Is apparel manufacturing coming home?

Faster fashion and in-season flexibility are keywords in providing an attractive offer to consumers and for being successful in the challenging market environment. Only if companies transform from the historical supply focus to a demand focus can they stay relevant for consumers and improve top- and bottom-line performance. Increasing costs in traditional supply markets add to the margin pressure apparel players face today. In this environment, going from a pure unit-cost strategy to one of product profitability in sourcing provides a strong supporting argument for the inevitable shift to nearshoring for US and European mass-market apparel brands and retailers. Nearshoring will happen, but not without challenges.

Era of change

The apparel industry is going through a decisive era of major consumer, channel, and supply shifts while suffering from increased economic volatility. One factor contributing to greater volatility is the shift to bottom-up trend setting. In the past, consumers were spoon-fed trends via apparel companies’ ad campaigns. For decades, this “push” model worked for apparel players.

Today, however, in many segments in the mass market, trends are more likely to pop up from the street. Consumers take their style cues from Instagram, user reviews, and their peers, and not so much from big brands’ marketing gurus. Individuals – whether they are celebrities or simply stylish consumers who have generated large followings on social media – have become the trendsetters and tastemakers. A new generation of consumer insights is gaining importance for the design and product development process. Even some of the traditional “fast-fashion” companies have not been able to switch quickly enough from the “push” to a “pull” model – a model in which products are developed, tested, and produced on demand

Increasingly more apparel players are including sustainability as an integral part of their businesses and are beginning to look at circular economy models for solutions. Adopting the position of a “truly circular fashion choice” is seen as highly likely to be a winning strategy by 2025 by more than a quarter of respondents. Nearshoring and automation are important enablers in implementing a circular apparel value chain

It used to be that a six-month fashion cycle was considered fast. Today, speedy time to
market means no more than six weeks and some retailers are able to do it even faster.
But by no means should mass-market apparel brands and retailers aspire to apply speed
models to their full assortment – to be successful, they will have to strike the right balance
in a multimodal sourcing strategy in which low-cost countries and traditional production will
continue to play a big role.While moving to a demand-led model requires apparel companies to pull levers in all phases of the fashion cycle, bringing production back closer to consumers with near- or onshoring offers the opportunity to eliminate big chunks of lead time.

Given these market shifts, it is not surprising that 79 percent of respondents in our survey
believe that a step change in nearshoring for speed is highly/somewhat likely by 2025,
especially as the economics of nearshoring are starting to add up

Nearshoring breakeven

Production in the Far East is no longer as cost efficient as it used to be. Wages for factory
workers across Asia have risen. For instance, labor costs in China in 2005 were one-tenth
of those in the US; today, they are about one-third. In some nearshore markets, the gap to
offshore labor costs has even disappeared, while a lack of capability and capacity continues to prevent any quick shifts in production footprint.

Take Mexico as an example of a nearshore market for the US: today, Mexico offers lower
average manufacturing labor costs than China. While development in nearshore countries
for the Western European market is moving in a similar direction, manufacturing labor costs are still higher than those in China – but the gap is shrinking. Whereas hourly manufacturing labor costs in Turkey were more than 5 times higher than those in China in 2005, the factor diminished to only a factor of 1.6 times by 2017.

Today,even from a mere landed cost price perspective, nearshoring can be economically
viable in certain cases, mostly due to savings in freight and duties. For instance, a US
apparel company that moves production of basic jeans from either Bangladesh or China to
Mexico can maintain or even slihtly increase its margin, even without higher full-price sell through. For Europe, unit costs still remain significantly lower when sourcing from
Bangladesh, but reshoring from China to Turkey is economically viable. Landed cost prices
for denim, for example, can be 3 percent lower when sourced from Turkey. Onshoring the
production to the US or to Germany, however, will not result in breaking even. Which means that while it is attractive from a landed cost perspective for production to move closer, it is less attractive for apparel manufacturing to come home.

How quickly can the prospect become reality?

As automation technology continues to evolve, overcomes the current barriers mentioned
previously, and becomes more affordable, the economic viability of near- and onshoring by
suppliers with advanced manufacturing will improve over time.

