Battling Supply Chain Inflation
Battling Supply Chain Inflation A call for integrated sourcing management
www.kurtsalmon.com
Battling Supply Chain Inflation A call for integrated sourcing management Increasing costs and prices characterise the current situation in sourcing Sourcing and supply chain costs have significantly increased over the past months. At the same time demands for shorter lead times, more flexibility and innovation have amplified as well. The shortage of available production capacities during the crisis and increasing domestic demand in sourcing countries, especially in China and India, have led to a massive pressure on costs and prices. Prices for raw materials, such as cotton, partly have tripled since the beginning of 2010. Additionally, unfavourable external influences, e.g. the bad cotton harvest in China and devastations in Pakistan, as well as financial speculations contributed to this development. Labour costs in the Chinese textile and apparel industry have increased up to 30%. Additionally, energy and oil prices raised significantly, resulting in higher operational and transportation costs. The fluctuation of exchange rates is also contributing to this situation, e.g. the rise of the Chinese RMB against the US$ which was strongly driven by political interests. With regard to labour costs, higher minimum wages and a shift of work force into financially more attractive industries (especially in China) add to increasing costs. Furthermore, the ongoing consolidation of sourcing markets supports higher sourcing prices. In 2006, the top 5 sourcing countries for the EU provided 58% of the total volume – in 2010 this number was up to 71%. The USA see a similar development with a slightly lower degree of concentration. Important KPIs for the real production costs are the so-called Production Cost Indices (PCIs). Those are delivered by Kurt Salmon’s “Global Sourcing Reference“, a comprehensive study being published for the 10th time in 2011. The “Global Sourcing Refer-
ence 2011” offers manufacturers, brands and retailers a complete overview of the most important sourcing countries with their respective production and logistics costs. Additionally, it indicates the current sourcing developments and trends along the complete supply chain. The study identifies cost, time and margin potentials that can be realised by optimising the mix of sourcing countries and suppliers, managing the supply chain holistically and adjusting the sourcing organisation. The Production Cost Indices significantly increased for relevant sourcing markets compared to the last report in 2009 (e.g. China by Ø 50%, Indistan by Ø 14%, South East Asia by Ø 5%). Only Turkey has become relatively cheaper for EU compared to 2009. A long-term comparison shows – especially for China – a continuous increase of PCIs. The development in other countries has proven to be softer (e.g. Vietnam, Pakistan) or rather characterised by heftier influences, such as currency, cost, productivity and capacity fluctuations (e.g. Turkey, Indonesia). Development of PCIs (EU) of Selected Sourcing Countries Country
2005
2007
2009
2011
Pakistan
11
11
11
14
Cambodia China
13
16
13
15
11-14
13-17
14-19
26-30
India
17
22
21
25
Romania
30
30
28
39
Key objectives: Stabilising gross margin and reducing overall sourcing costs “A holistic sourcing management is one of the most important levers in order to increase profitability in
Development of Sourcing Shares (€) Apparel (EU) of the Top Sourcing Countries 2006
2007
2008
2009
2010
China
Country
28,5%
31,9%
36,4%
38,6%
41,4%
Turkey
12,4%
13,0%
11,4%
10,6%
11,1%
Bangladesh
7,1%
6,6%
7,0%
7,9%
8,3%
India
5,8%
5,7%
5,7%
6,3%
6,4%
Tunisia
3,8%
3,9%
3,9%
3,5%
3,4%
Total Top 5
57,6%
61,1%
64,4%
66,9%
70,6%
2 Battling Supply Chain Inflation A call for integrated sourcing management
www.kurtsalmon.com
the current market situation. An improvement of four to five percentage points is definitely feasible.”, says Dorothea Ern-Stockum, Managing Director at Kurt Salmon Germany. “Especially in these difficult times with inflating supply chain costs the study can be an important signpost and a useful tool for orientation”, adds Dr. Sven Kromer, Senior Manager at the German office and co-author of the “Global Sourcing Reference 2011”. Results of the analyses and interviews of the study show that only a combination of various levers leads to success – price and cost increases are too big to be compensated by one activity alone. Companies mainly focus on direct measures in sourcing: 85% of the people interviewed state to move buying more towards lowest-wage countries or regions. 75% want to reinforce their relationships with strategic suppliers. 70% aim at reducing production costs, especially for materials, followed by lean manufacturing and value engineering projects (35%) which are targeting a reduction of suppliers’ production costs. In product development, companies more and more move into sourcing countries (30%), followed by a more systematic integration of purchasing offices or agents (25%). More than 50% plan selective price increases, mostly with keeping opening price points constant – a development that has not been observed in the past 20 to 30 years. In logistics, the focus is on optimising the flow of goods (45%) and increasing warehouse productivity (35%). In merchandising, it is mostly about improving assortment planning and optimisation (60%), improving markdown management in retail (55%) and aligning forecasting with customer and purchase order management in wholesale (65%).
