Strategies for Success in a Global Sourcing Environment

1
Strategies for Success in aGlobal Sourcing
Environment

• Prepared For
• National Textile Association
• 151st Annual Meeting
• Amelia Island, Florida
• November 7, 2005
• JASSIN OROURKE GROUP
• 48 W. 38th Street, New York, NY 10018
  212-382-0045 (o) 917-567-3540 (c)
  morourke_at_jassinorourke.com

2
Consumer / Retailers / Traditional Brand Owners
Market Dynamics Supply Chain Havoc

• Consumer Confidence Level
• Discretionary Spending / Non-Apparel Growth
• Sluggish Mall Traffic to E-tail Growth
• Profound Consumer Demographic Changes
• Explosion of Focused Lifestyle Brands
• Private Label eating Brand Share
• Fast Fashion/Chase/Replenishment Models
• Consumer Value Merchandising/Marketing
• Unabated Price Pressure
• Sourcing Uncertainties . . .

3
Retailers and Brand-Owners Focus

• Bottom Line Growth Maximize Margin Profit
• Reduce Sourcing Costs
• Quota-free 2005
• Last shift to lower cost needle countries
• Sourcing administration/overhead consolidation
• Analysis shift to raw material cost impacts,
  rather than inputs
• Fabric price per yard, transitioning to fabric
  cost per garment
• Typical Garment Fabric Yield Specifications,
  impacted by
• Sourced-fabric seconds history
• Apparel manufacturers cutting technology use
• Apparel manufacturers history of finished
  garment seconds
• FOB versus To Store or Distribution Center
  Garment Cost Competitiveness
• After duty, shipping, brokers fees
• Seconds extraction/refurbishment
• Sourcing capital timeline
• Full package terms elimination of letter of
  credit

4
Variables Cutting Automation
Yield Impacts Net Fabric Cost/Garment
Automated Cutting /Productivity/Planned Yield
Impact on Planned Fabric Use/Yards Per Garment
Yards/Garment
5
Variable Cost ImpactsTypical Seconds
Experienced by Cotton Apparel Importers
Seconds
6
Retailers and Brand-Owners Focus

• Bottom Line Growth Maximize Margin Profit
• Identify/Fast Track High Margin Opportunities
• Rapid Response to Key Fashion Trend Items
• Style
• Fabrication
• Consumer-Desirable/Marketable, Innovative
  Products
• Performance
• Comfort
• Carefree
• Fashion Replenishment Programs Signature Items
• Color

7
Regional Apparel Sourcing Prospects . . . .

• Safeguards sustain regional markets short term
• Long term stability and growth dependent on
• Lead time improvement/advances
• Single greatest opportunity
• Pre-production elements most critical
• Private label market share advances
• Leaner merchandising calendar for PL
• Forcing traditional brands into more
  seasons/product lines
• Specialty stores adopting fast fashion business
  models and core fashion replenishment programs
• Innovation
• Where performance is the key value proposition
• Communicating Cost Competitiveness
• Return on Sourcing Capital Employed

8
Chinas Mega-Investments Are Paying Off

• Expansion-driven, foreign investment for apparel
  export entities
• 70 of Chinas exported apparel production is
  under non-mainland control
• foreign-owned
• joint ventures
• equity partnerships
• Mainly HK, Taiwan, S. Korea, Japan,
  Singapore-headquartered apparel vendors
• Quality increasing with equipment / technology
  choices, improved methods and through better use
  of equipment and training
• Significant focus on IT systems and logistics
• Better customer communication
• Noticeable lead time reduction
• Pre-production through delivery
• Cost reduction through process streamlining
• Brand-owners transferring more authority
• To their own Asian-based sourcing management
• To Asian vendors

9
Some China Fast Facts . . .

• Guangdong Province, for example
• Closest to Hong Kong, led by the cities of
  Shenzhen, Dongguan and Guangzhou.
• 40 of Chinas knit apparel exports or more than
  5 billion pieces
• Dominated by circular knit apparel output, from
  sportswear t-shirts to better quality, fine gauge
  knit cotton shirts (though this fabric is largely
  imported).
• Third largest province for knit machinery
  imports many vertical knit/sew operations, small
  to large.
• Third largest cotton fabric-producing province,
  including some 200 million meters denim.
• Largest importer of cotton apparel fabrics,
  representing some 1.7 billion meters.
• 60 of export apparel production from this
  province uses imported fabrics
• Mainly due to dyeing quality
• Adds to lead time.