In our survey related to this work, 82 percent of respondents believe that simple garments
will be fully automated, affecting an 80 percent labor reduction by 2025. 70% think that it is highly/somewhat likely that more complex garments, such as dresses and jackets, will be significantly automated (resulting in a 40-percent labor reduction). Within five years, semi-automated factories could enable nearshoring and selected lighthouse projects of new business models, such as store factories, which could help build customer excitement. Within five to ten years, suppliers with fully automated factories could enable full onshoring. More complex silhouettes will be semi-automated within a decade and to such a degree that companies can scale up new, high-margin business models that include customization. As the earlier analysis on nearshoring breakeven and the economic viability of automation  demonstrated, near- and onshoring for the US market will help achieve greater benefits, even from a pure labor cost perspective. In comparison, the nearshore opportunity will become attractive for European apparel mass-market brands and retailers, while onshoring – to the high labor cost Western European markets especially – will remain more evasive. However, beyond technical feasibility, cost savings, and the commercial value- generation potential of automation, there are other factors that will impact the rate of adoption in apparel manufacturing. Therefore, the scenario methodology used by the MGI8 includes the time required to develop capabilities, labor supply and demand dynamics, regulatory
considerations, and social acceptance, among other factors. Based on this perspective, the
adoption of automation in US apparel manufacturing has the potential for a real step change
development before 2025, when the adoption rate of automation is expected to reach up to
63 percent in an earliest scenario model.

Taking the first step

Mass-market apparel players that aim to win tomorrow should have started yesterday. The
strategy will differ for those players that aspire – and need to aspire – to be globally leading
based on scale and importance of speed in their overall business model. Others that are
smaller and for which speed is less critical will still be safe by taking a follower approach.

However, the future apparel manufacturing and sourcing footprint will be more differentiated.
There are many things that players can already act on now and the riskiest strategy to follow
is to simply wait for new technologies to emerge. For the transformation of the apparel value
chain – as with any digital transformation – there is no such thing as a correct long-term
strategy derived from facts. Rather, the pace of innovation and change in consumer behavior
require an approach that sets a direction and then applies an agile approach of testing and
learning as well as solving issues on the go. Hence, companies need to be bold and take the
first steps, pick up the pace and get going, and handle situations as they arise.

Some companies today use flying as a shortcut to achieve the speed of nearshoring called.
Players use this strategy to start developing the commercial engine that fully leverages
short lead times. That entails improving their in-season trendspotting (monitoring social
media, frequenting trendy locales, sourcing trend information from store staff, etc.), radically
tweaking the batch size and inventory strategy to embrace test-and-scale and in-season
replenishment, and also adjusting pricing, promotions, markdown, and marketing tactics.
Of course, a rapid product design and development cycle will enable fully executing these
actions (especially the trend-action part), but they should already be a priority for any fashion
player. Emulating a fast supply chain to develop the commercial engine will not only enable
brands to use nearshoring, it will also help quantify the value of speed to enable more
fact-based decision making. However, flying is neither sustainable from an economic nor
environmental perspective. Nearshoring and automation will be key in building up a more
sustainable, circular value chain.

Starting the nearshoring journey now rather than waiting for automation to further
improve the economics is critical in leapfrogging the competition. Based on the financial
scenarios modeled, it should already make sense to nearshore some product lines
and categories if the value of speed is what is being considered. Even for product lines
that are not yet economically favorable, it could be a worthwhile investment for brands
to make a slightly lower profit in order to gain an edge on competitors. Nearshoring for
speed and sustainability will not be an easy endeavor. Companies need to solve issues in manufacturing capabilities and scale and also have quick access to fabric, manage a more
complex sourcing setup, implement “design-to-speed” thinking (i.e., adjusting design so
that it is possible to produce garments quickly given fabric availability and the manufacturing
process), and create a commercial engine to capitalize on speed. Being far ahead on this
learning curve could provide an advantage that will be difficult for competitors to top.
In addition, apparel companies should not be passive when it comes to automation
technologies. They should go out and place several bets, e.g., collaborate with
manufacturers, invest in technology firms, and recruit talent for in-house engineering.
Technological advancement (e.g., in gripping technology, robotic vision, cobots) has pushed
automation in apparel manufacturing to the brink of a breakthrough, and putting “rubber to
the road” in the form of investments could very soon lead to a disruption. Apparel companies
that are active in driving the development should expect to see great returns on their


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