A study conducted at the University of Pretoria investigated the reasons behind South African clothing and textile retailers’ decisions to source globally, what risks these firms are exposed to and how these risks are identified and managed.
BETTER PRICES, higher quality, greater variety and shorter delivery lead times are just some benefits that South African clothing and textile retailers experience when sourcing their products globally. Combined with the uncompetitive nature of the South African clothing and textile manufacturing industry, these benefits are often the very reasons driving many firms’ decisions to take the global route.
Whilst many benefits could be leveraged in global sourcing arrangements, firms should tread carefully as the increased complexity of these arrangements may very well amplify the firm’s exposure to risk and disruptions.
A study conducted at the University of Pretoria showed that the clothing and textile industry sourced its products globally for a variety of reasons. Access to lower cost goods and better quality was a major influencing factor in participants’ decisions to source globally. Limited or lack of local supply and access to more variety were noted by participants as significant push factors for small clothing and textile retailers to source globally. Global manufacturers appear to be more up to date with the latest trends and can provide products not available locally. Ease of access to the market and familiarity with the sourcing market significantly influenced decisions on which countries to source from.
Several participants noted that having family or friends from the sourcing country, or being a native from that country, created greater ease of access to that particular market. Participants indicated that complicated and costly logistics added a significant risk element as many items are damaged or go missing during the mandatory customs clearance activities. In addition, they experienced delays in the clearing of items, which increased overall lead-times. Political and economic instability in the South African context makes fluctuating exchange rates a constant problem, as the majority of global purchases are paid for in US dollars. These fluctuations drastically impact the firms’ purchasing power and ultimately profit margins as they cannot increase their prices as often as the exchange rates fluctuate.
Communication and cultural barriers often lead to the inability to negotiate with suppliers to get better prices or result in delayed outputs. These aspects also make visits to sourcing countries more
challenging. Several other risks were indicated, such as supplier reliability, which often affects the quality of items for which the retail owners present custom design requirements.
Given the size of participating firms, the majority of risk identification approaches used tended to be informal in nature and were conducted at the sole discretion of the clothing and textile retail managers.
Some participants used a landscape analysis as part of their risk identification process, where the firm assessed the sourcing country’s political, economic and environmental conditions by conducting online research. Informal product quality checks were conducted by several firms to ensure that products comply with order specifications in terms of design and quality before being packaged for shipping.
Supplier pre-buying reviews were conducted in which owners checked suppliers’ business profiles and online reviews before making a decision to source from any particular one. Exchange rate monitoring through regular rand to US dollar exchange rate checks were regularly conducted. Though informal, multiple approaches to manage risk were reported. Exchange rate fluctuation buffers were either proactively or reactively built into participants’ profit margins to manage the risk of exchange rate fluctuations. Hedging tends to be a better alternative, but the costs involved with hedging prohibit the majority of small retailers from making use of this approach. Dual ransportation
by means of separating orders into batches and transporting them individually was a method only employed by a select few of the participants, but seemed to be effective nonetheless.
Managing communication and cultural barriers using mobile translation applications allowed participants to improve their negotiation abilities and assisted in securing the supply of products. The risks associated with global sourcing are a reality for many firms operating in other retail contexts. This study identified a range of informal risk identification and management approaches that can be implemented without the need for major investments in capital or time.
Contributed by By Wesley Niemann, Supply Chain Management Educator, Researcher & Consultant at University of Pretoria
Article first appeared in Logistics News - Click here to download the Oct Nov 2020 issue of Logistics News