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Risk analysis of the apparel supplyRisk analysis of the apparel supplyRisk analysis of the apparel supplyRisk analysis of the apparel supply

chain in 2012chain in 2012chain in 2012chain in 2012

2012 edition2012 edition2012 edition2012 edition

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April 2012

By Malcolm Newbery

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OverviewOverviewOverviewOverview

The supply chain has recently faced a perfect storm. This storm was composed of three cost elements:

• A violent increase in the price of cotton, hitting US$ per lb in late 2010 • Considerable direct labour wage increases in low cost countries such as Sri Lanka and Bangladesh,

allied to inflationary wage increases in manufacturing giants, such as India and China • A tripling in the cost of shipping a container from Shanghai to Rotterdam, from below US$ in

late 2008, to over US$ in late 2010

It's easy to refer to examples like these, and reasonably easy to understand that they must have serious effects on the supply price (the retailer’s buy cost) of apparel. But it is not so obvious to calculate the effect that these changes have (as every supply chain purchase contract will have a different set of variables) and there are quite a few variables.

In this first-edition report, just-style has created six supply chain cost models to illustrate the differences between the supply price from different countries and the effect of changes to those cost elements. These cost models allow you to see what effects certain scenarios have on a typical supply chain. The scenarios include:

• Using local materials • A doubling in fibre prices • A doubling in wages • A trebling in shipping • A combination of all, the "perfect storm"

This report considers what is happening and is likely to happen in the apparel supply chain in the areas of:

• Cost • Risk (incl. risk assessment and “what if” scenarios) • Time • Responsibility • Environment • Finance

The cost models have been created to explain the effect on the final retail price of manufacturing in different parts of the world.

A risk analysis has been made up of sourcing from different parts of the world.

The impact of time and the supply chain critical path are all considered and modelled.

The argument for responsible sourcing is measured against both cost and concern for the environment, with examples of recent practices.

The effect on both the buyer and the supplier of different ways of financing the supply chain is explored.

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This report is an essential resource for anyone involved in:

• Managing supply chains • Sourcing apparel garments and materials • Managing business costs in the apparel industry • Analysing and forecasting risk scenarios and trends in their business

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ContentsContentsContentsContents Chapter 1 Costs of sourcingChapter 1 Costs of sourcingChapter 1 Costs of sourcingChapter 1 Costs of sourcing Introduction Base cases Using local materials Perfect storm cost increases, fibre Perfect storm cost increases, direct labour Perfect storm cost increases, shipping Perfect storm cost increases, triple whammy More recent developments Chapter 2 The issue of time in the supply chainChapter 2 The issue of time in the supply chainChapter 2 The issue of time in the supply chainChapter 2 The issue of time in the supply chain The supply chain The original argument of cost and time Quick response Electronic data interchange (EDI) The product life cycle, manufacturing, shipping and distribution The product life cycle, product development The fast fashion product life cycle The Zara time model Chapter 3 Risks in the supply chainChapter 3 Risks in the supply chainChapter 3 Risks in the supply chainChapter 3 Risks in the supply chain The nature of apparel supply chain risks Cultural and linguistic risks Climatic risks Political and economic risks, the Arab Spring revolutions Political and economic risks, the Indian sub-continent Political and economic risks, Africa Risk analysis model

Chapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and risk The balanced supply chain Over emphasis on cost alone Collaborative supply chains Bringing it back home Chapter 5 Corporate social responsibility and the environmentChapter 5 Corporate social responsibility and the environmentChapter 5 Corporate social responsibility and the environmentChapter 5 Corporate social responsibility and the environment Good behaviour Political influences Examples from industry Scare stories about ethics and the environment Water Marks & Spencer

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The Centre for Sustainable Fashion (CSF) Chapter 6 Supply chain financeChapter 6 Supply chain financeChapter 6 Supply chain financeChapter 6 Supply chain finance The timing of the supply chain, critical path for both garments and finance Supply chain finance Prime revenue for Hanesbrands Sainsbury’s Conclusion

List of tablesList of tablesList of tablesList of tables Table 1: Supply chain cost models: Base case Table 2: Supply chain cost models: Local materials Table 3: Supply chain cost models: Fibre doubles Table 4: Supply chain cost models: Wages double Table 5: Supply chain cost models: Shipping trebles Table 6: Supply chain cost models: Triple whammy Table 7: Risk analysis of all world sourcing regions Table 8: Letter of credit cash flow, supply chain model 2 Table 9: Letter of credit cash flow, supply chain model List of figuresList of figuresList of figuresList of figures Figure 1: The supply chain – producer to consumer Figure 2: Far East sourcing for Europe, (the manufacturing, shipping and distribution cycle) Figure 3: Far East sourcing for Europe (the product development cycle) Figure 4: Far East sourcing for Europe (the product development cycle) Figure 5: The Egg-Timer and the Kite Figure 6: Corporate Social Responsibility (CSR) Figure 7: The supply chain, critical path for both garments and financeTable of contents