Sourcing becomes key for shorter lead times and more sustainability Long-term trends in Sourcing: > Reducing lead times through integrated sourcing management > Moving product development activities into sourcing countries > Extending CSR activities (Corporate Social Responsibility) > Shifting use of electronic market places from transaction to information Despite of – or rather because of – the current pressure on costs, reducing lead times continues to be a key lever to respond quickly and flexibly to changing consumer trends and competitor activities. The results of the report indicate the most important trends: Sourcing needs to be managed as an integral part of the supply chain. Cross-functional planning and an holistic go-to-market calendar management are key to sustainably reduce lead times within the supply chain by up to 25 to 40%. Additionally, the movement of product development activities into sourcing countries – from technical product specification to quality control – results in a better and faster local coordination of development and sourcing decisions. Due to better management possibilities, companies find it easier to shift these activities into own buying offices (40%) rather than working with external agents (30%). Looking at the production side, the trend towards Corporate Social Responsibility continues, increasingly also for upstream production stages (tier-2
Management Levers
Key Reasons
Managing Supply Chain Inflation
Strategic Pricing Management
Product Development and Material Management
Sourcing and Production Optimisation
Logistics and SG&A Optimisation
Merchandising and Inventory Management
• Review and potentially adjust opening price points • Change mix of price levels in current assortments • Combine pricing with quality decisions
• Shift responsibilities to sources • Substitute fabrics and trims • Selectively decrease quality • Leverage core materials • Supplier target costing and open book calculation
• Optimise sourcing country mix • Consolidate supplier base • Flexible sourcing organisation • Develop supplier relations • Value engineering and lean manufacturing
• Improve product flow • DC network opt. • Improve DC productivity • Outsourcing and 3PL management • Centralise operational and backoffice functions • Review wholesale sales organisation
• Consumer driven assortment planning and decisions • Proactive slowseller management • Align forecast and order management in wholesale • Demand-driven allocation and replenishment
www.kurtsalmon.com Battling Supply Chain Inflation A call for integrated sourcing management
3
suppliers). New CSR elements are to be implemented, for example the payment of fair wages. Considering the existing challenges with regard to sourcing costs, activities causing additional implementation costs are currently being partly pushed back. However, from a long-term perspective, the trend towards CSR will continue. On the consumer side, ecologically or socially responsibly manufactured products are mostly not considered as differentiators: 40% of the people interviewed see such a potential for only 5% of their assortment. Another trend in sourcing is the use of electronic B2B market places. They become more and more relevant as a means for more transparency on the supply market. Those information platforms list and categorise as many suppliers as possible and have also started to audit them. However, companies consider them useful for transactions for only 5 to 10% of the sourcing volume. Retailers and brands still have too many quality and service concerns. Additionally, considering the current capacity and cost situation within the supply chain, suppliers tend to more refrain from participating in such price-oriented business models.
