A Revamped Operating Model is Key to Alleviating Retail’s Sourcing Woes, Report Suggests

As countries continuously replace one another on the list of new, promising apparel sourcing destinations, a report from Kurt Salmon, part of Accenture Strategy, suggests that this is but a short-term fix. The report, “From Cost-Cutting to True Value Creation — On the Road to Analytical Sourcing and Supply Chain,” proposes a smarter long-term strategy that would require retail to adapt its operating model.

The cost of production for apparel and footwear has been steadily increasing worldwide, a trend that is unlikely to reverse anytime soon. While in the case of China this is nothing new, now even many of the so-called low-cost sourcing countries such as Bangladesh and Indonesia are seeing rising production costs.

As the chart below shows, the rate of cost increase is comparatively higher for Bangladesh, Indonesia, Pakistan and other apparel sourcing destinations that have been popular in recent years.

Source: “From Cost-Cutting to True Value Creation — On the Road to Analytical Sourcing and Supply Chain”

Companies have responded to this rise in labor costs by seeking out new and cheaper sourcing destinations such as Cambodia and Myanmar. China’s western regions, which are less developed than their eastern counterparts, are also receiving increased attention from apparel companies.

Lower costs, however, come with a trade-off, namely increased risk in the areas of operational performance, product quality and issues of corporate social responsibility. In addition, constantly seeking out new sourcing countries in order to trim costs is hardly a practical solution for the long term.

Instead, the report makes the argument for updating and reinventing current operating models. More specifically, “a close alignment between product development and supplier can play a significant role in unlocking this potential by providing true consumer value and brand differentiation with regard to product innovation, time to market, reliability and execution excellence, as well as superior technical capabilities and quality.”

In a consumer world where fast fashion has become the norm, time to market is crucial. A 2017 survey of senior sourcing executives conducted by Salmon found that time to market was considered the top priority, beating out social and environmental compliance and product quality.

The report thus makes the case for differentiated seasonal calendars that are more attuned to consumer needs and trends and use a customized mix of near and far sourcing destinations.

Retailers should also pay more attention to delivery reliability as in-store product life cycles shorten. If, for instance, a particular product is only planned to be in stores for eight weeks, a delivery delay of a week or two will have a significant effect on sell-through rates.

Check out the full report here.