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Chapter 1 Chapter 1 Chapter 1 Chapter 1 Costs of sourcinCosts of sourcinCosts of sourcinCosts of sourcingggg

IntroductionIntroductionIntroductionIntroduction

The supply chain has recently faced a perfect storm. This storm was composed of three cost elements:

• A violent increase in the price of cotton, hitting US$x per lb in late 2010

• Considerable direct labour wage increases in low cost countries such as Sri Lanka and Bangladesh,

allied to inflationary wage increases in manufacturing giants, such as India and China

• A tripling in the cost of shipping a container from Shanghai to Rotterdam, from below US$xxxxx in

late 2008, to over US$xxxxx in late 2010

It is easy to refer to examples like these, and reasonably easy to understand that they must have serious effects

on the supply price (the retailer’s buy cost) of apparel. But it is not so obvious to calculate the effect that these

changes have, as every supply chain purchase contract will have a different set of variables, and there are quite

a few variables. just-style has created supply chain cost models to illustrate the differences between the supply

price from different countries and the effect of changes to those cost elements.

Base casesBase casesBase casesBase cases

The basis for the models is shown in Table 1.

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Chapter 2 The issue of time in the Chapter 2 The issue of time in the Chapter 2 The issue of time in the Chapter 2 The issue of time in the

supply chainsupply chainsupply chainsupply chain

The supply chainThe supply chainThe supply chainThe supply chain

Before addressing the argument that must go on in every retail buying department about the relative

importance of cost and time, it is valuable to refer to a reminder of the complexity of the apparel supply chain.

The supply chain is complex because of the variety of different ways that garments can be routed to reach the

consumer. These are shown schematically in Figure 1.

Figure Figure Figure Figure 1111: : : : The supply chain The supply chain The supply chain The supply chain –––– producer to consumerproducer to consumerproducer to consumerproducer to consumer

Source: justSource: justSource: justSource: just----stylestylestylestyle

.

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Chapter 3 Risks in the supply chainChapter 3 Risks in the supply chainChapter 3 Risks in the supply chainChapter 3 Risks in the supply chain

The nature of apparel supply chain risksThe nature of apparel supply chain risksThe nature of apparel supply chain risksThe nature of apparel supply chain risks

Not all retailers are as brave in their management of the supply chain as Zara. Many look anxiously over their

shoulders at the risks inherent in the supply chain. There are a number of sources of the potential risks inherent

in the supply chain. These include:

• Cultural

• Linguistic

• Climatic

• Political

• Economic

The last three+ years, since the financial meltdown of October 2008, have seen a variety of all of these in the

management of the apparel supply chain around the world.

Cultural and linguistic risks Cultural and linguistic risks Cultural and linguistic risks Cultural and linguistic risks

It has always been the case that history, and a shared language and culture play a part in the choice by retailers

of suppliers, and by manufacturers of their target customers. Historically as sourcing developed:

• The Americans first went to Mexico, then further into the Caribbean, Central and South America

• The French went into French speaking North Africa

• Germany looked east towards the Eastern European communist countries

• Italy sourced from Yugoslavia, until that country tore itself apart

• The UK, with a maritime history, and an empire, sourced from India, Pakistan and of course Hong Kong

For each, a shared history and a common language avoided some of the potentially embarrassing

misunderstandings. When the author was supply chain director at the Liberty of London department store, one

of his first problems was occasioned by a total misunderstanding by a Thailand manufacturer of little gifts of

the specification for a Christmas giraffe made out of Liberty fabric. When the 10,000 giraffes arrived at the

Liberty warehouse, they all appeared to be male and exceptionally well endowed, almost five legged. All had to

be burned. There were no giraffes in store that Christmas.

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Chapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and riskChapter 4 Balancing cost, time and risk

The balanced supply chainThe balanced supply chainThe balanced supply chainThe balanced supply chain

The idea of a balanced supply chain is nothing new. The author co-wrote an article about it for Textile Outlook

International over 20 years ago. But, as the elements of, and the issues facing the supply chain, change all the

time, so the balance changes. At one point and for one retailer, it could be “cost is everything”. At the same

time for another, “speed to market is paramount” could be the mantra. Yet again, at the same time, for a third

retailer “minimise risk” could be the watchword.

