Let’s start right off with a quote from a recent news story.
Jim Issler, president and CEO of H.H. Brown, said the footwear industry
is entering a new era, where cheaper labor will no longer be an
alternative to raising wholesale prices. “It’s definitely a turning
point in our industry and it’s not going to be solved easily,” he said.
“We chased labor around the world. Now, we’re at the end of the maze
and there is nowhere else to go.”
Funny it should be a footwear company that said that, as almost a couple years ago we predicted that would happen, using the phrase "time to strap on the sneakers again." Chasing cheap labor can work for a while, but some competitors will be looking deeper into their organizations and creating change that saves more than cheaper labor ever can. But this article tells a story of woe that goes beyond just rising labor costs, and basically indicts the entire offshore outsourcing mantra.
Many firms are bracing for steep increases in the costs of raw
materials, labor, ocean freight and transportation. Skyrocketing
petroleum prices, the weak dollar, new labor policies in China and
increased competition for workers in the Guangdong region are all
pinching the bottom lines of many companies.
Let’s see… if you manufactured in the U.S. you could take advantage of the cheap dollar and significantly reduce transportation costs. Which is why some foreign companies are outsourcing to America. Now where are all the protectionists that want to erect artificial trade barriers? In which direction?
Some companies expect the customer to just absorb the cost if their inherent inefficiency.
Skechers CEO Robert Greenberg said prices at Skechers could rise 3
percent to 8 percent. However, he won’t be looking for ways to
substitute lower-cost materials. “We’re certainly not going to
sacrifice our product just to make them cheaper,” he said. “[If the
product is right] consumers will pay the prices and retailers will make
more per pair.”
But perhaps the end of the cheap labor road is going to force some companies to see the light.
Wolverine is also reexamining its sourcing strategy and looking for
savings wherever possible. “Competitively, we constantly have to try to
find ways to do things better because it’s very difficult to pass it
along to the consumer,” [President Ted Gedra] he said.
And some companies have already been working toward lean. We told you about Nike’s lean efforts in China just last month. They aren’t the only ones.
Adidas AG CFO Robin Stalker said the company was well situated. “We
believe we are extremely well positioned competitively, vis-à-vis our
competitors, in terms of lean manufacturing and engineering of our
Nike likewise said its efficiencies
would mitigate cost increases. “Continued progress on gross margin
initiatives and favorable selling currencies more than offset the
impact of sourcing cost pressures such as higher oil prices, labor
rates and stronger Asian currencies,” said VP and CFO Donald Blair.
I never thought I’d sound like a pompous diplomat and use the term "vis-à-vis" in this blog. Oh well. What’s really sad is that the best option is completely outside the blinders of some of these execs.
While many footwear firms are tweaking sourcing plans for China, few plan to leave the country anytime soon.
“Going farther north may be an interim approach, but the reality is
that as we see economies changing in China, it’s what the future is
going to be, and we’re going to have to adapt as an industry,” said [Deckers exec Pat] Devaney. “Everybody has looked at India and talked about India, but
there isn’t an infrastructure of support there to make it more cost
effective. Yes, they make shoes and there are leather suppliers, but
it’s not up to where it needs to be.”
At H.H. Brown, Issler said the economics of relocating manufacturing to
India and Vietnam wouldn’t likely yield any significant savings.
[Sketchers CEO Robert] Greenberg agreed. “There is no moving to another country,” he said.
“People talk about India, but that is light years away. There’s nowhere
to hide anymore.”
Why hide? Instead of devoting so much energy to finding the next cheap labor outpost in Timbuktu, setting up a new factory, training new people, enduring initial quality problems, and then doing it all over when labor inflation ruins your business model (again)… why don’t you look internally to drive process efficiency? You might find and remove so much waste that you could be competitive from North American factories.