Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.
As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.
In prior industry-specific predictions posting, we dived into Automotive Supply Chain Residing Across North America .
Apparel and Footwear Producers and Respective Supply Chains
Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel. Apparel supply chains are global in nature with many interlinked flows and sometimes, hidden flows. Because of the high content of direct labor involved in the production of apparel and footwear, the cost of direct labor is a prime determinant as is the overall cost of transportation to move goods to designated geographic markets.
U.S. consumers have become very accustomed to expect cheaper apparel prices. More affluent consumers demand higher and latest fashion and have been willing to pay a premium price for availability. The Trump Administration policies to initiate business tax reform and protect U.S. jobs will likewise have a significant impact to apparel and footwear supply chain sourcing and pricing strategies.
The geopolitical forces of increased trade protectionism is expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing NAFTA agreement, the goods flow freely and duty-free across borders in North America.
Any threat of a trade war among the U.S. and China, or a border adjusted tax on goods imported from other countries, will have a dramatic impact on apparel and footwear financial margins.
At the same time, traditional retailers are under enormous profitability pressures in 2017. Retailers with volume buying clout may well force suppliers to shoulder the burden of increased footwear and apparel costs. They likewise can continue to turn a blind eye to the ongoing and elusive practices of hidden sub-contracting of production among low-cost region apparel producers. Similarly, industry efforts directed at better and fairer enforcement of social responsibility practices related to sub-standard factory working conditions and excessive daily labor hours’ burdens of apparel workers in low-cost global manufacturing regions could be re-railed by a new round of industry cost burdens.
Smaller, more specialty retailers may have little choice but to pass along cost increases in higher prices. More popular branded or in-demand producers may be able to pass along price increases as-well, but that can be risky.
Industry disruptors focused on “fast fashion” business strategies have been leveraging supply chain near-shoring strategies to provide far more agile responses to the latest and most prominent fashion trends. Their appeal to higher margin, in-demand fast fashion supports higher pricing and thus flexibilities to support near-shoring of fast production. The key to fast fashion has proven to be more agile supply chain sourcing strategies and that will expand in 2017. That may prove to be a significant strategic advantage and opportunity in 2017, but here again, if the existing NAFTA agreement is changed or eliminated in 2017, such strategies will need to be revisited or altered.
This concludes our 2017 prediction related specifically to apparel and footwear industry supply chains. Next up in the industry-specific category will be pharmaceutical and drug supply chains.
A final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on Prediction Four.
2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP). Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.
For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.
Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.
A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”
As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.
Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.
We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics. They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.
Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.
Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.
As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.
Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017. Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.
This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Three years have passed since the tragic Rana Plaza apparel factory fire that killed many hundreds of garment workers that were trapped by a factory collapse, and according to a recently published Bloomberg report, (Paid subscription may be required) an uncomfortable truth is emerging: “Vigilance isn’t enough.” The result is both continued efforts by branded apparel buyers to require more fashionable clothing at cheaper costs, while factories that need to producer such garments are subject to an economic and policy vise.
The report indicates that some factories in Bangladesh have improved, completing more than 60 percent of fixes required by the inspectors sent by major clothing brands. However, of some 1,600 factories covered by the Accord on Fire and Building Safety in Bangladesh, a major inspection program run by the apparel retail brands, more than 80 percent are behind schedule on completing necessary improvements. Factories covered under the smaller Alliance for Bangladesh Worker Safety initiative have also reportedly lagged. The government of Bangladesh has since shut down just 39 facilities that posed an “immediate” danger to workers. Meanwhile, industry consortium and government investigators, along with outside organizations, keep finding factory defects.
An ironic observation from this latest Bloomberg report indicates: “The craze for cheap, on-trend clothing that helped turn Bangladesh into the world’s second-biggest apparel exporter, after China, has actually intensified since the disaster. Low-priced brands keep undercutting one another, and that keeps squeezing the factories that produce their clothes.”
The United Nations International Labour Organization (ILO) which vows to shutdown unsafe facilities determined in June that factory safety upgrades within the country would cost an estimated $929 million, of which, an estimated $635 million in upgrades have yet to be accomplished. The economics of factory owners being able to secure affordable loans or even be granted such financing to fund needed worker safety improvements clashes with the reality that brand safety consortiums’ financial support is limited. Securing and installing necessary safety equipment is noted as another challenge because of the relentless pressures for product output at lower cost.
