Sourcing around higher Chinese wage rates
INSIGHT ARTICLE |
Apparel imports from China peaked a few years ago, as retailers and vendors moved to lower-wage countries. Still, despite rising labor costs over the past decade, China has remained a preferable manufacturing base, because of its strong infrastructure, supply chain, availability of raw materials and highly trained labor force. There are many considerations to weigh, however, as well as strategic actions to take when sourcing in China or other countries.
Some companies offset high labor costs in China by moving production into lower-cost, lower-wage countries. This could be a double-edged sword, however, as in many cases, the labor forces are not as well trained; consequently, product quality suffers. Thus, while many companies have moved sourcing to a number of locations, including Bangladesh, Cambodia, Thailand, Indonesia and India, in the quest for lower labor costs, resultant quality issues have remained an important issue. Additionally, raw material availability has continued to be an issue, logistics are more complicated and the cost savings have diminished.
Presently, we’ve seen minimum wage rates in a number of those countries increase rapidly, to the point where the total manufacturing costs, on a landed basis, may not justify the less advantageous production and supply chain deficiencies. Other issues, such as political unrest, safety issues and environmental compliance, also impact the decision to move sourcing to new locations.
Recently, a number of companies have taken actions that have enabled them to make the finished product cost in China competitive with many of the lower-wage countries. Examples to consider:
- Reduction of labor content through design. As an example, The North Face has been successful with its FuseForm garments. The pattern is styled and cut to eliminate all sewing, with the exception of the zipper; the rest of the jacket is fused at the seams. The fusing saves labor costs for the company.
- Collaboration with manufacturers to reduce product hours through efficiencies. The development of a standard minute value per garment, or cost per minute, can eliminate small, costly embellishments that do not affect the look or performance of the product.
- Analysis of product and price variations, eliminating higher-cost, lower-volume items. This is not exactly adopting the 80-20 rule (amount of volume driven by 20 percent of the SKUs), but forces management to reduce the number of unprofitable products and categories and focus on the moneymakers.
This is not an all-inclusive list, but rather, one of cost-saving opportunities some companies have utilized to offset the higher wage rates. Raw material costs can be volatile, but have not been a significant factor overall.
Other sourcing locales to consider
Production in Central America and Mexico has become more popular for many manufacturers. Production costs are slightly higher, but production cycle time is faster; this is particularly important for seasonal and fast fashion businesses. Speed to market and economic stability seem to have become more important in determining where to produce.
Finally, the "Made in USA" trend is growing in popularity, but this will grow more slowly, due to the availability of raw materials and trained labor forces. Increased use of technology, in time, should bolster the “Made in USA” effort. A shorter production cycle and more efficient and timely distribution should help offset the labor cost differential that prevails within China and Southeast Asia.
Approximately 40 percent of U.S. apparel and footwear is still imported from China. Although there are many other options, including Southeast Asia, Central America and the U.S., China will remain a powerhouse in the apparel sector for years to come. Fashion company executives must stay on top of all costs, proactively research sourcing options and be willing to make changes in order to be competitive and profitable.