ses the 45 most important sourcing countries and the current challenges resulting from the inflating supply chain costs. For the first time, the USA are included as a separate import market offering a truly global perspective. In addition to sourcing markets for fashion goods, the study also investigates sourcing countries for hard-goods such as household appliances, electronics and toys. The study shows two indices: the production cost index and the sourcing cost index. The latter includes production as well as transportation costs and facilitates decision-making for retailers. The production and logistics costs are based on data generated by Kurt Salmon through numerous global sourcing and logistics projects and validated by additional research and statistical methods. Additionally, data was collected from sources, such as Eurostat, UNCTAD, PRS, GTAI, Euromonitor, the US Department of Commerce, the US International Trade Commission, OANDA and CIA World Fact Book. The study costs € 790,– and can be ordered via [email protected]
China emerges from the crisis as a winner, but for how long? An analysis of the winners and losers amongst the sourcing countries shows: Despite the cost developments, China is clearly leading the list of sourcing markets. Considering its size and capabilities this position will not be in question for the next few years. However, the followers are coming closer. Especially Vietnam, which has profited from the shift of Chinese suppliers and a stronger domestic demand, as well as Turkey, which faces considerably less capacity constraints, offers a strong textile industry and benefits from favourable exchange rate developments. Bangladesh could not fully keep up the growth pace it showed during the economic downturn in 2009, but globally remains an important sourcing market as lowest-wage country. The losers for European sourcing are once again the countries of Eastern Europe which continue to face shrinking market shares. This is mainly due to productivity deficits and a lack of verticalisation in the industry. As opposed to Turkey, Eastern Europe also did not have the capacities needed to close the arising gap of supply in China.
About the study The “Global Sourcing Reference 2011” comprises the results of interviews with more than 100 top sourcing decision-makers in Europe. It also analy-
Kurt Salmon Germany GmbH Königsallee 11 40212 Düsseldorf T: +49 (0)211 7595 0 F: +49 (0)211 7595 111 [email protected] www.kurtsalmon.com
4 Battling Supply Chain Inflation A call for integrated sourcing management
www.kurtsalmon.com
www.kurtsalmon.com
Battling Supply Chain Inflation A call for integrated sourcing management Increasing costs and prices characterise the current situation in sourcing Sourcing and supply chain costs have significantly increased over the past months. At the same time demands for shorter lead times, more flexibility and innovation have amplified as well. The shortage of available production capacities during the crisis and increasing domestic demand in sourcing countries, especially in China and India, have led to a massive pressure on costs and prices. Prices for raw materials, such as cotton, partly have tripled since the beginning of 2010. Additionally, unfavourable external influences, e.g. the bad cotton harvest in China and devastations in Pakistan, as well as financial speculations contributed to this development. Labour costs in the Chinese textile and apparel industry have increased up to 30%. Additionally, energy and oil prices raised significantly, resulting in higher operational and transportation costs. The fluctuation of exchange rates is also contributing to this situation, e.g. the rise of the Chinese RMB against the US$ which was strongly driven by political interests. With regard to labour costs, higher minimum wages and a shift of work force into financially more attractive industries (especially in China) add to increasing costs. Furthermore, the ongoing consolidation of sourcing markets supports higher sourcing prices. In 2006, the top 5 sourcing countries for the EU provided 58% of the total volume – in 2010 this number was up to 71%. The USA see a similar development with a slightly lower degree of concentration. Important KPIs for the real production costs are the so-called Production Cost Indices (PCIs). Those are delivered by Kurt Salmon’s “Global Sourcing Reference“, a comprehensive study being published for the 10th time in 2011. The “Global Sourcing Refer-
