July 29, 2020
The risks of reliance on a single manufacturing source
Over the past several months, shortages of supply in a variety of areas have been revealed across the globe. While early shortages of medical equipment and other Chinese manufactured goods have spotlighted decisions around the risks of single source dependence, tariffs remain a constant challenge as the trade war between the US and China continues to be area of concern for many organizations.
The goal of applying tariffs is to change behaviors that benefit China and possibly increase revenue, even if only a small amount, as well as to punish and discourage the practice of intellectual property theft, which many countries have alleged of China and other supplier countries. Another objective of the import tax is to alter the flow of goods throughout the supply chain.
The US and other countries depending on Chinese manufacturing for most products has essentially forced companies to source internationally, with China getting a large portion of orders. Over decades, US manufacturing jobs have dropped, production has waned, and a large trade deficit ensued. Recent tariff increases have reduced the 2019 $346B trade deficit and shifted trade elsewhere.
Another goal includes negotiating better rates or reducing barriers to trade with a country—in this case, asking China to buy more American goods and services. A small amount of benefit, in relation to the overall government, comes from the customs revenue.
Managing manufacturing sourcing via control center technology
Retailers must consider short-term impacts of a trade war with China and examine other options for pricing and sourcing. Tariffs are not new considerations, especially to the apparel and footwear industry. In the short term, retailers and brands should strategize the impact of cost increases and it affects on prices.
Longer term, retailers can address two things: material composition and manufacturing location. Product designers should leverage the Harmonized Tariff Schedule (HTS or HS) and material exclusions to create new design configurations in a product lifecycle management solution that reduce tariff costs. However, some industries may be easier to redesign around the tariffs than others as the complexities of impacted materials vary from “man-made” textile materials like rayon to “flat fabrics.”
While Section 301 tariffs and the details within it can change, retailers and brands may opt to modify their sourcing countries. Many notable retailers are changing to suppliers and factories in numerous other geographical regions to diversify their risk.
The supply shortages of 2020 have further illuminated our dependence on China for a variety of products. When the initial outbreak occurred, production in China screeched to a halt everything from fashion, household goods, medical devices, pharmaceuticals, as well as personal protective equipment (PPE). China, being the central source for most of these items, has prioritized domestic use first before meeting other countries’ needs. A limited government stockpile, insufficient or delayed domestic capacity, and an export reduction from China led to a worldwide shortage.
Given the ramifications of sourcing mainly from China, retailers and brands have recognized the need to scale up production in one region while reducing demand in another, possibly even shifting to more domestic output. With the world’s dependence on Chinese manufacturing, wages have steadily increased for the average factory worker by 300% over the past 10 years, slowly deteriorating cost savings originally deemed attractive. While great for citizens of China, global retailers will reevaluate supply based on design costs that include labor, tariffs, lead times, working conditions, and sustainability of Chinese manufacturers.
Indications reveal that retailers’ demand for Chinese exports to the US fell by more than 16% in 2019 according to BBC News, a significant change from previous decades. Although just one year, evidence also shows imports from other Asian countries have spiked.
With all this information, assortment planners can consider both private label products from the design team as well as sources of third-party styles. Before finalizing the seasonal buy, regional sources should be aggregated with analysis done on percentage of category business, cross-category, price, margin, lead time, and more.
As goods are moving throughout the supply chain, a network control center solution can provide visibility to goods coming from China, Vietnam, South America, as well as domestically, to ensure any disruption is anticipated so a mitigation strategy can be implemented.
For additional strategies for building the resilient supply chain needed for the Retail Revolution, download the complete Supply Chain Resiliency Best Practices Guide.