Sourcing Outlook: ‘How Do I Redefine Value Today?’
When it comes to sourcing amid rising inflation, declining consumer demand and other macroeconomic uncertainties, vendors, factories, importers, brands, retailers and consumers are all feeling the pressure. So how can value be redefined in a way to benefit everyone?
This question and more were addressed during the Sourcing Outlook panel, featuring Jason Kra, president of global supply chain company Li & Fung; Guido Schlossmann, president and CEO of global trading company Synergies Worldwide and Pulkit Seth, vice chairman of India-based manufacturing group Pearl Global Industries Ltd. The panel at Sourcing Journal’s Annual Global Outlook event on Tuesday was moderated by Edward Hertzman, founder of Sourcing Journal.
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Sourcing is in a state of flux amid the “double whammy” of increased raw material costs and decreased orders to the tune of “a 20 to 25 percent reduction on the average repeat item” (declines that feel extra painful following last year’s post-Covid peak consumption). Other headwinds include “wage increases in every market” and inflation (8 and 10 percent in the U.S. and Europe), with spikes more dramatic in production countries (40 percent in Pakistan and Turkey). With energy the biggest cost of running a factory outside of raw materials, surges in multiple markets (up 150 percent in Bangladesh) are also painful. Fluctuating exchange rates increase the uncertainties.
Those factors, combined with shifting demand, beg the question: How do I redefine value today? “What we’re getting at,” said Kra of Li & Fung, “is the definition of value is not necessarily just price, it’s everything that you can bring forth to the consumer.”
As someone who owns production units around the world, Pearl Global’s Seth cited the need for deeper partnerships for the supply chain to be healthy in the long term. “Every manufacturer around the world has to provide that additional value, that service,” he said. “It’s really survival of the fittest.”
Shifting supply map
With so much out of a company’s hands, one thing they can control is their sourcing map, and indeed, risk analysis is now a boardroom topic. But despite a massive reduction in reliance on China for finished product, companies are still leaning too heavily on the Asian nation for raw materials. Meanwhile, diversification out of China is still centered on Bangladesh, Vietnam, Indonesia, and Cambodia, so there’s still “concentrated risk” there. With growing regional trade blocs (Asian, European, African, etc.), one now must think first about region, then country, then supplier, which is a bit backward from how it was done before, said Kra. “What’s safe today, isn’t necessarily safe three years from now.”
For example, Schlossmann noted, “Just imagine the Chinese government would put some restriction on the export of raw material? And that raw material could be used in China for production?”
Panelists were bullish on Bangladesh as one of the largest apparel-producing nations in the world, with growing infrastructure, technology and a commitment to take on China, but realistic to its vulnerabilities. With 70 percent of Bangladesh’s economy driven on one sector—apparel—risks like cost of capital or dropping demand could have dramatic consequences.
“The places you’re seeing the hardest hit is the SMEs, the smaller companies, their cost of capital is going up in a lot of these manufacturing countries, to where it’s essentially bordering on hard money 13, 14, 15 percent, because there’s limitations on capital,” said Kra. “And these events are almost like a reset of the industry. I believe you’ll see a reduction or a group of the factories that stop operation and shut down in a lot of countries, not just Bangladesh. There’s a real need for liquidity in the next 12 months.”
As brands and retailers are looking to cut back, what does that mean for the agent or sourcing company? Schlossmann sees three trends: One, a downsizing from offices in Hong Kong and Singapore to more satellite offices in places such as Bangladesh and Pakistan to be closer to the manufacturing and owners for perceived control. Two, expert management in main offices is being substituted by local management. And three, certain functions like design and development, which aren’t easily outsourced to the manufacturer, are being outsourced to trading companies and virtual manufacturers.
At the end of the day, it’s all about a balanced sourcing strategy and partnerships. With uncertainties slowing down up-front bookings, partnerships will be vital for the speed-to-market agility that’s needed to chase trends as they happen into 2024. “There’s no merit in retailers moving programs for a few cents,” said Seth. “Because ultimately, you’re just taking short-term advantage and not going to be sustainable in the long term.”