ence 2011” offers manufacturers, brands and retailers a complete overview of the most important sourcing countries with their respective production and logistics costs. Additionally, it indicates the current sourcing developments and trends along the complete supply chain. The study identifies cost, time and margin potentials that can be realised by optimising the mix of sourcing countries and suppliers, managing the supply chain holistically and adjusting the sourcing organisation. The Production Cost Indices significantly increased for relevant sourcing markets compared to the last report in 2009 (e.g. China by Ø 50%, Indistan by Ø 14%, South East Asia by Ø 5%). Only Turkey has become relatively cheaper for EU compared to 2009. A long-term comparison shows – especially for China – a continuous increase of PCIs. The development in other countries has proven to be softer (e.g. Vietnam, Pakistan) or rather characterised by heftier influences, such as currency, cost, productivity and capacity fluctuations (e.g. Turkey, Indonesia). Development of PCIs (EU) of Selected Sourcing Countries Country
2005
2007
2009
2011
Pakistan
11
11
11
14
Cambodia China
13
16
13
15
11-14
13-17
14-19
26-30
India
17
22
21
25
Romania
30
30
28
39
Key objectives: Stabilising gross margin and reducing overall sourcing costs “A holistic sourcing management is one of the most important levers in order to increase profitability in
Development of Sourcing Shares (€) Apparel (EU) of the Top Sourcing Countries 2006
2007
2008
2009
2010
China
Country
28,5%
31,9%
36,4%
38,6%
41,4%
Turkey
12,4%
13,0%
11,4%
10,6%
11,1%
Bangladesh
7,1%
6,6%
7,0%
7,9%
8,3%
India
5,8%
5,7%
5,7%
6,3%
6,4%
Tunisia
3,8%
3,9%
3,9%
3,5%
3,4%
Total Top 5
57,6%
61,1%
64,4%
66,9%
70,6%
2 Battling Supply Chain Inflation A call for integrated sourcing management
www.kurtsalmon.com
the current market situation. An improvement of four to five percentage points is definitely feasible.”, says Dorothea Ern-Stockum, Managing Director at Kurt Salmon Germany. “Especially in these difficult times with inflating supply chain costs the study can be an important signpost and a useful tool for orientation”, adds Dr. Sven Kromer, Senior Manager at the German office and co-author of the “Global Sourcing Reference 2011”. Results of the analyses and interviews of the study show that only a combination of various levers leads to success – price and cost increases are too big to be compensated by one activity alone. Companies mainly focus on direct measures in sourcing: 85% of the people interviewed state to move buying more towards lowest-wage countries or regions. 75% want to reinforce their relationships with strategic suppliers. 70% aim at reducing production costs, especially for materials, followed by lean manufacturing and value engineering projects (35%) which are targeting a reduction of suppliers’ production costs. In product development, companies more and more move into sourcing countries (30%), followed by a more systematic integration of purchasing offices or agents (25%). More than 50% plan selective price increases, mostly with keeping opening price points constant – a development that has not been observed in the past 20 to 30 years. In logistics, the focus is on optimising the flow of goods (45%) and increasing warehouse productivity (35%). In merchandising, it is mostly about improving assortment planning and optimisation (60%), improving markdown management in retail (55%) and aligning forecasting with customer and purchase order management in wholesale (65%).
