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71% of fashion companies turning to nearshoring: McKinsey

17 Nov '21
3 min read
Pic: Busakorn Pongparnit | Dreamstime.com
Pic: Busakorn Pongparnit | Dreamstime.com

Following lockdowns in retail and factory closures in source countries, supply chain disruptions continue to hit the fashion industry hard. With shipping costs becoming the biggest cost driver, 71 per cent of apparel and fashion companies are planning to increase their nearshoring share by 2025, according to a latest report by McKinsey & Company.

“Harbor shutdowns, port congestion, container shortages, and capacity issues in sea and air freight are putting the fashion industry under massive pressure. For the first time, shipping disruptions are becoming the biggest cost driver,” according to the leader of the Apparel, Fashion & Luxury practice at McKinsey in Germany, Senior Partner Karl-Hendrik Magnus.

82 per cent of sourcing executives surveyed cite shipping costs as the biggest driver, while labour costs in source countries—previously always one of the top drivers—is mentioned by only 21 per cent. “The era of sourcing continuous cost improvement is being challenged as never before and there’s an increasing focus on other competing goals,” says Patricio Ibáñez, co-author of the study and Partner at McKinsey.

“Fifty percent of companies have already embarked on extensive transformations to increase sourcing speed and flexibility,” according to the key findings of the study “Revamping fashion sourcing: speed and flexibility to the fore” by McKinsey & Company. As part of the international study, the management consultancy surveyed 38 CPOs (chief procurement officers) from leading apparel companies and retailers in North America and Europe, who together account for roughly $100 billion of sourcing volume.

Discussing the increasing importance of nearshoring, resilience, and sustainability, the report states that to remain competitive, fast response times and supply chain resilience are crucial for today’s fashion companies. More and more businesses have reported a fall in earnings in recent months as new merchandise and replenishments have arrived too late, the assortment fails to resound with consumers, and markdowns on overstocks are increasing.

One way to respond more flexibly to supply chain risks and current trends, while also managing production by sales data, is to introduce shorter transport routes, says the report by the global consulting firm. Despite the higher sourcing costs, almost three-quarters of respondents are planning to grow their nearshoring share—that is, to source apparel from nearby countries.

For the first time, Turkey is now one of the top-3 most promising source countries for the years ahead. Turkey is particularly appealing for the European market: Transportation from Turkey to Germany, for example, takes three to six days compared to the up to 30 days needed to move an item of clothing from southeast Asia by ship. For the US market, Central America has become more of an important focus. Relocating production back to the domestic market is also gaining interest: 24 per cent of sourcing executives mentioned increasing their reshoring share as an option.

“Another advantage of nearshoring is that the shorter transport routes increase sustainability while lowering greenhouse emissions. Nearshoring also allows more flexible in-season production, which helps to reduce overproduction,” says the report’s co-author Saskia Hedrich. This will also support a trend where 53 per cent of firms are planning to reduce the number of options in their assortment in the next few years by focusing more on analytics to deliver more intelligent and customer-centric design. It’s a trend that benefits everyone: Customers with products that are better tailored to their needs, businesses with better full-price sales, and the environment with less product surplus and waste.

Fibre2Fashion News Desk (RKS)

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