Retailers are balancing rising costs in China and the need for greater flexibility and shorter lead times with the value of longstanding supplier relationships.
In this extract from Retail Week’s Retail 2013 report, Ben Cooper finds out about retailers’ supply chain strategies.
The news that Chinese export growth slowed in November 2012 to just 2.9% year on year is reflected in the comments the 28 leading retail executives interviewed for the Retail 2013 report make concerning their sourcing strategies.
More than half are now sourcing less from China, strongly suggesting the trend towards moving supply lines westwards within Asia, or indeed substantially nearer home, continued in 2012 and will remain a feature of the UK retail market in 2013.
However, while there is clearly a discernible move away from China, the responses at the same time show how important China remains as a supplier for many UK retailers, and reflects that the move into other countries is not solely about rising costs in the People’s Republic.
Rethinking China
Some 14 of the 28 retail chiefs are now sourcing less from China in favour either of alternative markets in Asia or increasing sourcing from European countries and the UK. As four of the 28 companies do not source from China at all, this actually represents 58% of a reasonably representative sample of 24 companies.
Even more striking perhaps is that only two companies expect to be sourcing more from China in the near future, a statistic that would have been unimaginable a few years ago.
However, to say retailers are deserting China altogether would be a misinterpretation. Even those retailers that are re-evaluating tend to stress that China continues to have a role to play.
The chief executive of a big clothing chain says the macro trends in China have resulted in a “little” change to its sourcing strategy. “Bangladesh and Cambodia are growing in importance,” he says. “We are watching Burma with great interest - that might be an important emerging market. China has become a little more expensive.”
“We are sourcing less from China, although it is still the main area we source from,” says the chief executive
of another clothing chain. “We are looking at some new places and actually testing in others, and it looks like it
will be different places for different things rather than one major source of supply like China.”
There is a strong sense in many of the retailers’ responses that Chinese suppliers have done little wrong. It is simply economic trends that have made China less attractive and other countries worth developing. “The jury is out,” this chief executive continues. “China is a hard act to follow. They have decades of experience and the quality of product is high. If you go somewhere else where the factory has just started up, it’s unlikely to be able to produce products as good as China does.”
The chief executive of a home products retailer says rising costs in China are “just beginning” to impact on the mix of his company’s supply chain. “I have slightly re-blended my business so that it is more European and less Chinese-sourced,” he says. “That has improved agility and saved on freight.”
Agility and shorter lead times
This remark, like other comments, reflects that while most of the commentary around Chinese exports may focus on rising costs - along with the changing outlook of the Chinese government - cost is by no means the sole, or even in some instances the predominating, motivation for moving elements of the supply chain away from China.
“Our strategy has not changed because of trends in China but we have changed sourcing to become more flexible, and a higher percentage of our sources are closer to home,” says the chief executive of a clothing and accessories chain. “We have moved some of our supply from China to Bali, which was not just about cost price increases. And we have got a more flexible approach to air freight which has increased speed of delivery on repeats.”
The executive director of a department store chain says his company “could have lived with the increased wages in China but the lead times have got longer and the minimum orders have increased”.
Consequently, the changes being made owe more to shorter lead times and the flexibility that can be obtained.
“We are bringing our manufacturing closer to home,” he continues. “We were mainly in China but now we’re manufacturing in places like Turkey where the transport used is lorry rather than ship, and India, which has a shorter lead time compared with China. So we now have the ability to move quicker. We’re manufacturing in Portugal too and Eastern Europe, which gives us greater flexibility.”
It may be that Chinese suppliers are experiencing something of a perfect storm. Not only have macro trends become unfavourable but many retailers are seeking greater flexibility and responsiveness in their supply chains and to shorten lead times. All of which can be provided by suppliers closer to home, whether in Asia or Europe.
“We have moved some of our sourcing closer to home and our UK sourcing has expanded considerably and that certainly has made us more agile and given us more flexibility,” says another department store chief, adding that Turkey has been a beneficiary of this trend.
The chief executive of a specialist chain concurs: “We’re looking for more flexibility and more locations to source from. We are also looking for consolidation of the supply base to work with fewer but more strategic partners that will help us from a service and availability point of view and from a cost point of view. We will be looking for sources closer to Europe for our bulkier items. As people look for value, transportation costs become important.”
“Flexibility and agility are always important for a retail company, and I look at them all the time,” the chief executive of a clothing retailer adds. “We’ve managed to get sources closer to home in almost every area of the business.”
Interestingly, no retailer specifically made reference to eurozone countries with particularly weakened economies, which should offer advantages both in terms of competitiveness and proximity, as potential new sources of supply.