Sourcing becomes key for shorter lead times and more sustainability Long-term trends in Sourcing: > Reducing lead times through integrated sourcing management > Moving product development activities into sourcing countries > Extending CSR activities (Corporate Social Responsibility) > Shifting use of electronic market places from transaction to information Despite of – or rather because of – the current pressure on costs, reducing lead times continues to be a key lever to respond quickly and flexibly to changing consumer trends and competitor activities. The results of the report indicate the most important trends: Sourcing needs to be managed as an integral part of the supply chain. Cross-functional planning and an holistic go-to-market calendar management are key to sustainably reduce lead times within the supply chain by up to 25 to 40%. Additionally, the movement of product development activities into sourcing countries – from technical product specification to quality control – results in a better and faster local coordination of development and sourcing decisions. Due to better management possibilities, companies find it easier to shift these activities into own buying offices (40%) rather than working with external agents (30%). Looking at the production side, the trend towards Corporate Social Responsibility continues, increasingly also for upstream production stages (tier-2
Management Levers
Key Reasons
Managing Supply Chain Inflation
Strategic Pricing Management
Product Development and Material Management
Sourcing and Production Optimisation
Logistics and SG&A Optimisation
Merchandising and Inventory Management
• Review and potentially adjust opening price points • Change mix of price levels in current assortments • Combine pricing with quality decisions
• Shift responsibilities to sources • Substitute fabrics and trims • Selectively decrease quality • Leverage core materials • Supplier target costing and open book calculation
• Optimise sourcing country mix • Consolidate supplier base • Flexible sourcing organisation • Develop supplier relations • Value engineering and lean manufacturing
• Improve product flow • DC network opt. • Improve DC productivity • Outsourcing and 3PL management • Centralise operational and backoffice functions • Review wholesale sales organisation
• Consumer driven assortment planning and decisions • Proactive slowseller management • Align forecast and order management in wholesale • Demand-driven allocation and replenishment
www.kurtsalmon.com Battling Supply Chain Inflation A call for integrated sourcing management
3
suppliers). New CSR elements are to be implemented, for example the payment of fair wages. Considering the existing challenges with regard to sourcing costs, activities causing additional implementation costs are currently being partly pushed back. However, from a long-term perspective, the trend towards CSR will continue. On the consumer side, ecologically or socially responsibly manufactured products are mostly not considered as differentiators: 40% of the people interviewed see such a potential for only 5% of their assortment. Another trend in sourcing is the use of electronic B2B market places. They become more and more relevant as a means for more transparency on the supply market. Those information platforms list and categorise as many suppliers as possible and have also started to audit them. However, companies consider them useful for transactions for only 5 to 10% of the sourcing volume. Retailers and brands still have too many quality and service concerns. Additionally, considering the current capacity and cost situation within the supply chain, suppliers tend to more refrain from participating in such price-oriented business models.
ses the 45 most important sourcing countries and the current challenges resulting from the inflating supply chain costs. For the first time, the USA are included as a separate import market offering a truly global perspective. In addition to sourcing markets for fashion goods, the study also investigates sourcing countries for hard-goods such as household appliances, electronics and toys. The study shows two indices: the production cost index and the sourcing cost index. The latter includes production as well as transportation costs and facilitates decision-making for retailers. The production and logistics costs are based on data generated by Kurt Salmon through numerous global sourcing and logistics projects and validated by additional research and statistical methods. Additionally, data was collected from sources, such as Eurostat, UNCTAD, PRS, GTAI, Euromonitor, the US Department of Commerce, the US International Trade Commission, OANDA and CIA World Fact Book. The study costs € 790,– and can be ordered via [email protected]
China emerges from the crisis as a winner, but for how long? An analysis of the winners and losers amongst the sourcing countries shows: Despite the cost developments, China is clearly leading the list of sourcing markets. Considering its size and capabilities this position will not be in question for the next few years. However, the followers are coming closer. Especially Vietnam, which has profited from the shift of Chinese suppliers and a stronger domestic demand, as well as Turkey, which faces considerably less capacity constraints, offers a strong textile industry and benefits from favourable exchange rate developments. Bangladesh could not fully keep up the growth pace it showed during the economic downturn in 2009, but globally remains an important sourcing market as lowest-wage country. The losers for European sourcing are once again the countries of Eastern Europe which continue to face shrinking market shares. This is mainly due to productivity deficits and a lack of verticalisation in the industry. As opposed to Turkey, Eastern Europe also did not have the capacities needed to close the arising gap of supply in China.
About the study The “Global Sourcing Reference 2011” comprises the results of interviews with more than 100 top sourcing decision-makers in Europe. It also analy-
Kurt Salmon Germany GmbH Königsallee 11 40212 Düsseldorf T: +49 (0)211 7595 0 F: +49 (0)211 7595 111 [email protected] www.kurtsalmon.com
4 Battling Supply Chain Inflation A call for integrated sourcing management
www.kurtsalmon.com
