Global Impact

Shaking up sourcing strategies for footwear and apparel brands.

During a chat about fashion trends with a senior VP for a leading surf and activewear manufacturer way back in July, the key fashion trend he pinpointed for ’09 was that “things are going to cost more.”

As we head towards the new year, that prediction looks to be ringing even more true, and the reasons why are plentiful. Six months ago, the main economic factor people mentioned when it came to sourcing was shipping costs. Today, with economic dynamics shifting on a daily basis, plenty of other factors that impact sourcing plans for manufacturers are also being rattled.

The result is that brands are looking more closely at their global sourcing strategies.
The bulk of it all starts in China. There are many issues currently impacting sourcing strategies in China that are giving industry execs major headaches. Here are just a few:

The Cost of Oil, Shipping and Materials

This is two-part conundrum. First, the fact that oil costs have risen in the past few years means that the cost of shipping goods has risen. The second part of the oil equation impacts material costs. Because oil is a component in so many materials that are used in the products our industry produces, the cost of buying materials has also risen sharply.

The Labor Force

Over the past year, labor rates in China have gone up. Factories are facing higher overhead costs, paying more for materials and utilities, and receiving less tax incentives from the government. Additionally, many in the labor force are being priced out of city living and have moved back from the coastal areas inland. In turn, because many factories are in the coastal areas, the worker migration inland has led to many new factories being built inland, particularly in the North and West. This can add an extra layer of cost. The further inland you go, the greater your transportation to port cost will be.

Exchange Rates and Inflation

The up and down value of the dollar is not the only economic concern for U.S. companies. The economic situations within Asia are also impacting business. Vietnam, for example, which has developed into a high quality option for footwear and outdoor manufacturers, in particular, is dealing with a hefty economic crisis. So while the country has made great strides in infrastructure over the past few years and many performance product manufacturers have Vietnam as a crucial part of their Asia strategy, the country’s crippling inflation rate is causing some factories there to close and others to raise overhead costs by 25 percent and more.

So, what does all this mean?

The impacts of the global financial crisis have led some to suggest that a shift in global sourcing would result. If it costs so much to ship product from Asia to the U.S., the thinking went, why not make it in the U.S.? But the multi-layered aspects of the global sourcing chain make that a very unlikely scenario for most brands in our industry. Or, as Sierra Designs president Paul Gagner told us, “It’s a fantasy.”

Successful brands are sourcing in China because it offers them, among other things, a skilled labor force and a highly developed infrastructure, as well as access to all of the materials they need. Getting these things may cost more in China today than it did a few years ago, but that in and of itself is not causing brands to jump ship.

“We are all experiencing inflation at every level around the world and China is no exception,” says Jim Weber, president and CEO of Brooks Sports, which, like the majority of performance running brands, manufactures in Southern China. “Between oil costs and material costs, as well as labor, it’s driving dramatic overhead cost increases for the factories over there. And every material for the most part in a running shoe is oil based, so that is a big factor. There has also been a dramatic weakening of the dollar over the last three years. Even though it has come back a bit, it is dramatically weaker than it was at its peak. These are global economic factors that are bigger than our industry.”

In explaining the situation, however, Weber points out that China has been the most productive place to make footwear for 30 years and that in 30 years, that will likely still be the case. Chasing cheaper labor is not the cure-all.

“You run out of places to go,” says Weber. “And the infrastructure in China is very substantial. The labor is only a portion of the cost of the shoe. It is significant but it is not over half. A lot of it is material and factory overhead and you have a lot of logistic costs. For us, China is closer than Vietnam, it is closer than India. Europe is a little different situation, it is very complex, but a lot of the issues driving costs are universal whether you are in Vietnam or China.”

As far as the direct impact that the current global landscape is having on his company’s business, Weber points out that because Brooks does not offer price point products, some of the increased costs can be passed on to the consumer. But refining design with an eye on reducing costs is also a priority.

“We are working this thing on every angle,” he says. “When we engineer a product, aesthetics matter, but there may not be as many aesthetic elements to a running shoe two years from now as there are today. We are going to put our resources into runability. We are engineering and designing against these new cost realities to try and reduce the cost of the product, but it is a balance. We are raising prices and trying to be as efficient as we can in the design and development. But there is nothing we can do about the price of a barrel of oil or the value of the dollar.”

Working the Balance Sheet

“When you think about design and development and how to build a product, you may think about fabric and form, but in reality our job is really about spreadsheets,” says Jim Wagner, a product designer and developer, who currently runs his own design firm, and has years of product development experience with brands such as The North Face, Garmont, Mountain Equipment and Columbia, among others. “We design and develop products and then we build a very complicated spreadsheet that analyzes whether this is a profitable direction or not.”

Wagner notes that an obvious benefit to doing business in China is its built-in infrastructure. “If you need to get a material, you can find it without too much trouble in China. If you go to another country, you might have a better labor rate, but then you really don’t have the materials. So that has to be factored into your spreadsheet and your timeline.”

While he highlights both Africa and India as having potential for the future, Wagner notes that “you need to analyze all of the aspects before you make a switch. Can you get the same materials over and over? China has that infrastructure. Can you get that elsewhere? Africa has potential, but it has no infrastructure. India has great opportunity. There are facilities already built there. They are empty. They have no orders because it is not an easy place to deal with.”

Opportunities in other parts of the world do exist, but need to be fully investigated and invested in, says Wagner. “If you stop saying this is the way we do it or this is the way we have always done it and look at other opportunities in Asia or in South America or wherever it happens to be, and figure out the best avenue for the manufacturer and the factory, you can negotiate agreements that really work for everybody.”

Refocus, Re-engineer

“There are a lot of moving parts here,” says Paul Gagner, president of Sierra Designs, which does the majority of its apparel, sleeping bag and tent manufacturing in China and Vietnam. “We are all being impacted negatively by the exchange rate and the cost of oil. Not just for transportation, but there’s also the fact that many of the materials we use, such as nylon and polyesters are oil based.”

Echoing the thoughts of Weber, Gagner says a part of his brand’s focus is on reducing product costs early in the design stage.

“We are being strategic in regards to sourcing and in regards to product,” he says. “We are trying to engineer out costs in the design where we can. We are also passing the price along to the consumer where we can. It is putting tremendous pressure on all companies’ gross margin and our costs will go up more rapidly than we are able to raise prices. Obviously what that means is then you need to look at other efficiencies within your organization.”

Because of the nature of the products Sierra Designs makes, Gagner does not see many sourcing options that are better than Asia.

“If we were making commodity products, it would be easier to move in a race for the bottom and find the next lowest cost country,” says Gagner. “But when you are talking about higher end, high quality goods that require experienced, skilled labor to build, frankly, you are talking about China, Taiwan, Vietnam, Indonesia, Laos is coming on line, those are the core countries that have the capability.”

India and Central America are not seen as options by many in the outdoor industry because the labor pool is not as skilled. As for the U.S., “The skilled labor force does not exist in any meaningful way,” says Gagner. “And there are not enough mills or converters. You’d have to ship raw materials over from Asia. People talk about domestic manufacturing increasing time to market, but I don’t see it happening.”

“Sourcing is a strategic advantage that companies who are smart take advantage of,” he continues. “Thrashing around and going ‘Oh my God, our costs are going up in Vietnam, let’s pull everything out of there and move to Swaziland’ -- I mean moving out of countries to somewhere else, while it does happen, it should be a strategic decision, not a knee jerk decision.”

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