The European or near-Europe countries named by retailers with regard to supply chains were Turkey, Tunisia and Poland. The only eurozone country mentioned was Portugal. The eurozone crisis is alluded to frequently by the retailers as a threat but where it might feasibly represent an opportunity, it was conspicuously absent. This could be attributed to the fact that these countries do not have local currencies weakened in proportion to the state of their economies or which they can unilaterally devalue to boost either exports or tourism. If that were the case they might look considerably more attractive as exporters at the moment, though it could be said that with a free-floating currency their economies would not have declined to such a desperate state.
According to recent OECD findings, while Greece’s competitiveness has been improving because of lower wages and falling prices, the hoped-for gains in exports have not followed. Exports are expected to decline by 2.9% in 2012 though are expected to recover that ground in 2013.
No cost rises
While a majority of the chief executives point to some reduction in the volumes they source from China, some say current trends have not resulted in any change to their supply chain strategy.
Interestingly, some also say they have not experienced any increased costs in their Chinese business. The commercial director of a value retailer, which imports about 30% of the products it sells “mostly from China”, says: “I know about the macro trends but they have simply not affected us at all. The prices didn’t go up any
more than I would have expected them to in a normal year.”
“We are diversifying from China but it is still the major source,” says another chief executive, who also plays down the increase in costs. Labour costs are a bit of a challenge but nothing like what we were seeing in China two years ago.” However, he adds that Turkey and Bangladesh look promising for short lead-time products.
Moreover, two of the retailers say their trade with Chinese suppliers is increasing, in spite of increased costs.
“We still have a lot of sourcing from China,” says the chief executive of a big high street chain. “We have a Far East office and we have marginally increased the amount we take out of China in the last year and some of the locations have changed. Costs have increased marginally but we are sticking with China.”
The executive chairman of another high street chain adds: “We have always been very active in our sourcing strategy, very international. We trade with China a lot. We have 150 people in Hong Kong and Shanghai. In fact our sourcing from China is becoming bigger and more important.”
Retailers that have established substantial infrastructures in China may take a long-term view and seek to ride out the current conditions. By the same token, any retailer which feels it has established a strong and successful relationship with a reliable supplier may also take a similarly long-range view.
Longstanding partnerships
The chief executive of a clothing chain asserts that building a solid partnership with a particular supplier can provide the enhanced flexibility and agility that most retailers are now seeking. “We are moving closer to our suppliers, assuring them of our financial stability and now we know they will bend over backwards for us and put us at the top of their production line. So we have improved agility by strategic partnerships. We have also tried to speed things up with strategic partners in China and India to hold fabric on the floor, and hold production capacity so that we are as agile and flexible as we can be.”
Another clothing managing director suggests the strength of his company’s relationships with longstanding Chinese suppliers has enabled it to cope with the adverse trends, though he concedes that at the same time the company has increased sourcing from other countries. “We are still sourcing from the Far East and China but we are also using sources closer to home. We have good relationships and partners in China and we have been able to find a way to continue to work with our main suppliers in that market despite the macro trends.”
A longstanding relationship is also likely to reflect satisfaction with suppliers from a technical and quality standpoint, which also militates against reacting too abruptly to less favourable structural conditions. For instance, the managing director of a specialist chain asserts that China is “ahead of other areas” in the particular technical skills it requires. “We are working with suppliers to make sure we get the keenest prices we can in China but we will be sticking with them for the moment. But we are looking at our easier-to-make garments and trying to find sources closer to home.”
Another fashion retailer also says it is continuing to back China for quality reasons. “We source from all over the world but about 60% comes from China. We have stuck with China because they produce a cleaner and more consistent and better quality garment.”
The staunch support that some retailers are giving their Chinese suppliers underlines the value of long-term relationships in supply chain management. Clearly, flexibility and agility have become more important, and
suppliers can also expect to continue to be driven hard on price in the current climate. However, the fact that so many retailers have voiced support for their Chinese suppliers shows that retailers are instinctively unwilling to make changes to successful supply chain arrangements, which they have invested in over a significant period
of time, for what might be shorter-term gains.
For this reason, retailers are unlikely to make wholesale changes to their sourcing strategies and the responses of the retail leaders here appear to reflect just that tendency. There is a desire to shorten lead times and build greater flexibility into their procurement strategies, so countries nearer to home are coming to the fore. Other Asian countries, such as Cambodia, Vietnam and Bangladesh, may well offer cost benefits but suppliers there will often be relative unknowns and are likely to be incorporated selectively to complement existing established and trusted supply chains.
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