By Felipe Caro
If you follow the recent supply chain news, which is quite likely since you're reading this blog, then for sure a word that you have heard repeatedly is reshoring. In the last year, there has been an avalanche of articles and conferences discussing the merits of bringing manufacturing back to developed countries. The subject has been particularly sensitive in the United States. Indeed, there was a national uproar when it was revealed that the Olympic uniforms of Team USA had been made abroad. President Obama has publicly praised companies that bring manufacturing jobs back to the United States and campaigns like Make it in America are eager to support the reshoring trend. One of the recent converts is Walmart. The giant retailer announced earlier this year that it plans to source the equivalent of $50bn from domestic suppliers over the next decade.
At the height of the U.S. Olympic clothing controversy, I was asked by the local NBC station whether it would make sense to "reshore" apparel manufacturing. Little of what I said was included in the news report (see link below), so here I would like to elaborate on the idea.
Several arguments have been used to justify reshoring. However, some of the most compelling reasons are still not strong enough to make a case in the apparel industry. For instance, many have noted the rising labor costs in China. This increase motivated Chesapeake Bay Candle to shift production from China to Maryland in 2011. Though rising labor costs in China have been felt in the apparel industry, it is still far cheaper than producing anywhere in the United States. Moreover, there are other countries like Vietnam and Bangladesh that are becoming "the new China". The increase in shipping costs has also been used as an argument, but since most of the raw materials – fabric, in particular – are imported anyway, the savings from reshoring are not clear. Other arguments have been quality concerns or to have manufacturing closer to R&D, but these reasons carry more weight for technology-intensive companies, like General Electric's decision to reshore its innovative GeoSpring water heater.
So why would it make sense to reshore apparel? A first thought based on the Olympic clothing fuss is that there exists demand for products with the "made in America" label. Unfortunately, despite some anecdotal evidence, there is no full-fledged study supporting this argument in the case of apparel. In fact, the Los Angeles based retailer American Apparel, which heavily advertises its insourcing strategy, has yet to be a proof-of-concept, and continues to struggle financially.
A more convincing reason for reshoring apparel is to gain speed. This argument is in line with the success of retailers like Spain-based Zara that operate with a dual supply chain in which clothing basics are made in distant low-cost countries, whereas the fashion items are sourced locally in order to respond quickly to demand. What's more, a recent empirical study by a group of academics at IESE Business School shows that products with short time-to-market (two to four weeks) have a significantly higher speed of sales than products that take several months to reach the stores. Hence, there is a proven business reason to move some apparel production out of remote low-cost locations, but there is a catch. The argument doesn't imply moving manufacturing back to the United States; just that production should take place closer to the consumer. In that sense, Mexico would probably be the natural choice for an apparel retailer that wants to gain speed in the United States, just as Zara chose Portugal and Morocco for its faster items. Doing business in Mexico might have other issues (just ask Walmart), but when it comes to apparel, Mexico could end up being the real winner from making things in America.
Sources (all accessed April 7, 2013):
- Walmart to Boost Sourcing of U.S. Products by $50 Billion over the Next 10 Years. Walmart. Jan 13, 2013.
- Not made in the USA: Losing out on Olympic clothing. NBC Los Angeles. August 8, 2012.
- Candle Maker Feels Burned. Wall Street Journal. May 5, 2011.
- Not Just Patriotic, U.S. Manufacturing May Be Smart. National Public Radio. December 8, 2012.
- The Role of Quick Response in Accelerating Sales of Fashion Goods. A. Lago, V. Martínez-de-Albéniz, P. Moscoso, A. Vall. IESE Business School working paper. 2013.
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