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Friday, 20 September 2013

Go West, Young Man!

Originally advice given by American author Horace Greely in the 19th century, this could well be applied to 21st century sourcing strategy as Chinese manufacturing wages rise and its 30-year position as a low cost supplier look to be coming to an end.

Although China remains an important supplier for many UK retailers Ben Cooper reported that half of 28 retail executives interviewed are now sourcing from alternative markets and even more significantly only two expect to be sourcing more from China in the near future.

So what are the main reasons for this and which countries are emerging to take China's place?

Huge increases in labour costs of up to 15% year on year. In fact it is anticipated by Boston Consulting that China's manufacturing cost advantage over the US will disappear by 2015.

The working age population is declining. The Financial Times reports that by the end of 2012 the population aged between 15 and 59 was 937.27m. A decrease of 3.45m from 2011 according to figures released by China's National Bureau of Statistics.

For the first time in 2013 the Chinese renminbi (yuan) became one of the top-10 most traded currencies and has reached record levels of value relative to other currencies making importing from China more expensive. In addition to this Chinese manufacturers are more often imposing high minimum order quantities.

Some retailers have experienced a degree of unreliability from Chinese suppliers due to the increasing mobility of the workforce and the seeming lottery of the "will they or won't they come back after Chinese New Year".

Zara is well known for having one of the very best supply chain models in the fashion world and where do they manufacture? Two thirds of their production is from Africa and Europe.

A new study from Stratfor Global Intelligence has identified a "Post-China 16" that includes four African countries as well as Mexico, Peru and Indonesia. Europe offers shorter lead times and lower minimum order quantities, which combined with reduced freight costs is good news for net profitability.

What next? A return of UK manufacturing? Fingers crossed, young man!

Written by Erica Vilkauls: JEM Retail Consultants

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