How can I achieve the best of both worlds by balancing far and near-shoring?
After years of buying large volumes of product from the Far East, sourcing is back on the agenda for retailers as their strategies shift.
Sanjay Bailur, managing director at consultancy AlixPartners, says retailers, especially those in fashion, are rebalancing their strategy. “There is a growing need to test products with smaller batches and respond quickly to customer demand. China is getting more expensive and requires larger volumes, so it’s not a ‘no-brainer’ solution.”
He adds India is in general 15% to 20% cheaper than China, and some areas of Vietnam and South Korea are also good options. Meanwhile, labour costs in countries such as Portugal are becoming cheaper and Eastern Europe is developing a more robust manufacturing base.
Working capital requirements and minimising markdown risk are critical factors in sourcing decisions, as credit and credit insurance become tighter. Far-sourcing is still attractive – retailers only consider near-shoring if it is 5% to 20% cheaper – but the most profitable solution is often more balanced. “Clients we have worked with are seeing 2% to 5% margin improvement from better sourcing and a 20% to 50% increase in speed to market,” Bailur says.
He adds these decisions need to be made carefully, using analytical tools, and tightly integrated into overall supply chain planning.
In a recent study, the Manufacturing-Sourcing Outlook, AlixPartners estimates that by 2015 China will import as many products as the US, which will increase Chinese manufacturing costs exponentially.
American and European companies are likely to look closer to home for manufactured goods, as the landed costs of sourcing products from China will equal the cost of locally producing goods.
As Bailur says: “China will remain important, but leading retailers are diversifying their sourcing and placing bets elsewhere.”