10
Chinas Labor Issues impact Brand Owner Margins

• China is not the lowest labor cost source in
  Asia.
• Rates can be as low as .55 per hour, to as high
  as 2.10 in some Shenzhen factories.
• Labor availability is an increasing problem in
  the key coastal areas.
• Competition from higher wage industry sectors has
  escalated, with the more skilled workers exiting
  the industry.
• Proportionately more migrant workers
• Extremely high turnover higher training costs.
• Deliveries running late
• Excessive short-shipments due to seconds and
  labor turnover

11
Average Apparel Labor Costs - Asia
12
Pre-production Lead Time Advances - Asia

• Initial fabric sampling
• 2 to 5 days
• Fabric lab dip samples
• 4 to 7 days
• Knit down samples
• 5 to 8 days
• Yarn dyes
• 10 days

13
Pre-production Lead Time Advances

• Pre-production garment sample cost quote
• Same day to 24 hours
• Concept garment samples
• Completed in 5 days or less
• Fit sample garments and corrections
• 4 to 8 days
• Salesman samples
• 2 to 3 weeks
• Fabric and garment testing
• 1 week or less

14
Conclusions

• West can compete with East
• Knit cotton basics underwear, tees, polos
• Simple make, knit sportswear tops
• Basic jeans (womens stretch more vulnerable)
• Performance bottoms (replenishment/no-iron/fast
  fashion color)
• Performance activewear
• Swimwear (womens upper moderate competitive)
• Daywear fast fashion (color) Shapewear
• Corporate Workwear

15
Strategies for Success

• Identify Retailers/Brand-Owners Pre-Disposed to
  Regional Sourcing
• Research/identify their consumer value
  proposition
• Determine how your product aligns with it
• Develop marketing spin on the true cost of
  sourcing cost reduction/margin enhancement
• Fabric yields, seconds, short shipments, etc
• Landed price versus f.o.b.
• Target Signature Tee Programs/Color Quick Ship
• Target Specialty Store Private Labels and E-tail
  QR Items
• Fabric sourcing knowledge among regional apparel
  manufacturers is critical
• Create sample libraries for key manufacturers
• Quote pricing within 24 hours
• Deliver lab dips in 4 days
• Partner with apparel manufacturers who quote
  garment cost 24 hours
• Investigate Partner/Fireman/QR sourcing with
  Asians

16
And Selling To China The Emerging Market

• Top line revenue growth strategies drive brands
  and retailers into the Chinese market local /
  unlimited sourcing will facilitate market access
• 2 of the population can afford any Western
  product
• Apparel purchase focus almost exclusively on
  Western designers and brands, mainly the EU
  luxury price points.
• Another 13, the emerging middle class, can
  afford product ranging from a Wal-Mart quality to
  department store brands.
• This consumer covets Western brands today
• They are status-conscious, and will mix one or
  two visible Western brands, with top Hong Kong
  brands, among their growing wardrobe of top China
  brands
• Major US brands targeting market development
  today
• Requires whole new approach, merchandising,
  product adaptation, body measurements, sizing to
  color
• Will add another layer of complexity to managing
  process
• How are you positioning to take advantage of
  China as a market???

17
Landed US Cost Analysis 2005 - US
18
China Raw Material Cost Impact Womens
Jean v. Textured Poly Pant
Textured Poly Pant
Denim Jean
10.63
7.43
70 Raw Material Finishing
63 Raw Materials
CHINA 2005
CHINA 2005
19
US Apparel Source of Supply - Projected

REST OF WORLD
CHINA
Regional Supply Canada, Mexico, CBI and Andean
US Production