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Insights into Asian Sourcing

Insights into Asian Sourcing

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Peter Bambridge is an Independent Industry Analyst and Consultant, who has worked for 30 years creating, selling and implementing software and services solutions for the retail and consumer goods industry; he is also one of WhichPLM’s resident authors. Peter recently attended CBX Software’s round table discussion on sourcing, and this is his exclusive report.

Increasing Challenges

For the mature markets of the retail, footwear and the apparel industry in America and Western Europe, sourcing in Asia has been seen as a cost effective alternative to on-shore and near-shore production. However over recent years, increasing resource and material costs combined with growing quality requirements and compliance concerns, have lead to a new era of global sourcing.

In this context, on 7th November 2014, CBX Software facilitated in London a breakfast round table discussion of retailers and brands with services and solution providers. This industry workshop was professionally hosted by Mark Gaydon of CBX, however the entire event was deliberately positioned as an informative and interactive workshop, and not a thinly disguised sales pitch (which I have experienced at many other similar vendor sponsored events).

The main speaker for the event was Richard Laub, the CEO of Dragon Sourcing. Richard gained extensive experience in the Asian sourcing field whilst a partner with Booz Allen Hamilton and then with Accenture. Dragon Sourcing offers end-to-end sourcing services leveraging the Asian supply markets, these services include market analysis, supplier qualification & auditing, sample development, negotiation and PO management / quality / logistics.

The new era of Global Sourcing

While Richard Laub’s expertise also ranges across Food & Beverage, Industrial products, Consumer Goods and DIY, the majority of the audience were interested in the Fashion / Retail sector as well as the wider trends.  This article reflects the insights that he shared at the event.

Richard presented some hard facts on currencies and wages in China that helped to explain why the initial 40% to 60% price reductions in China have more recently reduced to 15% to 25%.

  • The USD to RMB exchange rate was 8.27 in 2004, and is now 6.11
  • The Euro to RMB exchange rate was 10.29 in 2004, and is now 7.69
  • Average manufacturing wages in China in 2004 were 510 RMB, and are now 1560 RMB with a 10%/year growth rate

 

It is recognized that quality has been improving over recent years, but clearly the commercials are forcing companies to look elsewhere other than China and diversify their sourcing locations where resources are still more cost effective. But finding alternative sources is not so easy, as it is not all about cost.

Re-shoring is continuing to grow in the US with factories being re-established. However the same trend is less visible in Europe, thought to be partially as a result of more complex labor rules across Europe. Near-shoring on the other hand has been growing rapidly, with Mexico servicing US requirements, and Eastern Europe, Turkey and parts of Africa servicing part of the requirements from Europe.

 

New emerging markets are being investigated such as Indonesia, Cambodia, Vietnam, Latin America, and in Africa countries such as Ethiopia, Nigeria and South Africa. China and Turkey have recently been investing heavily in Ethiopia, helping to expand the textiles business.

Another effect of the increasing labor costs is delocalizing in China, with resources from the West of China being utilized more, and also looking further afield in South East Asia and Africa.

CSR programs are no guarantee that social responsibility and child labor constraints are enforced. Increasing use of audits and unannounced visits are being used to monitor performance.

In order to maintain growth, some China based businesses are globalizing through acquisition. At the same time, productivity is improving to help reduce costs

The potential implications of these changes include regionalization, the rise of emerging markets in low value categories and increased competitiveness of China in high value added categories.

As quicker lead times grow in priority, sourcing in Europe can achieve better response, quality and reliability that help to justify the higher costs. Quicker turn around and stock holding implications can be significant especially for the warehousing of seasonal products.

When Zara regularly beats 6 weeks from sketch to store, the 30 days on a boat can have a significant impact on the ability to respond to changing consumer demand.

The key reasons why China is continuing to change are:

  • Growth in local raw materials
  • Huge domestic and export market
  • Large international players have raised performance levels
  • Local suppliers are increasingly interested in international business
  • Continued investment in infrastructure and education

Dragon Sourcing have developed a comprehensive global sourcing best practice process that covers opportunity analysis, supplier selection and tracking, and procurement operations. This sort of comprehensive process can help reduce the risks associated with sourcing on a global basis. Combining the best practice process with effective enabling technology such as the CBX Total Sourcing Management platform can deliver a comprehensive solution to the challenges of global sourcing.

The event was followed by half an hour of intense Q&A discussions, debating current challenges and issues in the market. At the request of attendees, these discussions have been kept confidential and have not been documented in this article.

Further information

For more information on Dragon Sourcing and their services, please refer to the website: www.dragonsourcing.com

For more information about CBX Software and their Total Sourcing Management platform, please refer to the website: www.cbxsoftware.com

 For more information about wages comparisons, please refer to the website: www.wageindicator.org

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