Another noted irony is structural in nature. The country’s overall garment industry has new factories opening all the time, in some cases prompting a Darwinian closing of less safe factories, but in-turn, adding to the list of factories that now need to be monitored. The country’s factories are inherently small and their ties to brand apparel buyers is described as tenuous. A further factor is that both industry sponsored worker safety consortium programs only extend to 2018, leaving little time for changes to financed and implemented.
As Supply Chain Matters and others have pointed out in many apparel-specific commentaries, buying practices within the industry continue to foster multiple sub-contracting arrangements where brands are de-facto sheltered or hidden to visibility as to which specific factories are producing certain garments. Such buying practices make contract interpretation and safety compliance standards difficult and subject to needs for continual inspections as to which brand apparel is being produced in any of the country’s apparel factories. Then there are the realities of the workers themselves who must work, regardless of factory safety conditions to sustain their families and livelihood.
As we all look forward to the upcoming holiday buying and gift-giving season, we wanted our readers to be aware of this latest report regarding factory and worker safety progress within Bangladesh, and perhaps other countries as well.
As long as we as consumers, continue to desire fashionable clothing at the cheapest possible cost, without consideration as where and how that clothing was produced, then the industry will continue in its strategies for chasing and demanding the lowest-cost manufacturing source.
The de-facto result seems to be heading toward highly automated garment factories that can produce thousands of garments from robotic machines. The byproduct with that approach are impoverished workers, desiring opportunities to better their economic stature, having such opportunities eliminated.
By our lens, this has always been a challenge for both industry and government collaboration and investment. Sadly, for the country of Bangladesh, such challenges remain.
As businesses enter the all-important final four months of 2016, news of supply chain disruptions are permeating business media channels.
We, along with global media, have already alerted readers to the ongoing and quickly cascading implications of Hanjin Shipping’s financial receivership, which we have characterized as a financial shot heard across the globe. The potential for supply chain disruptions is imminent along with other cascading implications for shipping rates or further ocean container industry consolidation moves.
Samsung Galaxy Note 7 Product Recall
Today brings the stunning and somewhat embarrassing news that Samsung has initiated a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. All sales have been halted pending an investigation of why certain batteries are exploding during the re-charging process. According to a published report by The Wall Street Journal, Samsung had logged 35 cases of battery explosions which has prompted the electronics giant to issue a global recall. Apparently, Samsung has multiple suppliers for the lithium-ion batteries of the Note 7 and not all of the phones are affected. Samsung teams are now in the process of tracing the faults to a specific supplier. Still unclear at this point is whether suspect batteries effect other new Samsung models. An estimated 2.5 million of this model phone have been shipped since its availability announcement of two weeks ago.
The glitch comes at an obvious awkward time for Samsung, with holiday sales looming and with next week’s planned announcement from rival Apple rumored to be about the announcement of the newest versions of iPhones.
Gap Distribution Center Fire
Clothing retail chain Gap is dealing with its own supply chain disruption as a result of a fire that occurred at one of the retailer’s online support distribution center located in Fishkill New York. According to business media reports, the fire that occurred on Wednesday of this week, completely destroyed about 25 percent of the warehouse while the remainder of the facility suffered extensive smoke and water damage. The center supports Northeast U.S. online and store fulfillment needs for both Gap and Banana Republic branded merchandise and according to one report, represents 10 percent of the retailer’s nationwide warehouse capacity. In reporting of the incident, The Wall Street Journal quotes a Wells Fargo equity analyst advisory as indicating that the disruption of the fire could: “create a meaningful bottleneck given the upcoming critical holiday season.”
According to the WSJ, the retailer’s logistics and distribution teams are now working on plans to rely on other distribution centers located in Ohio and Tennessee, as well direct shipments from retail stores to support Northeast online fulfillment needs. Teams are further working to accelerate the reopening of a nearby New York warehouse that was planned to supply Old Navy branded merchandise.
This fire is obviously untimely since Gap has been in the process of a merchandising turnaround to boost sales and profitability.
