning considers what could potentially occur if a certain decision is made.

The best way to do this is to draft a decision map of possible outcomes. For instance, if a brand is sourcing a certain raw material, there’s a duty of care on the team to consider: a) could we be exploiting this material until there’s no resources left? b) does this material drive the local economy? and c) could we be putting other local companies out of business? These are the types of questions procurement and supply chain teams need to consider before locking in a deal, and the hypothesis planning process can help mitigate any future issues. It may seem like a hypothetical exercise is not the best use of time, but even thinking it through can help identify weak links in the supply chain.

While the apparel industry may be suffering in some parts, there are companies who have successfully managed to keep costs low and act sustainably. For example, global fashion brands Zara and H&M operate within the “fast fashion” space but are also some of the most reputable when it comes to ethical supply chains (according to Ethical Consumer’s latest product guide). These companies highlight that despite the lack of supply chain transparency that can result from cost pressures, a balance can be found if the right tactics of risk management, mitigation and hypothesis planning are undertaken.

Source: Procurious