Writing in 2010, Clothesouce’s Mike Flanagan asked the rhetorical question “will there be any new influences

on sourcing between now and 2012?” He came up with the answer “we suspect not.”

He suggested that his eleven key influences would remain by and large in the same balance, as they had been

in 2008-2009. His influences were:

1. How garment makers worldwide were already damaged by volatile interest, currency and inflation

rates before recession hit.

2. Growing buyer pressure for lower prices as factories were further hit by falling Western markets and

delayed client payment.

3. How China, almost uniquely, launched successful initiatives to keep its garment exporters in business.

4. Changing relative price competitiveness between producer countries.

5. Chinese garment makers' rapid improvement in minimum orders and delivery times.

6. Retail trends in Europe, North America and Japan.

7. Online shopping's erosion of European and Central American producer competitiveness.

8. The limited impact of widely claimed growing interest in "ethical" sourcing.

9. Which producer countries really did benefit from the move to fast fashion?

10. Threats to garment industries' viability in many developing countries by likely duty-free access loss

and by China's growing credibility.

11. Rich countries' collapsing protectionist barriers, and the low likelihood any new ones will be

introduced.

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Chapter 5 Corporate social Chapter 5 Corporate social Chapter 5 Corporate social Chapter 5 Corporate social

responsibility and the environmentresponsibility and the environmentresponsibility and the environmentresponsibility and the environment

Good behaviourGood behaviourGood behaviourGood behaviour

Perhaps the biggest, and possibly the most surprising, influence on the supply chain since the author last wrote

about it for just-style nearly three years ago, has been the rise in interest in making the chain behave

responsibly. Good behaviour in the supply chain starts with making the chain transparent. Supply chains used

to be so opaque that many retailers and brands had no idea who was actually manufacturing their garments.

Supply chains were a murky web of suppliers, sub-contractors, contracted factories and outworkers.

There was also the feeling that everything needed to be kept secret on both sides of the buyer/supplier fence.

Alan Braithwaite, Chairman of supply consultancy LCP Consulting, put it this way. “Everyone knows about the

concept of transparency, but along the supply chain there are blocks where people perceive what they are

being asked to do is against their short term commercial interests. They think they’re going to get competitive

advantage by keeping suppliers in the dark, when actually the reverse is the case.”

Simultaneously with the interest in transparency, came an interest in all things good and green:

• Ethical sourcing

• Environmentally friendly supply chains

• Fair trade

• Corporate social responsibility

Political influencesPolitical influencesPolitical influencesPolitical influences

Yet many of the great and the good, including Baroness Lola Young, a politician in the UK House of Lords, and

founder of the all party parliamentary group (APPG) for ethical fashion, believe corporate social responsibility

matters. In an interview with just-style she said that “The government doesn't enforce Corporate Social

Responsibility (CSR). There are laws, rules and regulations about, for example, environmental pollution and the

disposal of toxic substances, and also employment laws regulating the number of hours worked, and so on; but

it is up to each individual organisation how and if they adopt CSR policies and what that means to them and

their shareholders.”

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ChaChaChaChapter 6 Supply chain financepter 6 Supply chain financepter 6 Supply chain financepter 6 Supply chain finance

The timing of the supply chain, critical path for both The timing of the supply chain, critical path for both The timing of the supply chain, critical path for both The timing of the supply chain, critical path for both

garments and financegarments and financegarments and financegarments and finance

With interest rates in most developed economies still very low, why should fashion retailers and clothing

brands be concerned about supply chain finance? just-style investigated the logic and the costs to retailers and

suppliers alike of the supply chain and some new approaches to “oiling the chain”.

Figure 7 repeats the critical path in Figure 2, following the physical progress of a Spring Summer 2012 purchase

order, but adding in the payment process.

Figure Figure Figure Figure 7777: : : : The supply chain, critical path for both garments and financeThe supply chain, critical path for both garments and financeThe supply chain, critical path for both garments and financeThe supply chain, critical path for both garments and finance

Supply chain, physical, SS season June July Aug Sept Oct Nov Dec Jan Feb Mar Apr

Sample garment ȄȄ

Approve garment

Place supplier order

Receive fabric at supplier

Manufacture

Ship

Receive at warehouse

Allocate

Distribute to stores

Sell at retail

Supply chain, financial, SS season, letter of credit (LC)

Pay for sample

Pay for fabric

Pay for manufacture

Pay for shipping

Receive customer payment

Supply chain, financial, SS season, normal terms of trade

Pay for sample

Pay for fabric

Pay for manufacture 30

Pay for shipping

Receive customer payment

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