Continuous Natural Disasters
It seemed that during the months of July and August, a week did not pass without some occurrence of natural disaster. Whether it was continuous wild fires across the U.S. West, severe flooding southern Louisiana and China, devastating earthquakes in Peru and Italy or this week, the first hurricane in 10 years to impact southern Florida and the U.S. Southeastern coast, supply chains are continually disrupted in various degrees.
Indeed, the timing and occurrences of major supply chain disruption cannot be controlled, especially when occurrence is just prior to one of the most important and meaningful revenue and profitability quarters. After and in spite of such occurrences, supply chain teams learn more of the critical importance of active supply chain risk mitigation and business continuity planning.
As our U.S. readers prepare to take advantage of the summer’s last long Labor Day holiday weekend, keep in mind that supply chain teams remain engaged in responding to supply chain disruptions.
August marks the traditional start of the peak transportation period leading up the October thru December peak holiday fulfillment period involving both traditional and online retail channels. Today we feature two Supply Chain Matters commentaries addressing two separate but important trends that will make the forthcoming period far different and perhaps far more challenging for industry supply chain teams. The first was our prior posting, Amazon’s continued strategic and tactical efforts in deploying owned logistics, transportation and last-mile delivery capabilities.
In this posting, we highlight a recent report echoing the currently gross overcapacity conditions concerning global ocean container fleets, a situation which supply chain and procurement teams need to pay close attention to in the coming weeks.
Global Trade Magazine reports that certain industry alliances involving ocean container shipping lines have now suspended shipping services available for the current peak holiday global shipping season. In this report, Why are Shipowners Parking Containships?, the publication observes that in ideal world, ship fleets would be fully utilized during this upcoming peak holiday period as goods make their way from Asian based suppliers and manufacturers to global markets in-time for the forthcoming holidays at the end of this year. Instead, the G6 Alliance has suspended transpacific service resulting in five of its six vessels being idled while the Ocean Three alliance suspended its Manhattan Bridge service idling nine container ships. The report cites Drewry Shipping Advisors proprietary data indicating that over 300 container vessels, with a combined capacity of over 800,000 TEU’s were idle by early July, at the start of this year’s peak shipping period. The report further implied that the ongoing peak period is rather weak and resulted in the decisions by shipping alliances to idle vessels much earlier in the season. More importantly, the report speculates that carriers are not only moving to park unused capacity earlier in the peak period, but further attempting to boost spot rates up by increasing load factors on remaining active vessels.
This commentary further declares:
“As deliveries of new ships continue, carriers are starting to run out of options on how to deploy them even their largest ships in today’s over-supplier market.”
The above is the obvious red flag to industry supply chains as the overcapacity crisis now reaches an extreme stage. Compounding the problem is the opening of the expanded Panama Canal that occurred in June, causing ships with 4500-5000 TEU capacity to be now idle as carriers begin to route their largest vessels directly through the canal.
For industry supply chain and services procurement teams, particularly those directly related to the retail industry, the coming peak season obviously requires very careful planning of inventory and capacity needs. Those that have a higher reliance on spot market movements and rates need to be especially vigilant in the coming months, particularly if inventory movement needs relate to supporting post-peak market needs in the January-March period. By the end of the year, the overcapacity situation involving ocean container lines should be even more of a challenge that can impact transit times as well as vessel availability.
Thus, it remains critically important for industry supply chain teams to pay close attention and double-check all planning related to inventory requirements and transportation servicing needs. This advice includes teams who have outsourced much of their transportation planning and execution needs to third-party providers. While there may be an assumption of predictable rates, industry dynamics are changing quickly, and along with this, vessel availability and global shipping transit times.
Technology can certainly aide in this area, particularly that which tracks spot ocean container shipping rates and vessel availability trends. But in the end, you cannot afford to assume that your transportation partners totally have your back, especially if you are an organization that dwarfs the shipping needs of far larger global retail or manufacturing enterprises. Small and medium businesses are often subject to the mercies of the spot market.
Insure your organization does its homework, constantly checks and validates planning assumptions and keeps a keen eye on spot market transportation rates. Consider using technology that can assist in navigating these unchartered waters.